Global Entrepreneurship and Development Index

Acs and Szerb believed that the GEM project and its focus on the business formation process in a large number countries, while impressive and valuable, fell short due to its failure to incorporate the different impacts of new businesses and its ranking of countries based primarily on the number of new businesses without regard to their success from a financial perspective or in terms of job creation, improving the local knowledge base and increasing the level of development and innovation.[1]  Specifically, they were critical of the tendency of empirical investigations of entrepreneurship to take “simple, one-dimensional approaches” even as modern research theories implicitly acknowledged that entrepreneurship required a multi-dimensional definition.[2]  For example, they argued that indexes such as GEM’s TEA that are based solely or primarily on measures of “self-employment”, business ownership, new business creation or the percentage of the adult population willing to engage in “entrepreneurial” activity[3] neglected important differences in the “quality” of entrepreneurial activity (e.g., skills, innovation and high growth); differences in environmental factors; and the efficiency and level of the society’s institutional setup (e.g., property rights, size and role of government and regulatory conditions to new venture formation).  Acs and Szerb believed that it was important to distinguish entrepreneurship from small businesses, self-employment, craftsmanship and “usual businesses” and defined entrepreneurship as “a dynamic interaction or entrepreneurial attitudes, entrepreneurial activity, and entrepreneurial aspiration that vary across stages of economic development”.[4]

Using their definition of entrepreneurship, Acs and Szerb set out to address and overcome the above-described shortcomings of the GEM project and other then-existing measures of national entrepreneurship based primarily on business formation by creating the Global Entrepreneurship and Development Index (“GEDI”).[5]  Acs and Szerb explained that their goal in constructing the GEDI was to contribute to the understanding of economic development by providing a measuring tool that “captures the essence of the contextual features of entrepreneurship and fills a gap in the measure of development”.[6]  The initial GEDI covered 71 countries around the world and was based on both the quality and quantity of the business formation process in those countries and designed to incorporate both individual and institutional level variables.[7]  In a report prepared for the US Small Business Administration Acs and Szerb explained that the GEDI captures the contextual features of entrepreneurship by focusing on three broad areas referenced in their definition of “entrepreneurship” referred to above: “The first is entrepreneurial attitudes, a society’s basic attitudes toward entrepreneurship through education and social stability.  The second area of focus is entrepreneurial activity, what individuals are actually doing to improve the quality of human resources and technological efficiency. The final area is entrepreneurial aspirations, how much of the entrepreneurial activity is being directed toward innovation, high-impact entrepreneurship, and globalization.”[8]

The GEDI created by Acs and Laszlo was a “super-index” based on societal scores on three sub-indexes measuring activity, aspiration and attitudes[9]:

• The entrepreneurial attitude sub-index, or “ATT”, focuses on identifying and measuring “entrepreneurial attitudes” associated with a society’s entrepreneurship-related behavior. Among the areas of interest with respect to ATT are the potential for perceiving novel business opportunities, “fear of failure”, “startup skills” and personal networks.  Acs and Laszlo believed that several institutional factors would influence ATT including the size of the market, education, business risk, Internet usage and culture.
• The entrepreneurial activity sub-index, or “ACT”, makes the GEDI distinguishable from other empirical measures of entrepreneurship through its focus on measuring “high growth potential start-up activity”. Among the factors taken into account are “opportunity start-up motives”, sophistication or intensity of technology involved, level of education and product/service uniqueness.  Acs and Laszlo believed that the relevant institutional factors relating to ACT included ease of doing business (referred to as “business freedom”), the availability and absorption of the latest technology and the level of human development (i.e., education and training).
• The entrepreneurial aspiration sub-index, or “ASP”, relates to what Acs and Laszlo called “the distinctive, qualitative, strategy related nature of entrepreneurial activity” and incorporates “the efforts of the early-stage entrepreneur to introduce new products and services, develop new production processes, penetrate foreign markets, substantially increase the number of firm employees, and finance the business with either formal or informal venture capital, or both”.[10]

Acs and Szerb concluded that public policy makers must takes steps to strengthen institutions before a country’s entrepreneurial resources can be fully deployed.[11]  Thus, for example, steps must be taken to increase “business freedom” by easing restrictions on the ability of entrepreneurs to start, operate and close a business and making governmental processes with respect to business approvals more efficient and transparent.  In addition, the government must take appropriate action to improve the society’s human capital, through education and training to increase the capacity to absorb and apply new technologies, and reduce corruption and business risk by creating a legal framework that provides investors with a higher level of trust in entering into business transactions.  Institutional building should also be targeted toward activities that have been identified as drivers of development such as technology-based ventures and enterprises that pursue distinctive business strategies and seek to become fully integrated into a global marketplace.

Acs and Szerb, like others[12], observed that an understanding of entrepreneurship requires going beyond the traits and characteristics of the individual entrepreneur to also consider institutional variables and they noted that “[t]he dynamics of the [entrepreneurial] process can be vastly different depending on the institutional context and level of development within an economy”.[13] They explained that entrepreneurship occurs within an environment that is influenced by economic development and that development directly impacts and strengthens institutions that eventually affect characteristics that are considered to be vitally important to the phenomenon of entrepreneurship such as quality of governance, access to capital and other resources, the perceptions of entrepreneurs and incentive structures for prospective entrepreneurs.  Researchers have found evidence that the strengthening of institutions causes more entrepreneurial activity to be shifted toward “productive entrepreneurship” which, in turn, strengthens economic development.[14]  Entrepreneurial activity reaches its highest level of intensity as countries go through the innovation-driven stage and eventually levels off as institutions are fully developed and the country has achieved a high level of innovation.[15]

Acs and Szerb reported the rankings of the 71 countries in their survey and noted that their findings were significantly and highly correlated with other well-known measurement tools such as the Global Entrepreneurship Index, Index of Economic Freedom and Global Competitiveness Index.  When reporting the rankings Acs and Szerb placed the countries into their appropriate stage of development using the aforementioned categories developed by Porter (i.e., factor-driven, efficiency-driven and innovation-driven).[16]  Acs and Szerb pointed out the following notable findings from the 2010 rankings:

• Nordic and Anglo-Saxon countries in the innovation driven stage of development were in the front ranks. Denmark and Sweden led the GEDINDEX, Iceland and Norway joined them in the top ten and Finland was 13^th  The US and Canada were third and fourth and Australia, Ireland and Switzerland also did well although they were weak in at least one of the sub-indexes.
• The most populous EU countries were in the middle part of the rankings, with the United Kingdom at 14^th, Germany at 16^th, France at 18^th, Italy at 27^th and Spain at 28^th. Acs and Szerb suggested that there was a relationship between low levels of entrepreneurship in those countries and their relatively weak economic performance over the decade leading up to the rankings.
• The bottom of the rankings hosted a number of low GDP-level factor-driven countries such as Jamaica, Bosnia-Herzegovina, Venezuela, Brazil, Philippines, Iran, Bolivia, Ecuador and Uganda.

Entrepreneurial performance of the innovation driven countries was significantly different from the efficiency-driven countries, with the largest differences observed with respect to indicators of new products, “non-fear of failure”, internationalization and risk capital. Factor-driven and efficiency-driven countries were more similar regarding entrepreneurship indicators, but notable differences could be identified with respect to attitudinal indicators of “non-fear of failure” and “cultural support”.

Acs and Szerb also used “cluster analysis” to divide the surveyed countries into five country groups that possessed similar entrepreneurial features.  The first group included most of the factor-driven economies in the survey with low scores on measures of international connections and development of human resources.  A number of the efficiency-driven economies were in the next cluster and Acs and Szerb noted that these economies were involved in trying to increase entrepreneurship from what was currently a relatively low level of development.  The remaining three clusters were home to most of the innovation-driven economies and broke down into innovation leaders, such as the US and the Scandinavian countries who topped the list for several reasons including the availability of formal and informal venture finance and excellence in technology application and adaptation; innovation followers that generally took a “follower” approach in identifying and pursuing innovation strategies first launched within the “leader” group; and innovation challengers who possessed some relative advantages that would allow them to compete with the leaders in certain instances.  The most significant differences among the three “innovation” clusters could be found in the area of “entrepreneurial attitudes”, which included opportunity perception, startup skills, “non-fear of failure”, networking and cultural support.

In general, the innovation leaders were the same countries who led the GEDINDEX rankings; Latin American countries appeared in the factor-driven cluster; and most of the Eastern European and Balkan countries and five out of six of the African countries appeared in the efficiency transformers cluster.  An interesting, although not totally surprising, finding was the tremendous diversity among the Asian countries with respect to entrepreneurship.  Acs and Szerb observed that the poorer Asian countries fell into the resource- or factor-driven clusters while highly populated Asian countries such as China, India and Indonesia could be found in the efficiency-driven cluster.  Among the richer Asian countries, Hong Kong was an innovation challenger and Japan, Korea and Singapore were innovation followers.  None of the Asian countries appeared in the innovation leader cluster.  Acs and Szerb concluded that the cluster analysis provided further confirmation of a strong and positive relationship between economic development and entrepreneurship.

In 2010 the five highest ranking countries on the entrepreneurial attitude sub-index, or “ATT”, were, in order, New Zealand, Australia, Canada, Sweden and Denmark.  The US was 6^th.  The five lowest ranking countries were Guatemala, Indonesia, Russia, Syria and Uganda.  The five highest ranking countries on the entrepreneurial activity sub-index, or “ACT”, were, in order, Denmark, Canada, Puerto Rico, Ireland and Norway.  The US was 8^th.  The five lowest ranking countries were Bosnia and Herzegovina, Morocco, the Philippines, Serbia and Uganda.  The five highest ranking countries on the entrepreneurial aspiration sub-index, or “ASP”, were, in order, the US, Iceland, Singapore, Israel and Sweden.  The five lowest ranking countries were Bolivia, Guatemala, Iran, Kazakhstan and the Philippines.  Sub-index scores of a few of the other major global economic players were as follows: China—54^th on ATT, 53^rd on ACT, 26^th on ASP and 40^th overall on GEDI; Japan—47^th on ATT, 23^rd on ACT, 22^nd on ASP and 29^th overall on GEDI; and India—62^nd on ATT, 51^st on ACT, 40^th on ASP and 53^rd overall on GEDI.  Not surprisingly, there were several instances of significant deviations, upward and downward, on one of the sub-indexes in relation to the other sub-indexes and overall GEDI.  For example, Germany placed 7^th on ASP but its ranking of 24^th on ATT drove its overall GEDI placement down to 16^th.  Israel, not surprisingly, was 4^th in ASP but its placement as 38^th and 21^st in ATT and ACT, respectively, led to an overall GEDI for this famously entrepreneurial society of 21^st.

This post is part of the Sustainable Entrepreneurship Project’s extensive materials on  Entrepreneurship.

[1]  Z. Acs and L. Szerb, “The Global Entrepreneurship and Development Index (GEDI)” (Paper presented at Summer Conference 2010 on “Opening Up Innovation: Strategy, Organization and Technology”, Imperial College London Business School, June 2010).

[2]  Id.

[3] With regard to self-employment, see Z. Acs, D. Audretsch and D. Evans, “Why does the self-employment rates across countries and over time?” (CERP Working Paper No. 871, Center for Economic Policy Research, 1994); D. Blanchflower, A. Oswald and A. Stutzer, “Latent entrepreneurship across nations”, European Economic Review, 45(4-6) (2001), 680-691; and I. Grilo and R. Thurik, “Determinants of Entrepreneurship in Europe and the US”, Industrial and Corporate Change, 17(6) (2008), 1113-1145.  With regard to business ownership rate, see M. Carree, A. van Stel, R. Thurik and S. Wennekers, “Economic Development and Business Ownership: An Analysis Using Data of 23 OECD Countries in the Period 1976–1996”, Small Business Economics, 19(3) (2002), 271-290; and A. Cooper and W. Dunkelberg, “Entrepreneurship and Paths to Business Ownership”, Strategic Management Journal, 7(1) (1986), 53-68.  With regard to new venture creation, see W. Gartner, “A Conceptual Framework for Describing the Phenomenon of New Venture Creation”, The Academy of Management Review, 10(4) (1985), 696-706; and P. Reynolds and D. Storey and P. Westhead, “Cross-national comparisons of the variation in new firm formation rates”, Regional Studies, 28(4) (1994), 443–456.  For information on the TEA, see Z. Acs, P. Arenius, M. Hay and M. Minniti, Global Entrepreneurship Monitor: 2004 Executive Report (Babson Park, MA: Babson College and London: London Business School, 2005); and N. Bosma, K. Jones, E. Autio and J. Levie, GEM executive report 2007 (Babson College, London Business School, and Global Entrepreneurship Research Consortium, 2008).

[4]  Z. Acs and L. Szerb, “The Global Entrepreneurship and Development Index (GEDI)” (Paper presented at Summer Conference 2010 on “Opening Up Innovation: Strategy, Organization and Technology”, Imperial College London Business School, June 2010).

[5]  Id.  Acs and Szerb did note that the original GEM model had been updated to incorporate a number of “contextual” factors that impact entrepreneurship including education, infrastructure, government support, venture capital and research and development transfer and that the GEM was also beginning to recognize individual differences in the “quality” of new ventures (i.e., “startups”).  N. Bosma, K. Jones, E. Autio and J. Levie, GEM executive report 2007 (Babson College, London Business School, and Global Entrepreneurship Research Consortium, 2008); N. Bosma, Z. Acs, E. Autio, A. Coduras and J. Levie, GEM executive report 2008, (Babson College, Universidad del Desarrollo, and Global Entrepreneurship Research Consortium, 2009).

[6]   Z. Acs and L. Szerb, “The Global Entrepreneurship and Development Index (GEDI)” (Paper presented at Summer Conference 2010 on “Opening Up Innovation: Strategy, Organization and Technology”, Imperial College London Business School, June 2010).

[7]  Acs and Szerb explained that all of the institutional variables used in compiling the indexes that are part of the GEDI were taken from the Global Competitiveness Index.  For further information on the Global Competitiveness Index, see X. Sala-I-Martin, B. Bilbao-Osorio, J. Blanke, M. Hanouz and T. Geiger, “The Global Competitiveness Index 2011-2012: Setting the Foundations for Strong Productivity” in K. Schwab (Ed), The Global Competitiveness Report 2011-2012 (Geneva: World Economic Forum, 2011), 3-50.

[8] Z. Acs and L. Szerb, Global Entrepreneurship and the United States (Washington, DC: US Small Business Administration Office of Advocacy, September 2010) http://www.sba.gov/content/global-entrepreneurship-and-united-states [Accessed April 30, 2011]

[9]  Z. Acs and L. Szerb, “The Global Entrepreneurship and Development Index (GEDI)” (Paper presented at Summer Conference 2010 on “Opening Up Innovation: Strategy, Organization and Technology”, Imperial College London Business School, June 2010).  The article includes an extensive discussion of the methodology used in compiling and weighting the indexes and a description of the institutional variables used in the indexes.

[10] Z. Acs and E. Autio, “The Global Entrepreneurship and Development Index: A Brief Explanation”, www.imperial.ac.uk/business-school [Accessed April 30, 2011]  One of the institutional variables used by Acs and Szerb was “business strategy” and referred to “the ability of companies to pursue distinctive strategies, which involves differentiated positioning and innovative means of production and service delivery”.  See Z. Acs and L. Szerb, “The Global Entrepreneurship and Development Index (GEDI)” (Paper presented at Summer Conference 2010 on “Opening Up Innovation: Strategy, Organization and Technology”, Imperial College London Business School, June 2010).

[11]  Id.

[12] See, e.g., L. Busenitz and J. Spencer, “Country Institutional Profiles: Unlocking Entrepreneurial phenomena”, Academy of Management Journal, 43(5) (2000), 994-1003.

[13]  Z. Acs and L. Szerb, “The Global Entrepreneurship and Development Index (GEDI)” (Paper presented at Summer Conference 2010 on “Opening Up Innovation: Strategy, Organization and Technology”, Imperial College London Business School, June 2010).

[14]  D. Acemoglu and S. Johnson, “Unbundling institutions”, Journal of Political Economy, 113(5) (2005), 949-995.

[15]   F. Fukuyama, “The End of History?”, The National Interest, 16 (1989), 3-18.

[16] For further discussion of the views of Acs and Szerb on the contributions of entrepreneurship to development and relative importance of institutional factors in promoting entrepreneurship at different stages of economic development, see “Factors Influencing Entrepreneurial Activities” in “Entrepreneurship: A Library of Resources for Sustainable Entrepreneurs” prepared and distributed by the Sustainable Entrepreneurship Project (www.seproject.org).