Entrepreneurship & Inequalities in India: An ARDL Bounds Testing Approach.
| Author | Sharma, Poonam |
| Position | Autoregressive distributed lag |
Introduction
Entrepreneurship has been an intriguing area of research for many decades. It has been accepted as a way to stimulate the engine of the economy's growth. Many studies have related entrepreneurship to different concepts and theories. The evolution of entrepreneurship is credited to many researchers who have enriched this concept from time to time. Schumpeter (1934) related entrepreneurship with innovations. Davids and Bunting (1963) said that entrepreneurs are the one who undertakes business, Brockhaus (1980) pointed out that they are one who is a major owner of the business. On the other hand, Van Praag and Versloot (2007) concluded that entrepreneurs are a very crucial segment of the economy. Also, they have very specific functions like engendering produce and productivity growth, employment creation and commercialization of highquality innovations. The list is too long, it is still increasing as entrepreneurship and economic growth; both are very related and complex issues of any economy.
Economic growth is thought to be the outcome of an increase in entrepreneurial ventures. Suggestions are given by economists and researchers to increase capital formation, trade openness and total factor productivity for economic development. The developing economies witness a chain of economic reforms because of the implementation of these suggestions. Therefore, these economies face the need for capital formation to keep the economy growing. The entrepreneurial activities are considered best to channelize the investment. Therefore, more capital formation in the economy is related to the increase in entrepreneurial activities (Bal, Dash & Subhasish, 2016).
Along with this, the relationship between economic growth and income inequality has also been a hot area of research. The study of Lewis (1954) and Kuznets (1955) occupy a central position in this area as they relate income inequalities with the dynamic characteristics of an emerging economy with a special focus on savings and structural transformation. Lewis (1954) argued that as developing economies undertake changes in their economic structure with the shift in labor force from a subsistence economy to a capitalistic economy, the share of national income devoted to the capitalists in terms of profit rises. This leads to changes in functional distribution of income in favor of the capitalistic class, as an increase in profits or capitalistic surplus will further lead to increase in savings, investment and hence capital accumulation which is considered as the main engine of economic growth in developing countries. It is only in the later stages when the increase in capital accumulation is faster than labor force growth that the functional distribution of income shifts in favor of the working class. While Lewis focused on the functional distribution of income, Kuznets (1955) focused on distribution of personal income. Kuznets also believed that the concentration of savings and hence accumulation of income generating assets among the upper income groups is one of the reasons for the increase in inequalities in developed countries. Similarly, Piketty (2014) in his famous book "Capital in the Twenty- First Century" considers that the increase in capital accumulation leads to concentration of income among the upper income groups. Particularly, it is due to the larger returns to capital in the form of rent, interest, profits and dividend as compared to the returns to labor in the form of wages that leads to increase in inequalities in a free market economy. Beside this, there are studies that also argue that an increase in economic growth comes with a simultaneous increase in income inequalities. In this respect, Kaldor (1956) and Galor and Moav (2004) consider higher savings and hence capital accumulation as one of the main channels through which inequality positively influences economic growth. The arguments in the line of economic growth via entrepreneurship and income inequalities is ambiguous and complex but, encouraging entrepreneurship for the growth of the economy has been a well-accepted remedy (Uddin & Khan, 2016). Carrera and Vega's (2018) objective was to determine whether income inequality is a significant determinant of gross capital formation. This research added a new determinant of capital formation in the literature in the form of income inequalities. But their relationship has hardly been studied. This research found that investment and income inequality are related and it affects economic growth significantly. Bengtsson and Waldenstrom (2018) used a long-run data set of 21 countries and concluded that capital shares and income inequality are strongly associated, even if the relationship varies across the regions and time periods. This study supported the view that capital-labour split is an important determinant of inequality. Mahmoud Sami (2012) found that the relationship of income inequality with economic growth is not neutral and the second level of development will lead to the disappearance of income inequalities. Lecuna (2020) revealed that entrepreneurship-related policies, particularly informal employment is important for reducing income inequalities. This was proved by using a panel data set of 54 countries. Ragoubi and Harbi (2017) undertook empirical research to examine the dynamic relationship between income inequality and entrepreneurship. Their study pointed towards the presence of significant direct and negative impact of income inequalities on entrepreneurial activities in middle-income countries. Also, middle and low-income countries may face significant negative spillover effects of income inequality on entrepreneurial activities. The confusing results create the need to investigate this mutual relationship between entrepreneurship and income inequalities more. Although, many researchers have already tried to decode this relationship even some have empirically (Halvarsson, Korpi & Wennberg, 2017) tested this relationship. But still, this relationship is debatable because entrepreneurship and income inequality finds mixed results in the literature.
Francese and Mulas-granados (2015) argued that the functional distribution of income is a good way to study the income inequalities. This approach has been regarded as being basic to study income (Cowell, 2007). But the functional distribution of income has witnessed a paradigm shift in the share of income between capital and labor. Modern economists have refused the idea of the clear presence of...
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