Every successful development story has entrepreneurs at its center—not just the celebrated tech founders, but the factory owners who figured out how to compete globally, the traders who connected rural producers to urban markets, the service providers who filled gaps no one else noticed.

Yet entrepreneurship remains curiously undertheorized in development economics. We know it matters, but we struggle to explain why some countries produce entrepreneurs who transform economies while others produce entrepreneurs who merely extract rents from them. The difference rarely comes down to individual talent or cultural attitudes toward business.

The real story lies in institutions and incentives. Whether entrepreneurs create value or capture it depends heavily on the rules they face—formal regulations, informal norms, the structure of markets, and the availability of finance. Understanding these conditions helps explain why similar entrepreneurial energy produces industrial transformation in one setting and economic stagnation in another.

Economic growth requires moving resources from low-productivity activities to high-productivity ones. In textbooks, this happens automatically through price signals. In reality, it requires someone to actually do it—to see an opportunity, assemble the resources, bear the risk, and execute.

Entrepreneurs perform this function in three distinct ways. First, through innovation—introducing genuinely new products, processes, or business models. Second, through imitation—adapting technologies and practices from elsewhere to local conditions. Third, through market creation—establishing connections between buyers and sellers that didn't previously exist.

For developing countries, imitation and market creation often matter more than innovation. South Korea's industrial transformation didn't come from inventing new technologies but from entrepreneurs who figured out how to manufacture ships, semiconductors, and automobiles at world-competitive standards. They adapted existing knowledge to their context, trained workers, and built supply chains.

This entrepreneurial function explains why simply transferring technology or capital to developing countries rarely works without local business capacity. Someone has to translate external knowledge into viable enterprises suited to local wages, skills, and market conditions. That translation is entrepreneurship, and without it, development assistance often fails to catalyze sustainable growth.

Takeaway

Entrepreneurs drive development not primarily through invention but through the harder work of adaptation—taking what exists elsewhere and making it work in a new context with different constraints.

The absence of vibrant entrepreneurship in many developing countries isn't a mystery—it's a predictable response to hostile conditions. Start with regulatory barriers. The World Bank's Doing Business indicators famously documented how registering a company in some countries required dozens of procedures over many months. But formal registration is just the beginning. Operating licenses, zoning approvals, import permits, and labor regulations create ongoing compliance costs that favor established firms over new entrants.

Financial constraints compound these problems. Banks in developing countries typically lack information about potential borrowers and legal mechanisms to enforce repayment. They respond rationally by demanding collateral that most aspiring entrepreneurs don't have. The result is that business formation becomes restricted to those with family wealth or connections to credit—hardly a recipe for identifying the best ideas.

Then there's market power. Existing firms often enjoy protection through tariffs, exclusive licenses, or cozy relationships with government officials. New entrants threaten these arrangements. The response is frequently not competition but obstruction—using political connections to deny permits, manipulate regulations, or simply intimidate potential competitors.

These barriers don't eliminate entrepreneurship; they redirect it. When productive enterprise is difficult, entrepreneurial energy flows toward activities that circumvent barriers rather than create value—smuggling, regulatory arbitrage, or securing government contracts through connections rather than capability. The same business talent that could transform an economy instead becomes absorbed in rent-seeking.

Takeaway

Barriers to entry don't suppress entrepreneurial energy—they channel it toward activities that navigate obstacles rather than create value, producing entrepreneurs who extract rather than generate wealth.

Successful entrepreneurship promotion requires distinguishing productive entrepreneurship—creating value through new goods, services, or efficiencies—from predatory entrepreneurship—capturing value through political connections, market manipulation, or resource extraction. The same person might engage in either, depending on which is more rewarded.

Some policy reforms work reliably across contexts. Simplifying business registration and reducing ongoing compliance costs removes obstacles without distorting incentives. Improving contract enforcement makes formal business relationships viable and reduces dependence on personal connections. Enhancing access to finance through credit information systems, movable collateral registries, or development finance institutions expands who can start businesses.

More contested are industrial policies that actively promote specific sectors or firms. The East Asian experience shows these can work spectacularly—but also that they require institutional capabilities most governments lack. The difference between South Korea's targeted industrial promotion and many failed imitation attempts often comes down to whether governments could impose performance requirements on supported firms and withdraw support from failures.

Perhaps most important is competition policy—ensuring that entrepreneurial success comes from serving customers better, not from securing protection against rivals. This means not just antitrust enforcement but also resisting the political pressure that successful entrepreneurs inevitably exert to protect their positions. Countries that maintained competitive pressure on their business elites, even politically connected ones, generally sustained growth longer than those that didn't.

Takeaway

The goal isn't maximizing business formation but ensuring that success in business correlates with value creation—which requires both lowering barriers to entry and maintaining competitive pressure on incumbents.

Entrepreneurship isn't a solution to development challenges—it's a mechanism through which solutions happen. Without entrepreneurs willing to take risks, adapt technologies, and build organizations, even the best policies remain abstract possibilities.

But entrepreneurship isn't automatic or uniformly beneficial. The institutional environment determines whether business talent flows toward transformation or extraction, whether new enterprises challenge incumbents or become new rent-seekers themselves.

Creating conditions for productive entrepreneurship remains one of the most important and difficult tasks in development. It requires not just removing obstacles but building systems that reward value creation over value capture—and maintaining those systems against the inevitable political pressure from those who benefit from protection.