Entrepreneurship and economic growth are intertwined as we saw in my article last week on Understanding the Nexus around Entrepreneurship & Economic Growth in Africa. What we did not explore is how entrepreneurship leads to structural transformation in an economy when it is catalyzed over time. In order to achieve structural transformation within an economy, the kind of entrepreneurship needed is what scholars refer to as “growth entrepreneurship“.
Definition of terms
Growth entrepreneurship is entrepreneurship founded on innovation and transformational fundamentals. Growth entrepreneurship is based on identification of profit opportunities within the market; and innovating to either improve on the current solutions, or create new solutions all together. This can be contrasted with subsistence entrepreneurship which is founded on a necessity to fulfil immediate financial needs; and hence lacks a sustainability plan and a scalable business model around it.
Having understood what growth entrepreneurship is; we can now look at what structural transformation means. In the broader context of the economy, structural transformation refers to the reallocation of the three main factors of production to different sectors; in order to ensure that the deserving sectors get their fair share of the scarce factors of production including land, capital & labor.
Growth entrepreneurship & structural transformation
A thriving growth entrepreneurship ecosystem is assumed to lead to a more efficient reallocation of factors of production in the long run within an economy. The process however can only take place where factors supporting a thriving entrepreneurship culture exist. These factors include favorable regulatory frameworks, access to human capital, access to finances, access to social networks as well as other cultural influences.
In an ecosystem where growth entrepreneurs can easily access social networks, positive knowledge externalities emerge due to smooth flow of shared information. From Krizner’s theory, the shared knowledge within an ecosystem leads to identification of more profit opportunities; which when exploited yields more economic output, and finally results to economic growth. This growth in profits for the entrepreneurs and the positive result to the general economy by more jobs being created then stimulates the process of resources being reallocated to the more profitable ventures.
When the above processes are repeated over time, more resources will be drawn from poorly performing sectors and be reallocated into the high performing sectors in terms of returns to the individual entrepreneurs and investors; as well as contributing higher proportions to the overall economic growth. The end result will be a structural transformation of the whole economy; in the sense that some sectors will be rendered less important as new sectors rise to the top to give the economy a comparative advantage over its peers.
Contextualizing structural transformation for African economies
In the African context, we are in a transition phase moving from factor-driven economies to innovation-driven economies. During this transition period, new growth entrepreneurs are coming up with new innovative businesses that are going to leapfrog us into the fourth industrial revolution; where technology is the key infrastructure on which economies run.
As this transition process takes place, African economies will need to create enabling environments to support growth entrepreneurship; that will be needed to deal with the high poverty and unemployment levels across the continent. In addition, policy makers across African economies will need to wake up to the new reality that structural transformation will be coming alongside the transition into innovation-driven economies.
This means that some sectors previously considered as being very important for economic growth will be overtaken by new sectors cropping out of the fourth industrial revolution. This will in the short-term cause nightmares to policy makers as they institute changes to economies that in most cases tend to be opposed to change, and prefer status quo.
Big players in the previously important economic sectors from which resources will be withdrawn to be directed to the new more important sectors, are likely to be more rebellious to change; with possibilities of economic sabotage. The process of structural transformation should therefore be handled in an inclusive manner to ensure that the old economic guards in African countries do not hold us back; while at the same time ensuring that the cost of structural transformation does not exceed its benefits in the short-term during the transition period.
Author: Jeremy Riro – Managing Partner at Fie-Consult