Are regional entrepreneurs in disadvantage? Lessons from Chile/ ¿Estan en desventaja los empresarios regionales? Lecciones desde Chile.

Author:Felzensztein, Christian
  1. Introduction

    Empirical work has highlighted the role of entrepreneurship and new venture creation as a mechanism for employment creation, innovation and economic growth (Thurik and Wennekers, 2004), although the relative contribution of new ventures and growing firms to economic development is still controversial (Fritsch and Mueller, 2004) and may vary over time and across nations (Henrekson and Johanssen, 2008; Acs et al, 2008). The role of entrepreneurship in promoting catch-up for under-performing regions in Europe has been at the heart of national government and European Union policy and endorsed by the OECD for many years (OECD, 1998; European Commission, 2003). Yet the theoretical literature on core-peripheral economies suggests that uneven distribution of human, social and financial capital in a nation, reinforced by homophile effects and migration, can set up a virtuous cycle of entrepreneurship in agglomerations and a vicious cycle of dependence in the periphery (GEM, 2009). Some studies have suggested that this can result in unintended negative effects of regional policy in peripheral regions (Mueller, Van Stel and Storey, 2008), although this is based on limited evidence. This mismatch between theory, practice and policy, and the gap in evidence is the starting point of this study.

    According to the Global Entrepreneurship Monitor (GEM) 2007 Report, the high level of entrepreneurial activity yields above average economic growth. Amongst nations with similar economic structures, the correlation between entrepreneurship and economic growth exceeds 0.7 and is highly significant. Entrepreneurial framework conditions consist of two elements: perceived opportunities and perceived capabilities. GEM 2007 (p. 35) noted that perceived capabilities and opportunities are fairly high in most Latin American countries, where starting a business is a common event in comparison to high-income countries. However, the situation in Chile seems to be not encouraging enough as there is a standstill in entrepreneurship despite government efforts to promote it and despite the greater number of opportunities arising from economic development and free-trade agreements signed by Chile (GEM Chile, 2007). Furthermore, one discouraging sign is that business opportunities have also decreased and it is worrisome that in addition to having fallen, they are very focused on not very innovative projects that have a low growth potential, which usually have a low economic impact. GEM Chile 2007 also showed that the principal barrier is the lack of education, which was evaluated as the lowest of nine variables and stands out because no personal initiative is encouraged in generating projects or being entrepreneurial. Although there are some government programs for enhancing entrepreneurial activity, they are not focused on promoting research and development that have a commercial impact, which is needed in underdeveloped markets. While the GEM reports provide analyses of entrepreneurial issues in different countries and between countries, they commonly do not deal with comparisons between regions in same countries which enlighten differences between core and peripheral regions. Such differences may exist especially in countries where peripheral regions lie far away (Christaller, 1966) from core regions.

    In consequence, this paper deals with the different perceptions of entrepreneurs from core and peripheral areas about the conditions to develop and enhance entrepreneurial activities at national and regional levels. This is the first academic research at regional level in Chile to study specifically this problem, and therefore represents a heavy contribution to the emerging literature of entrepreneurship and regional development in the Latin-American context. To this purpose, we relied on data from the GEM project, which is probably the largest data gathering project in the field of entrepreneurship. It was initiated in 1997 and has increased in the number of participating countries since then to over 42 participating countries in 2007. The overall purpose of the GEM project is to investigate the impact of entrepreneurship on economic development (Reynolds et al., 2005; Sternberg and Wennekers, 2005; Hindle, 2006). Accordingly, the GEM database deals with entrepreneurship on the national level (Davidsson 2006), and enables to compare entrepreneurial activities across countries. GEM's intention to investigate, inform and influence national policy on entrepreneurship, is the reason why there has been a tendency to analyze data on the macro level. Only few articles have analyzed GEM data at the micro and regional levels, where the individual entrepreneur is the unit of analysis (Klyver, 2008). Consequently, this study is focused on entrepreneurs located in core vs. peripheral areas as the unit of analysis, and therefore enables micro-level analytical insights to be drawn from data collected in the GEM 2007 project.

  2. Theoretical Development and Background

    2.1. Core vs. peripheral aspects of entrepreneurship

    There is a rich literature on the role of geographical location within a country as a determinant of economic activity (e.g. Marshall, 1895). Christaller (1966) proposed the central place principle of economic activity, suggesting a definite ordering of communities within a region ranging from villages where only the lowest-order economic activities exist, up to primary cities which host the highest order of economic activity. The dependence of economic growth on geographical factors was originally explained by the endowments of either transportation routes or natural resources that encourage firms to locate in specific regions, which evolve into industrial districts and then agglomerations (Marshall, 1895; Weber, 1909). It has been suggested that the geographical location factor may not effectively matter for high-tech companies since these firms deal with low-weight/high-value inputs and outputs (Cooper, 1993). The evidence for this is mixed. Saxenian's (2006) portrayal of Silicon Valley demonstrates the importance of location, while at the same time noting that entrepreneurs with strong social networks in the Valley can operate from external locations. In an era in which natural resources are becoming depleted, this phenomenon may be better explained by the notion of density of human capital, i.e. regional endowments of highly educated and productive people (Florida, 2003). Human capital levels in peripheral areas on average are lower compared to urbanized regions (Mueller, Van Stel and Storey, 2008; Van Stel and Suddle, 2008). This phenomenon may be due to the move of the highly educated workforce away from periphery to larger cities where employment and business opportunities are better. This, in turn, may cause the average start-up in a peripheral area to enjoy a lower quality of human capital compared to the average start-up in an urbanized region.

    The economic advantage of highly dense urban regions is widely explained by the agglomeration effects literature (Davelaar and Nijkamp, 1987; Todling and Wanzebock, 2003; Florida, 2003; Van Stel and Suddle, 2008). This includes: a density of potential entrepreneurs; a highly educated population; a large potential market, in terms both of customers and of suppliers and services; and knowledge spillovers from universities and research institutions.

    Our research specifically focuses on the concept of peripherality, which is concerned with the effect of distance from the economic core. Based on the extant literature on entrepreneurship and regional development, we propose the following hypotheses:

    H1: Central-located entrepreneurs perceive higher accessibility to critical entrepreneurial resources (funding, technology, education, suppliers, communication and basic utilities services) than peripheral-located entrepreneurs.

    H2: Central-located entrepreneurs perceive higher market opportunities than peripheral-located entrepreneurs.

    In addition, the cause of rural entrepreneurial underdevelopment could be searched in the high risk perceived by rural entrepreneurs, which inhibits higher equity in the creation of new firms. Funders were found reluctant to invest in peripheral regions (Shefer and Frenkel, 2002; Gimmon, 2006) although location was not found to affect new venture performance. The advantage of central location such as the Silicon Valley in hiring good people and getting market notice tends to distract investors from peripherally located ventures (Roberts and Barley, 2004; Saxenian, 2006). As a result, in comparison to high technology industries, traditional industries show higher levels of concentration in the peripheral regions. This is the reason why governments try to turn around this unfavourable situation by offering generous grants in order to attract investments into peripheral areas, though with rather meager success (Frenkel et al., 2003). Also it is conceivable that mobile start-ups founded in the periphery who realize that they are less effective because of their location will relocate to central regions (Van Stel and Suddle, 2008).

    It is far from obvious that potential regional policies designed to maximize the number of start-ups in peripheral areas will have the desired effects on the regional economy. Recent studies (Florida, 2003; Psaltopoulos et al., 2005) suggest that on top of the traditional formula of financial incentives and organized business incubators to attract manufacturing facilities, the main task of regional development policy should be to attract and sustain talented and creative people who are the driving force behind regional development. Local agents should be transformed into active subjects within innovative processes and networks designed to identify renewed economic opportunities on environmentally and socially sustainable bases (Cannarella and Piccioni, 2006). In addition, policy instruments should support disembeddedness of...

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