Edited by Robert F. Salvino Jr., Michael T. Tasto and Gregory M. Randolph
Chapter 3: Economic freedom, entrepreneurship and growth
Entrepreneurship has the power to drive economic growth when it is encouraged and guided by an institutional framework that fosters productivity. Without productive entrepreneurship, a nation’s capacity for risk-taking and innovation is stifled, leading to economic stagnation and the loss of the competitive edge. This survey provides an overview of the literature linking economic freedom, entrepreneurship, and economic growth and offers the economic theory and logic behind the expected positive empirical relationships between these three key variables. Entrepreneurship, itself, is not easy to define. It consists of a wide variety of actions aimed at seeking out opportunities for profit and seeing these opportunities to fruition. In other words, entrepreneurs are individuals who seize on profitable opportunities and engage in the productive behaviors necessary to reap profit from these opportunities. This can take a variety of forms, from starting a new business, to savvy investment, to improving production techniques and so on. For the purposes of this survey, it is important to distinguish between productive and unproductive entrepreneurship, as productive entrepreneurship is key to economic growth. While establishing a culture of entrepreneurship is important, what is perhaps more important is providing the correct incentives to direct entrepreneurial behavior towards productive activities. A bevy of entrepreneurs engaging in unproductive entrepreneurship is no more wealth-enhancing than having a complete lack of entrepreneurship. In fact, unproductive entrepreneurship can even lead to a decrease in the wealth of a nation.
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