New Zealand Institute of Economic Research Research

Monograph
64
Wellsprings
of Enterprise
An Analysis of Entrepreneurship
&Public Policy in New Zealand
David AHarper

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© N .Z. Institute of Economic Research , 1994
THE N.Z. INSTITUTE OF ECONOMIC RESEARCH (I NC.)

The N.Z. Institute of Economic Research (Inc .), founded in 1958 ,

is an independent, non-profit making incorporated society with a
membership open to any person or corporate body. The Institute
is under the direction of a Board of Trustees, partly elected by mem-
bers and partly ex officio.

The primary objectives of the Institute are:

(a) to conduct research into economic problems affecting New
Zealand , especially in connection with economic growth;
(b) to encourage economic research by other organisations;
(c) to collect and circulate information on economic subjects;
(d) to promote the study and understanding of economic matters
by training economists, by holding conferences and semi-
nars , and by publishing the results of research and study.

AUTHOR: David Harper was a Senior Research Economist at

the NZIER

Views expressed are those of the author alone.

The Institute, its contributing employees and the Board of Trustees shall
not be liable for any loss or damage sustained by any person relying on the
Monograph , whatever the cause of such loss or damage .
WELLSPRINGS OF ENTERPRISE:
An Analysis of E~trepreneurship and

Public Policy in New Zealand

by
David A Harper

Research Monograph 64

1994

NZ Institute of Economic Research

8 Halswell Street
PO Box 3479
WELLINGTON
ISSN 0113-1877
ISBN 0908969066
CONTENTS

Acknowledgements

1. Introduction and background 1

1.1 Organisation of the monograph 4
1.2 The absence of the entrepreneur in standard
economic theory 4
1.3 Analytical conception of entrepreneurship in
various economic theories' 6
1.4 Definition of entrepreneurship in this monograph 7
1.5 Types of entrepreneurial activity: arbitrage,
speculation and innovation 8
1.6 The entrepreneur as the embodiment of an
economic function 9
1.7 Analytical distinction between entrepreneurs
and other economic agents 10

2. The neo-Austrian theory of entrepreneurship 16

2.1 Antecedents to Kirzner 16
2.2 Kirzner's theory of entrepreneurship 17
2.3 Characteristics of entrepreneurial alertness 21

3. Psychological determinants of entrepreneurship 29

3.1 A brief review of psychological studies of
entrepreneurship 29
3.2 The causal link between locus of control and
entrepreneurial alertness 33
3.3 The relationship between institutions, regulations
and LOC beliefs 36
3.4 Explaining sluggish entrepreneurial responses 40

/
ii
4. The dominant culture of a nation and its
entrepreneurial content .... ¥
4.1 Introduction 44
4.2 Technical aspects of culture 46
4.3 Moral aspects of culture 47
4.4 Comparison of New Zealand culture with
other cultures 51

5. Prerequisites for an entrepreneurial environment 62

5.1 The functions of a competitive discovery
procedure 62
a
5.2 The environmel1t as pool of resources 63
5.3 Prerequisites at the level of individual
entrepreneurs 65
5.4 Institutional prerequisites 66
5.5 Cultural prerequisites 71

6. Policy implications 76
6.1 General principles 76
6.2 Critique of existing public policies: effects on
entrepreneurship 81
6.3 Regulation 83
6.4 Competition policy 1DO
6.5 Taxation 104
6.6 Other policies to increase entrepreneurial activity
within the existing regulatory framework 109
6.7 Conclusions 115

References and selected bibliography 118

iii
TABLES & FIGURES

Figure 3.1 The causal link between LOC beliefs

and entrepreneurship 34

Table 4.1 Entrepreneurial rating of national cultures 54

Table 4.2 Entrepreneurial rating of national cultures 55

Table 4.3 Rating of national cultures by various aspects

of the ethic of achievement 56

Table 6.1 Actual and potential regulatory changes

and their impact upon entrepreneurship 87

iv
ACKNOWLEDGEMENTS

In the writing of this monograph, I have profited from comments

provided by Peter Bushnell, Peter Gorringe, Simon Smelt, Doug
Andrew, Graeme Davis, David King (all of the NZ Treasury), Roger
Kerr (NZ Business Roundtable), Alan Bollard (Commerce
Commission), and Simon Chapple (NZIER). I would especially like to
take the opportunity to thank Ralph Chapman (Ministry for the
Environment) for extensive feedback on various drafts.

Funding for the original project upon which this monograph is based
was provided by the Treasury.

Any remaining errors of course are my own. This report represents

my view, not necessarily those of the institutions involved, nor of the
people who offered comment.

David Harper

Wellington
May 1994

v
1. INTRODUCTION AND BACKGROUND

A key feature of an internationally competitive enterprise economy is

its ability to continually seek out and seize opportunities for profitable
new activities in local and world markets. The New Zealand economy
has made significant advances in this direction. The process of
economic reform and liberalisation in New Zealand over the last
decade has removed many of the regulations and controls which had
previously stifled entrepreneurial competition and enterprising
behaviour on the part of New Zealand businesses.

Encouraging entrepreneurship is an essential key to the achievement

of more rapid rates of economic growth in New Zealand and to the
continuing regeneration of the economy. This is because processes of
entrepreneurial discovery are necessary for vigorous economic
growth. Indeed, it has been suggested that the economics of growth is
to a large extent the economics of entrepreneurial discovery [Kirzner
1984a, p.50]. Entrepreneurship is critical to enhancing the
innovativeness and responsiveness of New Zealand businesses and to
improving our productivity, cost structure, international
competitiveness and trade performance. The entrepreneurial spirit
may manifest itself in the development of new markets, new products,
new methods of production and management which improve quality
and productivity, the discovery of new inputs and even the
establishment of new businesses and organisational forms.
Entrepreneurship is pertinent to the analysis of how these new ideas
(products, technologies etc.) can be realised to enhance this nation's
wealth.

1
It has been argued elsewhere that, in the longer-term, New Zealand's
economic growth depends on our ability to increase the value of what
we produce with our resources (people, land .and capital). The point
cannot be emphasised too strongly, however, that neither the ends to
which these resources are put nor the means for achieving these ends
(i.e. the set of resources and how they are used) are given or fixed.
They are the result of entrepreneurial choices and are open to
entrepreneurial initiative. They depend upon a myriad of individual
acts of entrepreneurial discovery (e.g. of higher-valued uses for inputs
and of the existence of hitherto unsuspected resources). As a result,
entrepreneurship may in effect override resource endowments and
scarcity as the prime determinant of economic performance. Seen in
this light, the economic process becomes open-ended: "we never know
what the real limits are to the elasticity of resource constraints that
circumscribe our existence" [Kirzner 1984a, p.43].

A better appreciation of entrepreneurship is required if we are to be

able to understand the market process and to explain how the
economy as a whole and individual markets attempt to adjust to new
circumstances. Such knowledge is needed to account for the
coherence of the economic system and for the continuous tendency
toward economic balance and internal economic consistency. In
addition, greater understanding of entrepreneurship is relevant to
policy aimed at the economic goal of eliminating disequilibrium in the
labour market - that is unemployment and skill shortages. In
situations of high unemployment, the importance of
entrepreneurship is even greater given that empirical studies have
shown that the vigorous growth of those new ventures which are
highly entrepreneurial accounts for a significant percentage of all new
jobs in the economy.

However, in spite of the fact that entrepreneurship is the engine of

economic growth and development, discussions of economic growth
in New Zealand often ignore (or fail to acknowledge explicitly) the
entrepreneurial forces of change and adaptation that underlie such
growth. Surprisingly, the role of entrepreneurship in determining
New Zealand's economic performance has attracted less professional
interest than the role of other factors, such as management, R & D and

2
education. Entrepreneurship is something we ignore at our peril: ."For
the successful allocative functioning of the market, and for the
stimulation of dynamic growth, the entrepreneur must not be taken
for granted" [Kirzner 1984a, p.57].

Consequently, this monograph is intended to reassert the role of

entrepreneurship as the "prime mover" in the process of New
Zealand's economic development - a process which combines growth
with structural adjustment. It seeks to provide a comprehensive
framework for explicitly analysing entrepreneurship and for
explaining its present state in New Zealand. The monograph also aims
to explore the public policies and institutional settings that might
stimulate (or at least release) entrepreneurship. The assumption of this
discussion is that the set of opportunities likely to be discovered by
entrepreneurs depends upon the institutional framework within
which economic growth is sought. Furthermore, the analysis aims to
identify the prerequisites for an entrepreneurial environment and to
pinpoint remaining impediments to enterprise that exist in New
Zealand.

Because of the exploratory nature of the project, the report is designed

to provide a broad coverage of issues rather than a narrow
concentration. It is not intended to result in a detailed policy
document, though it is hoped that the framework will contribute
subsequently to the development of specific public policy mixes with
respect to entrepreneurial activity in New Zealand.

The framework that is developed is derived from recent

developments in economic theory - especially those in the theory of
market processes, psychological economics and the economics of
business culture. By and large, these theories portray economic
growth as essentially an evolutionary learning process rather than as
simply a process of physical and human capital accumulation. In
addition, they reject the so-called "work harder" types of
microeconomic models of growth and argue against the proliferation
of dubious mechanical models of economic growth which are solely
concerned with aggregate macroeconomic relationships. The focus of

3
the project is upon the application of these theoretical developments
to the New Zealand situation.

1.1 Organisation of the monograph

The organisation of this monograph is as follows. The next section

explains why there is no mainstream (neoclassical) theory of
entrepreneurship. Section 1.3 itemises the major conceptions of
entrepreneurship that have been offered in economic theory. The
conception of entrepreneurship employed in this work is outlined in
Section 1.4 and expanded in the remaining sections of this chapter.

Chapter 2 provides a detailed account of the neo-Austrian theory of

the entrepreneur and of market processes, emphasising in particular
Kirzner's approach. Chapter 3 draws on insights from psychology and
behavioural economics. It attempts to provide a psychological
foundation for Kirzner's concept of entrepreneurial alertness and to .
describe the psychological determinants of entrepreneurship. The next
chapter emphasises the cultural influences on entrepreneurship and
applies Casson's approach in order to assess the entrepreneurial
content of New Zealand culture. The implications of the previous
chapters regarding the prerequisites for an entrepreneurial
environment are outlined in Chapter 5.

Chapter 6 develops the policy implications of the theoretical

framework elaborated in this report. It also provides a critique of
existing public policies in New Zealand. It intends to serve as a
starting point for policy analysis. It supplies tentative pointers on how
public policy-makers can bring about an environment closer to that
described in Chapter 5.

1.2 The absence of the entrepreneur in standard economic theory

Standard economic theory has developed along lines that virtually

exclude the entrepreneurial role. This has largely been a result of the
tendency to exclude all elements of unexpected change, to focus
attention almost exclusively on equilibrium states of affairs, and to

4
treat individual decisions as immune from the hazards of error.
Perfect markets are depicted as doing all the coordination that is
necessary and leave nothing for the entrepreneur to do. Taken
together, these features .mean that mainstream (neoclassical)
economics provides a very distorted picture of the competitive market
process and of the process of economic adjustment. Firms are
assumed to respond mechanistically and automatically to the signals
of the market. There is no spotting a gap in the market, no exercise of
initiative. Entrepreneurial characteristics are specifically excluded
from the model. '

If it was appropriate to examine only equilibrium (market-clearing)

levels of prices and output, we would not need a theory of
entrepreneurship. But if we want to explain the disequilibrium
process by which prices and outputs adjust in markets, then we must
have a theory of the entrepreneur. It has been shown convincingly
elsewhere that the market process cannot function, even within the
market for a single commodity, if all market participants are assumed
to be non-entrepreneurial neoclassical maxi misers who react
mechanically to changes enforced upon them by external
circumstances over which they have no control [Hayek 1949, Kirzner
1962, 1973]. A theory of entrepreneurship is a prerequiSite to any
theory of the dynamics of the market process.

The absence of a neoclassical theory of the entrepreneur has been

investigated at length within the economics literature and will not be
discussed in detail here. 1 At this junction, it is sufficient to mention
that the modem theory of competition (e.g. Debreu [1959], Arrow and
Hahn [1971]) cannot explain market processes - the way in which
market forces bring about adjustments in prices, quantities and
qualities and the introduction of new products and processes. At best,
neoclassical theory describes the conditions for competitive

1. For example, see: Baumo11968; Kirzner 1962, 1973, 1979; Latsis 1972, 1976b;
Casson 1982; and Loasby 1989. See too Harper 1992.

5
equilibrium (economic balance), without explaining adequately if or
how equilibrium may be reached.

1.3 Analytical conception of entrepreneurship in various economic

theories

Entrepreneurship is connected with change, but there are

many kinds of change, and correspondingly many
concepts of the entrepreneurial function fLoasby 1982,
p.244].

In economic theory, there is a lack of consensus as to what constitutes

entrepreneurship. There is no uniform treatment of the major role of
entrepreneurship and of why it is so vital to the economic process. In
the economic literature, the entrepreneur is variously portrayed as:

• an innovator, the initiator of discontinuous change [Say,

Schumpeterl

• a decision-maker

• an organiser and coordinator of economic resources or a gap-filler

fSchuItz, Leibenstein, Marshall]

• an employer of factors of production

• a contractor

• an arbitrager, located between different markets, who buys

resources cheaply and sells output more expensively fKirznerl

• a specialist who takes judgmental decisions about the allocation of

scarce resources [Casson 1982]

• an industrial leader [Baumol 1968, p.651

6
• the person who bears the risks or the Knightian uncertainty
associated with business ventures [Cantillon, Knight);

• the person who supplies financial capital [Mill]

• the owner of an enterprise [psychologicalliteraturel

• a manager or superintendent [Marshall]

1.4 Definition of entrepreneurship in this monograph

In the following paper (unless otherwise indicated), the approach

developed is largely neo-Austrian. Neo-Austrian economics
examines .the nature of competitive market processes, the role of
knowledge, expectations and learning in market processes, the
nature and significance of entrepreneurial discovery, and the
comparative effectiveness of alternative institutional frameworks for
evoking entrepreneurial discovery. In particular, Kirzner's approa.ch
to entrepreneurship is emphasised because in my judgment it
captures the theoretical core of entrepreneurship. Kirzner's concept
of entrepreneurial alertness is the common thread which runs
through the diverse entrepreneurial ro~es described in the previous
section. It is the common element shared by all the major definitions
of entrepreneurship which have previously been offered in the
literature.

Kirzner defines entrepreneurship as alertness to profit opportunities.

What entrepreneurs do is identify opportunities for gain that others
(and even they themselves) have earlier overlooked. The
entrepreneur recognises something that others have failed to
reCognise: that there is an opportunity waiting to be grabbed. More
specifically, . en.trepreneurship involves. the discovery and
exploitation of opportunities for buying at low prices and selling the
same items at high prices. The price discrepancy occurs because
many market participants simply overlook these opportunities.

Alertness is to be distinguished from standard optimising

behaviour. The latter is the allocation of given means to achieve a set

7
of given ends. It does not involve the discovery of hitherto
unperceived opportunities. In contrast, alertness involves the
identification of which (new) ends to pursue and the discovery of
which means are available. It is not limited to optimisation within a
presupposed ends-means framework. Entrepreneurial alertness
involves the perception of the ends-means framework within which
allocation and optimising is to take place [Kirzner 1973, pp.33-35J.

We can illustrate the difference between entrepreneurial alertness

and optimisation by means of a simple example: R & 0 in a private
firm. Optimisation is concerned with how a research manager
allocates the R & D budget among various, competing given
research projects. But entrepreneurial alertness is concerned with
how a particular research manager identifies before others that a
project idea is worth putting on the research agenda.

1.5 Types
innovation
0" entrepreneurial activity: arbitrage, speculation and

For the purposes of this paper, entrepreneurial activity will be

categorised into three major classes: arbitrage, speculation and
innovation. 2 Arbitrage involves the simultaneous coordination of
transactions in different parts of the market within a single time
period. No uncertainty is implied by arbitrage: the arbitrager
captures profits arising from existing interlocal price differences.
Speculation involves exploiting perceived opportunities created by
different market transactions entered into at different dates. The
speculator plans to make gains from intertemporal price differences
which arise from forces over which he or she has no control (such as
shifts in demand or exogenous supply shocks). Innovation concerns
the introduction of new goods and services, new methods of
production, new ways of organising transactions and new forms of
industrial organisation. These of course are the functions performed
by the Schumpeterian innovator. The innovator hopes to capture
profits from the introduction of a new product (or process). Profits

2. See too Kirzner 1984a, pp. 52-54.

8
are made if the innovator is able to sell the new product over a
future time period at a price-quantity configuration which brings
revenue greater than the sum of production and transaction costs.
Innovation entails making gains from intertemporal revenue-cost
differences but, unlike speculation, innovation implies bringing
about the revenue-cost differential by means of the entrepreneur's
own actions.

1.6 The entrepreneur as the embodiment of an economic function

The unit ~f analysis in this paper is the individual entrepreneur not

the entrepreneurial team or firm (nor is it the entrepreneurial event
or transaction).3 It must be noted that the individual entrepreneur is
the personification or embodiment of a particular economic
function, type of act or market role: 4

Economics, in speaking of entrepreneurs, has in view not

men, but a definite function. This function ... .is inherent in
every action and burdens every actor. In embodying this
function in an imaginary figure, we resort to a
methodological makeshift [Mises 1949, pp.253-254].

The individual entrepreneur is thus a special device introduced into

our analysis in order to simplify the framework. This is an
admissible limitation for developing a line of analysis.

The unit of analysis that one selects for a policy framework is also to
some extent culture-bound. For example, a specification of
entrepreneurship in terms of heroic individuals is more appropriate

3. The individual entrepreneur is the unit of analysis in the theories developed

by Kirzner 1973, 1979, 1982c and Casson 1982. Accordina to Casson, the
entrepreneur is a person, not a team, committee or orgamsation. Casson's
more recent work [1990], however, emphasises the nature and role of social
groups in entrepreneurship.
4. Cantillon [1931(1755») was the first to stress the economic function rather
than the personality or social status of the entrepreneur.

9
for individualistic societies such as the USA, whereas a definition of
entrepreneurship in tenns of groups and teams is more applicable to
societies such as Japan. New Zealand can be considered to be
located somewhere on the middle ground between these extremes.

How the entrepreneurial function is conceived can have important

implications for the design of public policy. For example, if
entrepreneurship is considered to be an clement inherent in all
decision-making, which is thus not restricted to particular business
types, then policies may be directed towards trying to foster all
economic agents to exercise their entrepreneurial faculties. 5
However, if entrepreneurship is identified with the aptitudes of only
a small fraction of the population, then policies will need to be
targeted at exciting the alertness of those individuals who are
representative of the entrepreneurial type. Policies may also then be
aimed at increasing the pool of individuals with entrepreneurial
personalities (e.g. via immigration policies).

1.7 Analytical distinctions between entrepreneurs and other economic

agents

In the following section, 1 try to distil the most salient points which
specifically distinguish the entrepreneurial function from other
functions, and which are also relevant for policy. Because of space
constraints, the discussion is necessarily brief.

It should be noted that in the real-world, a single physical person

often embodies more than one function. Each economic agent acts in
an integrated manner, which we (as economists) artificially analyse
as separate functions. The real-world entrepreneur is a single
composite personality who is also a manager, leader, capitalist,
coordinator, and organiser. Thus, although entrepreneurial,

5. A final point is that in a world of uncertainty there may be an element of

entrepreneurial alertness in decisions made by all types of economic agents
(consumers, capitalists, labourers, producers etc.) ana not just in those made
by pure entrepreneurs. An example is the discovery bv final consumers of
opportunities to buy at lower prices. '

10
managerial and capitalist functions are conceptually distinguishable,
in the real world the activities are invariably intertwined. Owing to
transaction cost factors, entrepreneurs must perform many non-
entrepreneurial and managerial functions, and they must often
provide some capital to facilitate the realisation of their own ideas.
Transaction cost factors inhibit the transfer of entrepreneurial
knowledge and block the formation of an external market in which
entrepreneurs could ~ell their ideas to other participants who could
realise them.

1.7.1 Entrepreneurship versus resource ownership

Prior ownership of resources is not a prerequisite to entrepreneurial

alertness [Kirzner 1979, p.97J. However, in a world in which
production is not instantaneous and in which an investment of
capital is often required, we may observe entrepreneurs as owning
resources as well. For the purpose of reallocating resources,
entrepreneurs may need to acquire them. For example, in order to
exploit a perceived profit opportunity, it may be necessary to
purchase assets in period to to be sold for a higher price in the later
period t1•6 What is decisive, however, is that at the time of the initial
entrepreneurial insight, the entrepreneur does not necessarily have
any resources whatsoever to contrib1:1te to the productive process.
The entrepreneurial decision responsible for the venture is made
before the act of purchase [Kirzner 1973, pp.46, 50, 66].
Consequently, entrepreneurship is not to be treated as a factor of
production.

In the real world, we are likely to observe market participants

exercising entrepreneurial alertness as well as being resource-
owners at the same time [Kirzner 1973, p.97]. For analytical

6. Borrowing from capitalists constitutes only one method by which an

entrepreneur can obtam profit in the absence of resource ownership. For
example, the entrepreneur may negotiate with resource owners and arrange
to have all deliveries of goods to taKe place at the same time, thus eliminating
the need to carry stock (though arranging for events to occur simultaneously
is high in transaction costs).

11
purposes, however, Kirzner believes it justifiable to consider an
individual who perfonns both roles or functions to be two separate
decision-makers. If, as a result of earlier entrepreneurial decisions,
an entrepreneur becomes a resource-owner, the entrepreneur can be
conceived as purchasing these inputs from himself or herself
[Kirzner 1973, pp.47-481.

Both Kirzner and Schumpeter are quite definite that

entrepreneurship does not include the control, accumulation or
provision of capital. It is "essential to note that the entrepreneurial
function, though facilitated by the ownership of means, is not
identical with that of the capitalist" rSchumpeter 1947, p.151 J. A pure
entrepreneur owns no capital. Institutions which facilitate the
separation of ownership and control give rise to capitalists who are
not entrepreneurs and to entrepreneurs who are not capitalists. And
since pure entrepreneurship does not include the provision of
capital, it must necessarily follow that it does not include risk-
bearing either, for the risks are borne by the capitalists who lend
funds to the entrepreneur (in fact Schumpeter strongly criticised
attempts to include risk-bearing within entrepreneurship [1954,
p.556]). It is the capitalists who lose their money in the event of
business failure. Entrepreneurs only bear risk to the extent that they
may also act as their own capitalists'? (Entrepreneurs may also
supply "reputation capital" to themselves and this too may be at
stake.) Consequently, one should not expect entrepreneurs to exhibit
special risk-taking propensities. Another important implication of
this definition of entrepreneurship is that profit is a reward for
superior perception or alertness; it is not a reward for risk-taking or
uncertainty bearing. (For a development of this view, see Kirzner
[1973, 1979].)

It should also be noted that changes in the institutions and business

financing methods by which entrepreneurs are able to obtain other

7. Indeed, an entrepreneur's personal funds often play an important role in

the initial setting up of an enterprise (i.e. the ~eed financing stage of
commercial ventures).

12
people's money and resources will affect the ease with which
entrepreneurs are able to realise their ideas.

1.7.2 Entrepreneurship versus invention

Although the entrepreneur may also be an inventor, there is no

necessary connection between entrepreneurship and invention. The
inventor produces new scientific and technical ideas, whereas the
entrepreneur may perceive the opportunity to apply such new ideas
commercially. The entrepreneur is alert to changes in technology
which create profit opportunities. Entrepreneurial alertness is
required to ensure that new methods of production will be
introduced fKirzner 1973, p.741. The entrepreneur is thus not an
inventor, but may be someone who decides to allocate resources to
the exploitation of an invention. Entrepreneurship is "exploiting the
new opportunities that inventions provide, more in the form of
marketing and developing them for widespread use in the economy
than developing the knowledge itself" [Rosen 1983, p.3071.
Entrepreneurial activity may, but need not, embody an element of
scientific novelty.

The ability to discover profit opportunities associated with the

reallocation of a specific item can be separated from the creative
ability involved in the invention of the item itself. Although one has
to be technically proficient in order to invent a fax machine, one
does not have to be technically oriented to notice that there is a
market for fax machines. The two attributes of inventive creativity
and entrepreneurial alertness might or might not exist in the same
person, but only the latter is a necessary requirement for being an
entrepreneur [Gilad 1982, p.1391.

1.7.3 Entrepreneurship versus management

Because the management function is more readily observable than

the entrepreneurial function, the latter is often subsumed within the
former. However, the management function is actually narrower in
scope than entrepreneurship. The manager is the agent who
supervises the ongoing efficiency of continuing processes [Baum01

13
1968, pp.64-65]. The manager's task is to find ways of approaching
the firm's production possibility loci, that is, of increasing efficiency
within the limits of known technology. The standard neoclassical
theory of the firm adequately describes the managerial function and
the routine optimising decisions that managers make. The manager
is the individual who equates marginal costs to marginal benefits in
a routine (through not necessarily static) manner.

As already mentioned, flesh-and-blood entrepreneurs must

undertake many non-entrepreneurial, managerial activities because
of transaction cost difficulties. Consequently, the entrepreneur's
managerial skills can have a significant impact on the outcome of a
venture. Efficient organisation and management may be essential for
entrepreneurial success. If entrepreneurial profit equals total
revenue minus the sum of production and transaction costs, and if
superior management is required to keep down costs, then whether
an entrepreneurial venture makes a profit or a loss may depend
upon his or her ability to manage the enterprise.

1.7.4 Entrepreneurship versus rent-seeking

In contrast to popular thinking, I will maintain that it is not possible

to distinguish rent-seeking from entrepreneurship. They are
behaviourally equivalent. In the massive rent-seeking literature,
entrepreneurs are the good guys in the right environment
(appropriate property right structures), who turn into undesirable
rent-seekers in the wrong environment: "When they start firms, they
innovate and foster growth, but when they become rent seekers,
they only redistribute wealth and reduce growth" [Murphy, Shleifer
and Vishny 1991, p.s03]. The efficient resource allocation is the
implicit standard of reference by which the undesirable
consequences of rent-seeking are evaluated. This ideal benchmark is
also used to distinguish between profit-seeking (entrepreneurship)
and rent-seeking. In order to be able to distinguish rent-seeking
from entrepreneurship, the economist must have objective

14
knowledge of what the efficient resource allocation looks Iike.8 In
reality, of course, the efficient resource allocation is riot known
beforehand (neither by the theorist nor by the economic agents) but
is the outcome of the competitive discovery procedure: In the
absence of omniscience and of an objective measure of output, it is
not possible for the analyst to know whether specific activities are
purely redistributive. The ideal benchmark of static equilibrium
must be abandoned in favour of the competitive process framework
which takes a dynamic, comparative institutional approach.

8. For a review of the difficulties inherent in the concept of rent-seeking, see

Ricketts 1987.

15
2. THE NEO-AUSTRIAN THEORY OF
ENTREPRENEURSHIP

In this section, Kirzner's theory of entrepreneurship will be

elaborated in more detail. This theory is the most well-developed
account that has been offered in neo-Austrian economics. Other
complementary approaches from behavioural economics and the
economics of culture wi\l be offered in later sections to supplement
this theory. A thorough discussion of these theories is considered
necessary if we are to be able to develop a coherent policy
framework for entrepreneurship. These chapters will thus provide
the basis for Chapter 5 (prerequisites for an entrepreneurial
environment) and Chapter 6 (policy implications).

2.1 Antecedent'i to Kirzner

Neo-Austrian economics analyses market processes (in which the

entrepreneur plays a crucial role) rather than equilibrium states.
Consequently, it emphasises the entrepreneurial character of the
market process. Indeed, entrepreneurship is considered to be
analytically inseparable from the process of competition.

According to the Austrian school of economics, the competitive

market process is typically characterised as a discovery procedure.
In his seminal articles, Hayek referred to the competitive process as
a procedure for the discovery of particular "facts" which arc useful
for achieving specific, transitory purposes [1978, p.181].9 Hayek was
not so much concerned with major discoveries, such as technological
advances, but rather minor discoveries about individual wants at
particular times and places. These discoveries arc localised, so that

9. For further discussion of comJX:tition as a type of discovery procedure, see

Hayek ]949, 1978, 1979 (Chapter 15).

16
different people have access to different information. More
specifically, competition is a spontaneous process which leads to the
discovery of previously unsatisfied "wishes and desires of
consumers, including the goods and services which they demand
and the prices they are willing to pay" [Hayek 1949, p.96]. It also
leads to the discovery of lower-cost techniques for producing
existing commodities and new methods of industrial organisation.

Hayek highlighted the central role of the price mechanism in

facilitating the effective mobilisation of local knowledge of
resources, technology and preferences. In common with mainstream
economics (namely, general equilibrium theory), however, Hayek's
analysis suffers from one serious problem: it assumes that all market
participants are price-takers. The question remains: how are prices
(and other elements of the marketing mix) determined, and how do
they move towards their equilibrium levels?

2.2 Kirzner's theory of entrepreneurship

Kirzner bridges the theoretical deficit left by Hayek by providing a

theory of entrepreneurial price adjustment which develops the work
of Mises [1949]. In Kirzner's theory, the price adjuster is the
entrepreneur. Entrepreneurs perceive changes in economic
circumstances, discover imperfect coordination between individual
decisions and adjust prices to new market conditions. In so doing,
entrepreneurs bring prices from one equilibrium (market-clearing)
level to another. Kirzner's perspective on entrepreneurship thus
seeks to explain the coordination of tastes, technolOgies, and
resources [1973, p.219ff] ..

In the following sections I provide a short summary of Kirzner's

theory of entrepreneurship and discuss in particular the factors
which provide scope for entrepreneurship.

2.2.1 Kirzner's single-period model of entrepreneurial alertness

In Kirzner's original and simplest formulation of his theory [1973,

1979], entrepreneurship is defined exclusively in terms of a market

17
for a single good within a single period. Kirzner appropriately
describes this theory of entrepreneurship as an arbitrage theory (in
fact Kirzner never distinguishes between arbitrage and
entrepreneurship). The entrepreneur in a single-period market is an
arbitrager who discovers inconsistency between transactions in
different parts of today's market [Kirzner 1982, p.154]. The
inconsistency manifests itself in a multiplicity of prices for the same
good. Market participants who sold for low prices did not
coordinate their plans with those who have bought for higher prices
[Kirzner 1973, p.222}.

The entrepreneur discovers existing interlocal price differences for

the same commodity in the same market (i.e. where buyers have
been paying too much and where sellers have been receiving too
little). The price discrepancy represents an opportunity for pure
entrepreneurial profit. The entrepreneur knows exactly what to do:
the entrepreneur bridges the gap by offering to buy for a little more
and to sell for a little less [Kirzner 1973, p.41].

The price movements arising from entrepreneurial actions gradually

communicate increasingly accurate information to more and more
market participants [Kirzner 1973, pp.228-229]. The actions of
pioneering entrepreneurs confront less alert entrepreneurs and
imitators with information that they themselves were not
sufficiently alert to discover [Kirzner 1973, p.223, 229]. Thus, the
process of capturing entrepreneurial profits is at the same time a
process of correcting market ignorance.

Kirzner extends this simple analysis to include arbitrage

opportunities ansmg from imperfect coordination between
transactions in resource markets and those in product markets. The
imperfect coordination expresses itself in divergences between the
price of inputs in factor markets and the price of outputs in product
markets. More precisely, the divergence represents the difference
"between the sum of prices on resource markets of a bundle of
factors that are able to produce a product and the price of that
output on the product market" [Kirzner 1973, p.44}. Thus,

18
entrepreneurship includes alertness to price differences in factor and
product markets for what is essentially the same good.1 0

Indeed, it is maintained that one of the most "crucial junctures"

where entrepreneurial alertness is likely to be required is the
interface between the factor market and the product market because
many of the unnoticed opportunities comprise possibilities for
improved coordination between transactions in factor markets and
product markets [Kirzner 1973, p.441. This then can also be expected
to be the major locus of entrepreneurial activity. The entrepreneur
can thus be conceived as a type of linking pin or middle person
linking external factor and product markets: "The essence of
entrepreneurial activity ... involves simultaneous participation in
more than one "market"- in fact, this activity consists of linking up
different markets" [Kirzner 1973, p.124 original emphasisl. In New
Zealand, the reform of key input markets (for finance, energy,
transport, and labour) have given a spur to entrepreneurial activity
between factor and product markets.

2.2.2 Kirzner's multi-period model

The single-period arbitrage theory is limited to the more or less

instantaneous discovery and exploitation of interlocal price
differences. In the generalisation of this theory, Kirzner uses single-
period alertness as an analogy for speculative entrepreneurship in a
multi-period context: that is, for a theory of the discovery and
exploitation of intertemporal (rather than interlocal) price differences
in the same commodity market or between factor and product
markets. It is assumed that alertness to imperfect coordination
between different parts of today's market is the same as recognising
imperfect coordination between transactions today and transactions
in the next period's market [Kirzner 1982c, p.154]. In short, the

10. Even though it has a different physical form, the bundle of inputs is
regarded as the "same" as the end product into which the bundle is
transformed, because the bundle of inputs "contains all that is technologically
required (and no more than is required)'" to make the end product (Kirzner
1973, p.BS, p.2221.

19
coordination of markets across space (Le. arbitrage) is regarded as
essentially the same as the coordination of markets across time (Le.
speculation). Furthermore, the overall function of entrepreneurship
in a multi-period context is argued not to change from that in the
single-period case: "It is still the case ... that the entrepreneurial
function is that of bringing about a tendency for transactions in
different parts of the market (conceived broadly now as including
transactions entered into at different times) to be made in greater
mutual consistency" [Kirzner 1982c, p.154J. In the single-period case,
the entrepreneur equilibrates the present market by bringing about
convergence towards a uniform market price. Correspondingly, in
the multi-period case, the entrepreneur coordinates present
transactions with future transactions [High 1982, p.1641. Kirzner also
extends the arbitrage analogy to include the introduction of new
productive processes, new products and new forms of organisation.

2.2.3 Ignorance as the source of entrepreneurial opportunities

As mentioned above, according to Kirzner's theory, scope for

entrepreneurial activity is provided by imperfect coordination
between transactions in different parts of the market. The imperfect
coordination in turn arises from ignorance.ll Indeed, the particular
type of ignorance that Kirzner argues is important for providing
scope for entrepreneurial alertness is the inexplicable "failure to
utilise a resource available and ready to hand", the failure of market
participants to perceive opportunities "staring them in the face"
[Kirzner 1979, p.130]. The term "ignorance" means that market
participants are unaware of and overlook opportunities available to
them. Potential buyers are unaware that potential sellers exist who
would sell to them at more favourable terms. Potential sellers are
unaware that potential buyers exist who would buy from them at

11. In contrast, in a situation of perfect knowledge and no ignorance, one

would expect Jevon's Law of Indifference or Law of One Price to prevail. This
law asserts that there cannot be two prices for the same good in the same open
market at any given point in time [Kirzner 1979, p.131 J. The Law of
Indifference can De extended to situations in which the !'UIl1 of input prices is
equal to the price of the output that those inputs generate.

20
higher prices lKirzner 1979, pp.69-70; 1973, p.4l, 44J. Opportunities
for mutually beneficial exchange between buyers and sellers are not
noticed and fail to be exploited. "We notice immediately that where
the conditions for exchange in fact exist but are not exploited owing
to ignorance there now exists scope for profitable entrepreneurship"
[Kirzner 1973, p.216].

According to Kirzner, knowledge of a profit opportunity simply

involves entrepreneurs opening their eyes and discovering economic
facts that had previously been overlooked by all other market
participants. The entrepreneur simply perceives an exogenous
change that has already taken place in consumer tastes,
technological knowledge or resource availability.

It should be noted that imperfect coordination between decisions

(i.e. market disequilibrium) and the resultant opportunities for
entrepreneurship cannot be wholly explained in terms of high
positive transaction and information costs. For even in a market with
zero transaction costs, mutually beneficial exchanges might still fail
to take place (and hence scope for entrepreneurial alertness may still
arise). The implication is that public policies to reduce transaction
costs may not necessarily increase entrepreneurial activity. If the
members ora society are not alert, profitable exchanges will fail to
occur even under ideal conditions of zero transaction costs. This
point is discussed further in Section 2.3.1.

2.3 Characteristics ()f entrepreneurial alertness

It is important to emphasise a number of important characteristics of

entrepreneurial alertness if we are to appreciate this elusive concept
and to have any hope of developing a public policy framework
which is conducive to it. A general point is that entrepreneurship is
not a factor of production, not even a special kind of productive
factor [Kirzner 1973, p.66; 1979, pp.180-181]. The characteristics of
entrepreneurial alertness which distinguish it sharply from
conventional economic resources can be summarised as follows:

21
(i) entrepreneurial alertness does not represent the mere possession of
superior knowledge of market opportunities;

(iD entrepreneurial alertness is non-deployable and tacit;

(iii) no market exists for hiring entrepreneurial services, and

entrepreneurship cannot be treated in terms of demand and supply
curves;

(iv) entrepreneurship is costless;

(v) entrepreneurial alertness is not a potential stock available to

society.

2.3.1 Entrepreneurial alertness does not represent the mere possession of

superior knowledge

Entrepreneurial alertness is "the knowledge of where to obtain

information (or other resources) and how to deploy it" [Kirzner 1979,
p.B]. Entrepreneurial alertness is a kind of prior knowledge or
foreknowledge. In this connection Kirzner is echoing the distinction
between two types of knowledge recognised by Samuel Johnson:
"Knowledge is of two kinds. We know a subject ourselves, or we
know where we can find information about it". Entrepreneurial
alertness refers to the latter kind of knowledge. More specifically,
entrepreneurial alertness is defined as the knowledge of where to
find market data rather than the knowledge of substantive market
information per se [Kirzner 1973, pp.67-681.

An important implication of this definition is that alertness does not

represent the possession of superior knowledge concerning market
opportunities. The entrepreneur is not necessarily privy to specific
or localised information that other agents do not possess. "What the
entrepreneur possesses rather is a sense for discovering what is
around the corner" fKirzner 19B4b, p.3J. Alertness does not involve
simply knowing more than others do where inputs can be

22
purchased most cheaply or where outputs can be sold at the highest
prices [Kirzner 1973, p.66].

Hence, entrepreneurship is alertness to the opportunities presented

by new and existing information rather than the possession of
information by itself [Kirzner 1973, p.68]. This distinction may be
clarified by considering the example of an entrepreneur who hires a
marketing manager [1973, p.681. It is granted that the marketing
manager may possess superior knowledge concerning market
conditions: specific or localised information on changes in the
marketing environment, including changes in the problems faced by
particular market segments. However, since the manager cannot see
how her knowledge can be successfully employed (if she had done,
she would have acted as her own employer), it is the entrepreneur
who exhibits the greater degree of alertness in perceiving the
opportunity presented by the information possessed by the
manager. "(T)he alertness of the entrepreneur is the abstract, very
general and rarefied kind of knowledge which we must ultimately
credit with discovering and exploiting the opportunities specifically
unearthed by those whom [the entrepreneur) has been wise enough
to hire, directly and indirectly" (Kirzner 1973, p.691.

If entrepreneurship were conceivable in terms of superior

knowledge, there would exist a factor market in which the services
of people who possess such entrepreneurial knowledge could be
hired [Kirzner 1973, p.66; 1979, p.174]. However, no such market
exists (see below).

Hence, public policy proposals to increase the supply of market

information and technical information (e.g. trade commissioner
services, information buros, statistical data etc) cannot be considered
to increase entrepreneurship directly. Entrepreneurial alertness is
still required to perceive any profit opportunities that may be
presented by such information. Entrepreneurship can also be argued
to be pushed back to an earlier stage: the stage at which public
policy-makers decide on where to find relevant information and
when they choose the information they consider worth collecting in
the first place. The completion of any possible mutually beneficial

23
transactions which are suggested by publicly-provided or publicly-
funded information is by no means inevitable, and is very definitely
not automatic or instantaneous. To have access (even free access) to
information about trading opportunities is by no means sufficient to
ensure that these opportunities will ever be discovered and
exploited. (Free) access to information does not correspond to
instantaneous perception and awareness of the usefulness of that
information. People may still not be aware of that information, even
if the government were to make it available at zero cost; they must
still perceive the opportunity to learn that information [cf. Kirzner
1973, p.2271.

2.3.2 Entrepreneurial alertness is non-deployable and tacit

It is argued that entrepreneurial alertness differs fundamentally

from conventional economic resources, such as technical knowledge,
in that, unlike technical knowledge, it is not possible to make
deliberate decisions concerning the deployment of entrepreneurial
alertness. The entrepreneur is not able to decide whether or not to
deploy it, for which competing purposes to deploy it, and how and
in what quantity to deploy it [Kirzner 1983b, p.641. In the course of
entrepreneurial decision-making, the entrepreneur does not consider
his or her hunches as a means (i.e a stock of knowledge) available to
achieve given ends [Kirzner 1979, p.1811. The entrepreneur cannot
decide to allocate, say, 10% of his or her entrepreneurial alertness to
the discovery of opportunity A, and the remaining 90% to the
discovery of opportunity B. Entrepreneurial alertness is not a
resource that can be acquired deliberately like other aspects of
human capital.

A major factor which gives rise to the non-deployability of

entrepreneurship is its tacit nature. An essential difference between
entrepreneurial and technical knowledge is that the entrepreneur
lacks self-consciousness concerning the former. Rather than being
aware of their hunches, entrepreneurs' actions simply reflect their
hunches [Kirzner 1979, p.1691. A further asp~ct of this tacit quality is
that entrepreneurs are not able to articulate or explain their
alertness.

24
2.3.3 No market existsJor hiring entrepreneurial services

The implication of the previous arguments is that no market exists

for the hire of entrepreneurial services because the market and the
entrepreneur are unaware of the need for (or the existence of)
entrepreneurial alertness for any particular opportunity [Kirzner
1979, p.174, ]80-181; 1983b, p.63]. Furthermore, the market does not
recognise that any particular individuals possess entrepreneurial
alertness. It does not identify any specific ability for discovering
price discrepancies or profit opportunities, even though individuals
differ in their ability to perceive entrepreneurial opportunities. Were
the market to recognise entrepreneurial alertness in the sense of an
available useful resource, there would be "markets in which this
factor service was hired, with its price rising to reflect its full
productivity, ruling out scope for pure market profit" [Kirzner 1979,
p.1811.

Consequently, strictly speaking, it is not possible to' treat

entrepreneurship in terms of demand and supply curves. The
market does not demand (in the ordinary sense) the services of
entrepreneurs. For any instance of imperfect plan coordination
about which market participants are supposed to be ignorant, it is
not possible for these same market participants then to demand a
service that is supposed to discover that very maladjustment. It
should be noted that to hire "an entrepreneur" is to be an
entrepreneur [Kirzner 1983b, p.69]. (On the other hand, if they are
aware of a particular opportunity, then they do not need to hire alert
entrepreneurs to discover it). Market entrepreneurship reveals to
market participants imperfect coordination and opportunities which
they did not realise existed, and which they did not recognise as
needing correction.

The implication for public policy-makers is that identifying

entrepreneurs ex ante is very problematic. Furthermore, if public
policy-makers subjectively believe that they can discover
opportunities to improve the existing structure of the economy (d.
the "think big" debacle), then they are also trying to act as
entrepreneurs by spotting possibilities for better coordination.

25
2.3.4 Entrepreneurship is costless

An essential characteristic of entrepreneurial knowledge is that it is

spontaneously learnt, spontaneous in the sense that it is acquired
entirely without being planned. Entrepreneurial alertness is the
ability to discover unexploited profit opportunities without deliberate
search for information. Alertness, however, may include the
discovery of previously unrecognised opportunities for deliberate
search (e.g. market research), but this initial discovery is itself not
the product of deliberate search activity by the entrepreneur
[Kirzner 1979, pp.142, 148-1491.12

The cost of using technical knowledge is measured in terms of

opportunity cost: the cost of using technical knowledge for a
particular purpose is the value of the best forgone alternative. In
contrast, entrepreneurial alertness does not involve opportunity
costs because hunches are learnt spontaneously. No resource inputs
are involved in acquiring them since no deliberate search is
undertaken. However, in describing entrepreneurial knowledge as
costless, Kirzner makes one caveat: "To describe (spontaneously
acquired) knowledge ... as having been costless or a free good is
somewhat misleading. To be sure, the spontaneous learner has
incurred no cost or sacrifice through his learning. But this is not so
much because the knowledge was costlessly available as because the
knowledge was simply not deliberately sought" [Kirzner ] 979,
p.143].

Demsetz [1983, p.278] does not agree that entrepreneurship is

costless. Firstly, he regards the time and mental energy that an
entrepreneur devotes to considering a prospect and judging its
potential as a cost of maintaining alertness, because the entrepreneur's
mind is diverted from other tasks. Secondly, costly prior acquisition
of knowledge may be necessary in order to discover opportunities.
However, Demsetz concedes that in many cases the costs of
alertness would not be significantly different from zero.

12. For further discussion on the differences between deliberate search and
entrepreneurial alertness, see Reekie 1984, pp.93-100.

26
In addition, not all theorists who emphasise superior perception as
the defining characteristic of entrepreneurship arc in agreement
with Kirzner's exclusion of search activity from the entrepreneurial
function. In contrast to Kirzner, for instance, Casson [1982] includes
the search for information within the entrepreneurial function and
emphasises that entrepreneurial search does not just involve the
extensive collection of facts. A synthesis is also required in
identifying opportunities for coordination [1982, p.120, pp.146-1481.
Furthermore, Casson [1982, p.29] regards the judgmental decision-
making of the entrepreneur as having a positive opportunity cost.

One implication of this feature of Kirznerian entrepreneurship is

that public policies which aim to reduce production and transaction
costs (via subsidies or R&D tax write-oHs) do not necessarily
increase the supply of pure entrepreneurship because the latter is
costless. The costs of entrepreneurship cannot be reduced by public
policy or any other means.

2.3 5 Entrepreneurial alertness is not a potential stock available to society

The non-deployable nature of entrepreneurial alertness gives rise to

another important characteristic. This is the feature that the potential
stock of entrepreneurial alertness in a society cannot be usefully
treated as some available quantity of a resource which is to be
allocated and used by an economic system. Rather entrepreneurial
alertness is embedded in the decisions of individuals [Kirzner 1983b,
pp.64-66]. Entrepreneurial alertness "somehow emerges into view at
the precise moment when decisions have to be made" [1983b, p.661.
The implication of this in turn is that the potential stock of
entrepreneurial alertness in a society cannot be measured. Thus, it is
not possible to derive quantitative relationships between
entrepreneurship and economic growth, although it is possible to
inquire analytically into how the institutional framework may affect
the alertness in which decisions are implanted. Furthermore, it is not
possible to compare the success and efficiency with which different

27
economic systems or institutional structures deploy a uniformly
given stock of entrepreneurship.

Having concluded my brief summary of Kirzner's conception of

entrepreneurial alertness, I will now move on to discuss the
psychological determinants of entrepreneurship.

28
3. PSYCHOLOGICAL DETERMINANTS OF
ENTREPRENEURSHIP

3.1 A brief review of psychological studies of' entrepreneurship

Kirzner accepts that different individuals possess vastly different

degrees of entrepreneurial alertness, that is, that they exhibit
different abilities to learn without deliberate search. "Some are quick
to spot as yet unnoticed opportunities, others notice only the
opportunities revealed by the discoveries of others. In some
societies, in some climates, among some groups, it appears that
entrepreneurial alertness is keener than in others" [Kirzner 1983b,
p.67). Entrepreneurs are those individuals whose alertness is the
"most acute, the most sensitive, and the most accurate" and "the best
developed" [Kirzner 1979, p.149].

An important line of research is to explain the psychological

determinants of individual differences in entrepreneurial alertness.
Unfortunately, many empirical studies into the psychology of the
entrepreneur have not excelled in conceptual clarity. Definitions of
the entrepreneur have often been vague and do not correspond
directly to the precise notions of entrepreneurship in economic
theory [Kets De Vries 1977, p.38]. The entrepreneur is often defined
loosely as an individual who sets up a business venture, usually a
firm (i.e. the unit of analysis is "enterprisers" rather than
entrepreneurs). The distinction between entrepreneur and manager
is also often blurred. In spite of these methodological and

29
definitional problems, however, there is some utility in surveying
briefly the psychological literature of the entrepreneur.13

3.1.1 Motivational variable: need/or achievement

The most important early contributions to the psychological

literature of the entrepreneur were provided by a psychologist,
McClelIand [1961, 1965J, and his associates [e.g. McCIeIIand and
Winter 1969J. The objective of these pioneering studies was to
determine whether entrepreneurs tend to possess a particular
psychological set of characteristics. The studies focused on the
concept of need for achievement (n Ach). Individuals with a high
nAch are depicted as those who prefer to be responsible for solving
problems and for setting goals to be reached by their own efforts as
well as having a strong desire to receive feedback on their task
accomplishment. On the basis of these demonstrated characteristics,
McClelland hypothesised that entrepreneurs would have high n Ach
because they seemed to possess the same characteristics. The
empirical results of McCIelIand's studies were interpreted as
corroborating the relationship between n Ach and entrepreneurial
tendencies. However, the studies suffer from several problems,
including the fact that McClelland's earlier studies were based on a
rather broad definition of entrepreneurial occupations.1 4

Gilad [1982, pp.140-141] considers n Ach not to add insights to the

essence of entrepreneurship and to the factors influencing
entrepreneurial activity. He considers Rotter's [1966] locus of control
construct to be more promising, especially because it can be usefully
linked to Kirzner's concept of entrepreneurial alertness, as we shall
see soon. Locus of control is considered by Gilad to be more

13. For extensive surveys of the literature on the psychology' of the

entrepreneur, See Brockhaus 1982, Brockhaus and Horwitz 1986, Gllad 1986,
and Maital1988 (Vol. 11, Part 91.
14. For a discussion of the methodological shortcomings of the achievement
motivation approach, see Gasse 1982 [pp.57-581.

30
fundamental to entrepreneurship than the need for achievement and
risk-taking propensities.

3.1.2. Locus of control

According to the theory of locus of control, an individual believes that

the outcome of an event is either within or beyond his or her
personal control. An individual with a belief in internal control
perceives that an event is "contingent upon his own behaviour or his
own relatively permanent characteristics" IRotter 1966, p.ll.
"Internal" people believe that they have some control on the course
of events in their life and that they are, therefore, responsible for
their own destiny. They expect that the environment can be
controlled by their own actions. In contrast, an individual with a
belief in external control perceives an event "as following some
action of his own but not ... entirely contingent upon his action"
[Rotter 1966, p.l]. An "external" person interprets an event as the
result of outside factors that they cannot influence, such as luck,
chance, fate, or sees events "as under the control of powerful others, or
as unpredictable because of the great complexity of the forces
surrounding him" [Rotter 1966, p.l; emphasis addedl.

Indeed, there is some support within the empirical psychological

literature for characterising an entrepreneur as an internal person.
McClelland's [1961] work is consistent with the proposition that
entrepreneurs are more internal than the general population in their
locus-of-control beliefs. More recently, Shapero [1975] has used
Rotter's Internal-External scale to determine the locus of control of
entrepreneurs. He found that the mean scores of 34 Italian
entrepreneurs and 101 Texas entrepreneurs were more internal than
those reported by Rotter [1966] for the general population (with the
exception of Peace Corps volunteers).

Shapero's finding was corroborated some years later by Brockhaus

and Nord f1979J. They also found that entrepreneurs did tend to
hold more internal locus of control beliefs than those reported by
Ratter (1966] for all groups in the general population except Pearce

31
Corps trainees. However, Brockhaus and Nord did not find that
locus of control beliefs differ significantly between entrepreneurs
and managers.

Brockhaus [1975] found that graduate business school students who

intended to become entrepreneurs held significantly more internal
locus of control beliefs than their classmates who did not intend to
set up business ventures. Furthermore, Brockhaus [1982, p.44] and
Shapero [1975, p.84] refer to Borland's [1974] doctoral dissertation
which determined that the concept of internal locus of control was a
better predictor of entrepreneurial intentions to launch a new
business than the need for achievement (n Ach). Hence, it may be a
superior concept for identifying entrepreneurs. However, Hull,
Bo sI ey and Udell's [1980] study of business school alumni did not
find a relationship between locus of control beliefs and the decision
to start a business.

In a more recent study, Brockhaus [1980] found that the beliefs of

owners of new businesses that still existed three years later were
more internal than the beliefs of owners of businesses that had
closed down. Hence the locus of control concept may hold promise
for distinguishing between successful and unsuccessful
entrepreneurs.

PsycholOgical studies have established that certain characteristics,

abilities and behaviour patterns are correlated with internal locus of
control. For our purposes, it is quite Significant that various studies
have discovered that a belief in internal locus of control is associated
with a more active role by individuals i'n shaping events and with
striving to control their environment [Atkinson 1957, McClelland
1961, Shapero 1975, Brockhaus 1975]. It has also been found that
internals are more likely to have a high need for achievement
(n Ach) than individuals with external locus of control beliefs.
Furthermore, internal persons have been found: to more actively
search for strategic information and knowledge relevant to their
situation and to be more likely to attain such knowledge [Seeman
and Evans 1962; van Raaij 1985, p.8}; and to be more efficient at
processing information [Wolk and DuCette 1974}. Thus, if it is

32
accepted that entrepreneurs are internal people, then entrepreneurs
may also exhibit these characteristics. .

Individual differences in internality decide who is entrepreneur and

who is employee. These differences in locus of control determine
who directs and organises all the inputs with the idea of selling them
in future transactions and who is in a position of subordination.
Individuals who are highly internal hire employees who are much
less internal and who are willing to temporarily limit their own
freedom of interaction rcf. Witt 1987, p.1901. The latter prefer
situations in which "transaction rights" arc decided and enforced by
others (Witt defines transaction rights as "rules stating how and with
whom someone is allowed to make transactions" (1987, p.181]). In
the firm, the entrepreneur achieves restrictions of trClnsaction rights
by private contract agreements with employees - which provides a
partial explanation for the hierarchical nature of the firm. Employees
who gain increasing confidence in their ability to control events, and
who perceive opportunities for personal gain outside the firm, will
tend to leave the firm and set up their own venture.

3.2 The causal link between locus of' control and entrepreneurial
alertness

An advantage of Rotter's psychological construct of locus of control

(LOc) is that it can be successfully linked to Kirzner's economic
concept of entrepreneurial alertness [Cilad 1982, 19861. From his
survey of empirical studies into the psychology of the entrepreneur,
Cilad concludes that an individual's locus of control is a major factor
determining his or her level of entrepreneurial alertness. In particular,
internal LOC is clearly associated with a heightened alertness to
opportunities for gain [Cilad 1982, pp.150-1531. The chain of
causality is depicted in the figure below. According to the diagram,
internal locus of control gives risc to more acute alertness which is
necessary for incidental learning (i.e. the recognition of profit
opportunities once they are encountered). This in turn results in
entrepreneurial behaviour.

33
 Figure 3.1 : The Causal Link Between
LOC Beliefs and Entrepreneurship

Internal

LOC
... Alertness to

opportunities ~
Incidental

learnl"g
... Entrepreneurial

behaviour

- ji

+
Intentional

learning

Sou/C8: Gi/ad [1982,p.15IJ

More formally, the hypothesised relationships between the relevant

variables can be specified as follows:

=
E f(C, T) where E =entrepreneurial activity
C = incidental learning (i.e. noticing
opportunities when they exist)
T = intentional learning (substantiating
one's knowledge about these
opportunities through deliberate
search for more information)

T=g(C)

C =h(A) where A =entrepreneurial alertness

34
 A =j(L) where L = (subjectively believed) locus of
control.

Therefore, entrepreneurial activity is also a function of locus of

control:

E =F(L)

The first derivatives of all the above functions are assumed to be

positive.

To this schema, we can also add:

L =k(l, P, M, D, S, B)

where 1= .the institutional framework, including the

type of political and economic system
(especially the degree of decentralisation in
economic decision-making and the system
of property rights) which determines the
"objective" locus of control (the objective
distribution of power over outcomes in the
environment [Gilad 1986, p.201]);
P = economic policy, especially: the stability
and neutrality of fiscal and monetary policy;
the nature and magnitude of taxes on
business and individuals; and the character
of regulatory constraints upon the
behaviour of firms and individuals (which
determine the distribution of power
between the decision-maker and outside
powers) [cf. BaumoI1983];
M = the availability of role models during the
developmental phase of the creative
individual's life (especially as internal LOC
expectancy appears to be passed on from

35
 entrepreneurial parents to their children
[Gilad 1982, pp.l53-154]);
°= other characteristics of the familial and
educational environment during the
developmental phase in an individual's life;
5 = cultural and social attitudes and norms
(e.g. fatalistic attitudes embodied in Latin
American social values conducive to
external locus of control beliefs);
B = the individual's sodo-economic
background and status (external LOC being
associated with lower socio-economic status
because people with a poorer socio-
economic background perceive the
opportunity structure open to them to be
narrower [Gilad 1982, p.154]).

Therefore, entrepreneurial activity too will ultimately depend upon

these factors:

E =k(j, P, M, 0, 5, B)

3.3 The relationship between institutions, regulations and LOe belief's

Of the determinants of locus of control (LOC) described above (i.e.i,

P, M, 0, 5, B), the following brief analysis will be limited to those
tractable variables which can be readily affected by public policy:
namely, the institutional framework and economic policy
(especially, regulations).1 5 We consider the effects of these factors on

15. The hypothesis can also be advanced that the locus of control of market
participants will be affected by the primary market structure in which they
find themselves. For example, buyers and sellers in (near) perfectly
com~titive markets (ef. the world market for some agricultural products)
may believe that their individual actions have no impact on prices for the
reJevant commodities. Such markets may therefore engender an external locus
of control. In contrast, monopolists or monopsomsts may enjoy greater
feelings of internal control concerning their abilities to affect prices or
quantities traded.

36
LOC beliefs (and thereby alertness, spontaneous learning, and
ultimately the exercise of entrepreneurship).16 Such a limitation of
analysis is considered appropriate for the time being "even if it is
admitted that in the last analysis intractable determinants [of
entrepreneurship] such as cultural circumstances are far more
potent in their effects... " [Baumol 1983, p.31]. We' leave the
investigation of the cultural determinants of entrepreneurship to
Chapter 6.

The institutional and constitutional framework is an important

factor in moulding and determining people's LOC beliefs [Cilad
1982, p.153, 156]. The implication is that LOC beliefs are
endogenous: it is hypothesised that the internality of economic
agents is dependent, among other things, upon the degree of
decentralisation in the economy. A society based on decentralised
control appears more likely than a centralised society to produce
citizens who believe in internal LOC [CHad 1982, p. 157; 1986, p.201;
Earl 1990, p.738]. The more decentralised an economy, the clearer
are the signals of internal control, since people's success is visibly
dependent more on their own actions and less on the activities of
"powerful others", such as the state. (However, sheer luck can still
play a significant role because entrepreneurial profits in a free
market can result from unexpected change [Kirzner 1979, p.180].) In
particular, the freedom of individuals to choose means and ends, the
freedom to try to grasp opportunities and to achieve rewards, are
prerequisites for the development of internality. Because LOC
beliefs can be influenced by economic variables, it follows that
entrepreneurship too is endogenous to the economic model [CHad
1986, p.201].

The economic environment determines people's experiences of

action-reward sequences which in turn shape the development of
their LOC beliefs. "Consistency of rewards, as well as the
dependence of rewards on onc's efforts and skills, are prime

16. For a survey of experimental findings on the determinants of LOC, see

Cilad 1984.

37
determinants of internal locus of control...Any institutional
arrangement that is related to the distribution of rewards can be
assumed to influence the LOC beliefs of the individual" [Gilad 1982,
p.154]' For example, a nation's tax policy affects the perceived net
rewards (or payoffs) from acting upon one's entrepreneurial
hunches and can be expect to affect LOC beliefs. In particular the
progressivity of the taxation structure and the existence of capital
gains taxes will affect perceptions of net profits).17 Furthermore, the
more neutral and stable are fiscal and monetary policies, the less
likely are arbitrary and unpredictable interferences perceived to be
made by "external powers" in individuals' decisions, and other
things being equal, the more likely are individuals to have feelings
of internal control and therefore the more alert they are to
entrepreneurial opportunities. In contrast, arbitrary monetary and
fiscal policies add an extra element of unpredictability to the often
intense uncertainty regarding the distribution of rewards. Hence,
they foster external LOC beliefs, and via the resulting diminution of
alertness and incidental learning, they ultimately reduce the supply
of entrepreneurial activity (see Figure 3.1 above).

It is also possible to conjecture that large-scale governmental

participation in production, trade and investment, especially a
public investment program (e.g. "think big") which crowds out
private-sector investment, promotes the attitude that outside forces
exert greater control over economic events (i.e. external LOC
beliefs).

The character of regulatory constraints has effects on the LOC beliefs

of participants in particular industries. (Regulatory constraints differ
from the institutional framework in that they are situation-specific
and less enduring.) An economic structure that is free from artificial
barriers to entry (e.g. statutory monopoly) and barriers to
participation (e.g. on the basis of gender, race, party affiliation,
religion, or caste/social class) is more conducive to evoking an

17. See Baumol (1983) for a formal model that tries to describe the impact of
taxation. and regulatory con~traints on the supply of entrepreneurship and
economic growth.

38
internal LOC than is a highly regulated, rigid structure [cf. Cilad
1982, p.155]. "If regulations affect LOC, then they will affect alertness
to opportunities and therefore the entrepreneurial discovery
process" [Cilad 1982, p.158]. Thus, in addition to distorting the
existing allocation of resources, regulations may hinder the process
of entrepreneurial discovery of opportunities. The intervention of
external regulatory powers in the determination of action-reward
sequences in a specific industry adds an clement of external control
to the situation. In this connection, current and historical New
Zealand examples include statutory marketing boards with export
monopolies in the agricultural sector, price stabilisation schemes,
prudential supervision in banking, the old system of production
subsidies and export incentives, import licensing and tariff
protection. Compared with unregulated industries, regulated
industries are less under the control of individual participants, so
that they are likely to perceive the regulatory environment as an
externally oriented power structure [Cilad 1982, p.157].

Over time, the imposition of regulations may reduce the supply of

entrepreneurship in a particular industry in at least three ways.
First, regulations may make the industry unappealing for internal
individuals outside the industry (especially once-potential entrants)
whose entrepreneurial alertness is the most acute. These individuals
will divert their attention to non-regulated industries where they
perceive a greater ability to control economic events (if regulations
become too pervasive, internal individuals might even emigrate to
less regimented economies) [Cilad 1982, p.157; 1986, p.202]. Second,
regulations can reduce the internality of established participants
who remain in the regulated industry, thereby dampening their
readiness to grasp at opportunities. Third, those incumbent
entrepreneurs who maintain their internal LOC beliefs will try to
influence the decisions of the regulatory body by means of lobbying
activity (or more extremely, bribery or blackmail). A case in point is
the lobbying by motor vehicle manufacturers and component
makers who have succeeded in obtaining a more lenient tariff
reduction program for their industry. Such entrepreneurs try to
exert their control via political rather than economic power, and it is
these strategic political actions which ,are "entrepreneurial":

39
"Arhitrage between economic and political activity is the driving
force behind redistributive politics" [Ma gee, Brock and Young, p.l;
emphasis added]. On the other hand, it is predicted that
deregulation (and with it the disbanding of governmental regulatory
agencies) will in the long run cause an increase in internality of
industry participants, and therefore, an increase in alertness to as yet
unsuspected opportunities.
3.4 Explaining sluggish entrepreneurial responses

Neoclassical approaches assume that the supply of entrepreneurial

services is highly elastic and that entrepreneurship responds
systematically and frictionlessly to the conditions of the market:

... the economist who operates in the mainstream of his

discipline assumes that the supply of entrepreneurial
services is highly elastic and that failures in
entrepreneurship are attributable to maladjustments in
the external environment. Thus, the determiruznts of
entrepreneurial performance lie on the demand side, in the
structure of economic incentives found in the market
environment - the home ground of the economist [Kilby
1971, p.3; emphasis added].

Similarly, the neo-Austrian theory of the entrepreneur would also

predict that a country which has formerly been subject to a morass
of regulations will experience thriving entrepreneurial activity (not
instantaneously, but sooner rather than later) once those regulations
are removed - largely because of the extent of discoordination
created by previous regulations, the entrepreneurial opportunities
awaiting discovery, and the new-found freedom with which to
exploit those opportunities [cf. Kirzner 1979, p.9, 32, 130,170].

In contrast, the rudiments of the behavioural theory that have been

advanced in this chapter suggest that entrepreneurial responses to
deregulatory measures may not be immediately forthcoming. In
particular, supply-side factors can account for the slow emergence of

40
entrepreneurial activity. From a behavioural perspective, changing
the institutional and regulatory structure of an economy (including
liberalisation) might not have the effects intended at the pace
expected if there is no accompanying change in the locus of control
beliefs of the members of that society. Rather than taking advantage
of the freedom of choice, the individuals may either fail to notice the
entrepreneurial opportunities available or resent or resist the change
in the institutional structure. ''To ... a group lof external individuals,
and we may add, individuals with low internality], an injection of
freedom of decisions and actions, entailing the acceptance of
personal responsibility for one's fortunes and misfortunes and the
reliance on one's own skills, may be undesirable and consequently
unsuccessful" [Cilad 1982, p.1551.

Historically, it could be argued that the institutional and regulatory

structure in New Zealand has tended to discourage highly internal
beliefs. For example, it has been the case that New Zeal~nders
generally have been accustomed to situations in which major
decisions regarding their own lives and economic destiny (e.g. in the
areas of business, health, education, welfare, retirement income)
have to a large extent been taken by powerful others, namely, the
state. Furthermore, it could be hypothesised that with respect to the
acquisition of wealth, for example, Americans have a higher internal
locus of control than do New Zealanders. Americans tend to ascribe
their economic achievement to their own efforts and skills, while
New Zealanders have tended to attribute their material well-being
to the actions taken by the government and other third parties, such
as trade unions. (It is not possible to say at this stage whether this
represents a cultural difference between the USA and New Zealand
or the effect of different institutional arrangements on people's LOC
beliefs.)

Consequently, although public policy reform in New Zealand has in

recent years removed many of the constraints on entrepreneurial
activity, there may still exist a failure to perceive and exploit
opportunities. In other words, low internal LOC beliefs may endure
for some time (perhaps even a generation) in spite of institutional
changes calling for an internal LOC and for individuals to adjust

41
more rapidly to the conditions of their environment. New Zealand's
experience of economic liberalisation, however, suggests that one
must avoid overgeneralisation. Entrepreneurial responses to
deregulation were thick and fast in some areas. Examples include
the flourish of entrepreneurial activity that followed relaxation of
entry restrictions into foreign exchange dealing, stockbroking and
banking (see Harper 1986).

The present LOC beliefs of New Zealanders, the degree of their

alertness to opportunities, and the extent of entrepreneurial activity
currently taking place are all related to the past history of the New
Zealand economy. These factors depend, in addition to the
institutional and regulatory framework, upon the past availability
of appropriate role models, previous social norms, past attitudes
towards innovativeness and a whole host of other variables
mentioned in the previous section. Indeed, it can be argued that in
the past the development of entrepreneurial talents in New Zealand
has been discouraged by public policies and that, as a result, present
and future generations of New Zealanders are having to bear the
social cost of these policies (in terms of forgone employment
opportunities). Cilad has these pertinent comments to make:

If a regime suppresses or reduces the extent of

entrepreneurial activity in a given time period, there is no
guarantee that the activity can be revived automatically
in the next period. In other words, entrepreneurial talent
is not 'available on demand', and restrictive policies and
regulations might cause damage beyond their
contemporary impact, by inhibiting the growth of future
entrepreneurial talent [1986, p.203].

If the social/political thrust of a nation moves away from

entrepreneurial achievements, reliance on free enterprise,
and sanctioning of 'economic heroes' to other concerns,
one should not be surprised to sec a decline in
entrepreneurial spirit and behaviour later on [1986,
p.205].

42
As a final point it should be noted that the direction of causality
between institutional arrangements and LOC beliefs is not
necessarily one way. Expressed formally:

L =f (I, .... ) and

1= f (L, .... ).

The institutional framework and the regulatory environment in New

Zealand are at least partly the outcome of a political process which is
responsive, among other things, to the LOC beliefs of individuals
and constituencies. David Easton's systems-theoretic analysis of
political processes can be adapted to this context. The LOC beliefs of
members of the population, in combination with their motivations,
interests, and ideologies, comprise the aggregate background of
wants which shape demands for public policy or for changes in
political personnel. Demands refer to those wants that the members
of an organised society would wish to see implemented through
public policy outputs of some sort (e.g. special-interest policies, such
as tariffs and trade restrictions, and wealth transfers) [cf. Easton
1965, pp.41-47, 70-84]. The result of this complication is that in
explaining the supply of entrepreneurship, we run into problems of
identification: that is, difficulties in disentangling the potential
simultaneous relationships which often characterise economic
phenomena.

In the next chapter, I move beyond psychological factors to consider

the cultural determinants of entrepreneurship. As we shall see,
cultural explanations also point out the possibility of a lack of
sustained vigour in entrepreneurial responses following significant
policy reform.

43
4. THE DOMINANT CULTURE OF A NATION
AND ITS ENTREPRENEURIAL CONTENT

4.1 Introduction

The policy-maker...is interested primarily in what

determines the supply of entrepreneurship and in the
means that can be used to expand it.

But there is reason to suppose that these issues are to a

very considerable extent matters of social psychology, of
social arrangements, of cultural developments and the
like [BaumoI1968, p.69].

Baumol concedes that the most important influence on

entrepreneurship are "intractable determinants" like cultural
backgrounds, religious ethics, attitudes and temperament. Such
influences are usually treated as exogenous variables in the
economic analysis of entrepreneurship. Casson [1990], however,
shows that the cultural determinants of entrepreneurship may not
be so inexplicable or intractable after a11.1 8

Casson postulates a link between entrepreneurial culture and

national economic performance. Entrepreneurial culture is identified
as a potential source of long-term competitive advantage, that is, a
source of economic rent. An entrepreneurial culture enables a nation

18. The reader is referred to Hill and Harper [1994) for a discussion of other
theories which predict that sociological and cultural factors affect the supply
of entrepreneurship.

44
to make better use of its resource endowments than would
otherwise be possible and to better discover and exploit profitable
opportunities for trade that exist both domestically and
internationally. 'The basic argument is that, after allowing for
obvious factors such as different resource endowments and different
attitudes towards work and saving, comparative economic
performance is explained by comparative transaction costs, and that
these transaction costs are culture-specific. The economic content of
a culture is, then, related to implicit scientific and religious attitudes
which are transmitted through education, the media, and personal
contact within social groups" (Casson 1990, p.viii]. Culture can be
used as a source of long-term competitive advantage by the firms
headquartered in a country because it is complex and difficult to
imitate. Cultural attitudes and beliefs possess an important tacit
dimension: firstly, people generally are not conscious that they hold
such beliefs; and secondly, people are also not readily able to
articulate their cultural attitudes and values.

Casson provides an analytical framework which combines cultural

and economic determinants of economic growth and proposes a
possible procedure for rating the entrepreneurial content of
dominant cultures in different countries. This section of the paper is
devoted to outlining that framework and procedure and, where
poSSible, it applies them to the New Zealand context. It should be
noted, however, that cultural explanations of economic development
should not be overemphasised. Culture is not just exogenous - as
Baumol contends - it is developed and shaped by the institutional
environment created by public policies.

A further point to note is that Casson's definition of

entrepreneurship is not identical to that which has been adopted in
earlier chapters of this book (namely, Kirzner's concept of
entrepreneurial alertness), although it is clearly complementary.
Casson defines the entrepreneur as "someone who specialises in
taking judgmental decisions about the coordination of scarce
resources" [1982, p.23]. The entrepreneur makes judgmental
decisions that affect the location, form, and use of goods, resources
or institutions. A judgmental decision is one where different

45
individuals, sharing the same objectives and acting under similar
circumstances, would make different decisions. The difference arises
because they have different access to information, or different
interpretation of it. As with Kirzner's conception of
entrepreneurship, Casson's concept of entrepreneurial coordination
captures the fact that the entrepreneur is not concerned merely with
the perpetuation of the existing allocation of resources, but with
improving upon it [Casson 1982, p.24].

According to Casson, culture comprises a number of significant

aspects, which can be classified into two major categories: technical
and moral aspects. We examine each of these aspects in detail below.
4.2 Technical aspects of culture

There are three main elements to the technical aspects of culture:

(i)a scientific outlook which promotes technological competitiveness.

This outlook is reflected in realistic rather than anthropomorphic
explanations of nature and social phenomena, in an emphasis upon
conscious and systematic learning by trial and error (especially by
piecemeal experimentation and observation) and in the search for ever
more universal and testable hypotheses.

(ii) an appreciation of the systems view of the natural, social and

economic environment. This aspect leads individuals to recognise the
division of labour within an industry, firm or team and to act in
accordance with their own comparative advantage. It leads them to
appreciate the division of labour not only in the transformation of
materials but also in the mental processes involved in the negotiating,
monitoring and controlling of transactions (especially within
managerial hierarchies). It assists in the development of new
technologies and in managing complex logistical systems which
coordinate external transactions between the firm and its input and
output markets as well as intra-firm transactions. An appreciation of
system interdependencies also fosters a recognition of the importance
of quality control throughout all phases of the production and
marketing process [Casson 1990, p.90].

46
(iii) and a sophisticated approach to decision-making (especially an
understanding of the principles of delegation). This gives rise to
managerial hierarchies in firms.

According to Casson, these technical aspects affect a person's grasp

of the environment and the quality of his or her decision-making,
including the quality of entrepreneurial decision-making about the
reallocation of scarce resources. It may also be added that the
scientific outlook, the systems view and a sophisticated approach to
decision-making can also be combined into a marketing orientation
which seeks to solve customer problems by a method of trial and
error (i.e. systematic new product development and marketing
research).
4.3 Moral aspects of culture

The moral dimension of culture legitimates general principles of

business behaviour and motivates entrepreneurial commitments of
various kinds. It also influences the degree to which people try to
fulfil their contractual obligations by establishing norms which
people are expected to achieve: "... moral commitments reduce a
wide range of different transaction costs within a territorial unit....
some moral attitudes are far more entrepreneurial than others, and
so are more conducive to the process of economic development"
[Casson 1990, p.92]. The moral aspects of culture which
entrepreneurs draw upon in their social environment may have an
important effect on the perceived relative transaction costs
associated with different organisational arrangements (such as
market governance, private ordering, third-party enforcement and
vertical integration). For example, other things being equal, an
entrepreneur seeking to obtain a patent licence (including the right
to manufacture future patented inventions) from a research
company will expect lower transaction costs in a high-trust culture
(which supports mutual trust, reciprocity and honesty) than in a
low-trust culture (which emphasises the pursuit of short-term
private interest) [cf. Yu 1981; Casson 1990].

47
We will now discuss particular aspects of the moral dimension of
culture in more detail.

The philosophy of voluntarism is an important ~oral aspect of culture

which is conducive to entrepreneurship. It grants economic agents
the freedom to interact with each other and to form contracts. It
implies a decentralisation of powers away from the state and results
in a minimum intrusion of governmental institutions in private
economic affairs. (This obviously relates to our earlier discussion of
the institutional framework and internal locus of control.)

In addition to the philosophy of voluntarism, Casson defines the

moral dimension of culture to include moral commitments and ethics
of achievement. Important types of moral commitments include
commitments to tell the truth and to respect other people's property and
interests. Moral commitments also include respect for the legal process
and attitudes regarding the integrity of the legal system and courts.
A culture which encourages a high degree of moral commitment
among its members will make members more trustworthy and so
reduce agency and transaction costs. These commitments help to
reassure market participants that they will not be exposed to
opportunistic behaviour on the part of their trading partners.

In the context of structural adjustment, another important moral

commitment is to the mission of the group. Commitments of this kind
may be static or progressive, inward-looking or outward-looking.
Static commitments attempt to resist changes in the environment
and to preserve the status quo, whereas progressive commitments
imply aiming for long-term targets but adapting to changing
circumstances in the course of time. Inward-looking group
objectives focus on the internal structure and processes of the group,
whereas outward-looking objectives emphasise the comparative
performance of the group relative to rivals. Static inward-looking
objectives are often typified by a predominant concern with the
redistribution of wealth within a social group; progressive outward-
looking objectives are characterised by an emphasis upon creating
more wealth than rival groups.

48
Long-tenn commitment to particular friends and partners has an
ambiguous impact on the degree of entrepreneurship in a nation. On
the one hand, it is likely to engender trust and increase transactional
efficiency. On the other hand, longevity of personal relationships
may impede structural adjustment if it implies immobility of labour
and a sluggish response to different regional market conditions.

Another important moral commitment is the emphasis upon specific

roles within a culture. A society which places much weight upon
preserving roles based upon traditional craft skills or obsolete jobs,
for example, will be very susceptible to social rigidities which can
hamper economic development and structural change.

Commitments in the form of personal loyalty to an employer,

respect for authority and respect for other people are other moral
aspects of culture. Moral commitments not identified by Casson but
which are increasingly important in New Zealand and overseas
include a respect for the environment (land, forests and fisheries)
and its sustainability. Such commitments may inhibit or at least
redirect entrepreneurial activity.

The final element of the moral dimension of culture which Casson

discusses is the ethic of achievement. This ethic affects the intensity
with which economic agents strive to meet individual performance
norms and quality standards, regardless of monitoring expenditures
by the relevant principals. The ethic of achievement has four aspects:

(i) the desire to realise specific performance nonns and quality

standards. The highest norm is perfect optimisation, making no
allowance for human error, shirking or organisational slack.

(ii) confidence in the capacity to maintain high norms (including high

standards of product quality) and confidence that large discrepancies
between actual performance and the norm can be overcome by effort.

(iii) persistence in the application of special effort to eliminate

discrepancies between actual and target performance.

49
(iv) an ascetic attitude of self-denial which accepts a sacrifice of
material comfort and leisure time in the pursuit of high performance
nonns.

It is important not to equate entrepreneurial culture with a climate

of the aggressive and independent pursuit of personal short-term
interests. An entrepreneurial culture requires an environment in
which entrepreneurs can also cooperate with suppliers, customers,
capitalists, employees and other entrepreneurs in one or more
functions or markets. "...a successful entrepreneurial culture must
support both competitive and co-operative behaviour... " [Casson
1990, p.93]. Analyses of socio-cultural change in cultural
anthropology also emphasise the importance of supportive
relationships and reciprocity in people's actions and personal
relations. Cultural dynamics affect the kind and degree of
cooperation between entrepreneurial teams and firms and influence
the types of social groups that entrepreneurs and other market
participants form to encourage cooperative transactions between
each other.

In this connection, it is worth noting that Williamson's original

[1975] theory of transaction costs fails to acknowledge sufficiently
the complex patterns of cooperation that may emerge in economic
affairs. It predicts that the distribution of transactions in industries
will be bimodal: more specifically, it predicts that most activity in an
industry will be organised by way of either discrete (arm's length)
market transactions at the one extreme or highly centralised,
hierarchical transactions at the other, with very few hybrid
transactions located in between. This dichotomy itself reflects a
cultural, American bias. It ignores the widespread networks of close
cooperation in production and development between independent
organisations within an industry, even though these companies may
be entirely separate in ownership and control. Coordination is
achieved through cooperation when two or more independent
organisations agree to match their related plans in advance
[Richard son 1972, p.890]. For example, in Japan, complex networks
of reciprocal obligations, inter-firm collaboration and affiliation and
high levels of mutual trust allow social groups to respond quickly

50
and flexibly to changes in their environments (see Harper 1993a,
1993b). Another example is the Prato district in Italy which is
discussed in Section 5.4.1.

4.4 Comparison of New Zealand culture with other cultures

Tables 4.1, 4.2 and 4.3 attempt to rate New Zealand culture by its
entrepreneurial content. The ratings for New Zealand were
provided by me; the ratings for the other countries were provided
by Casson [1990, pp.91-971. Without a doubt, this is a very highly
subjective exercise and one that is fraught with major difficulties.

Several points thus need to be made before proceeding with

Casson's schema. First, the ratings were not supplied by the same
person in the same time period. Second, I do not agree with all of
Casson's ratings. For example, I was surprised at the low
entrepreneurial rating given to Italy in Table 4.1 (and to the zero
score for the philosophy of voluntarism, in particular).

Third, all countries received the same rating according to the

criterion of respect for truth in Table 4.2, whereas I would have
expected some dispersion of ratings. Fourth, permanence of
relations in Table 4.2 receives a zero weighting (as a result of two
opposing forces offsetting each other exactly) so that is adds nothing
to the explanation of differences in entrepreneurial culture.

Fifth, it should be noted that Casson's typology itself and the

weights attached to particular cultural characteristics reflect a
cultural bias. For example, the philosophy of voluntarism may be
less likely to receive the same emphasis by Japanese researchers in
studies of an entrepreneurial climate.

Sixth, for the sake of simplicity, the approach taken below is

embarrassingly monocultural in its perspective. Culture as it is
described below pertains only to the dominant business culture (i.e.
Pakeha culture in New Zealand) within a country. It thus ignores the
interaction between cultures within a nation over time and does not
examine the impact of migrant groups from different cultures on the

51
entrepreneurial content and diversity of the dominant culture.
Future research could examine these cultural interactions and also
assess the entrepreneurial content of the cultures of other ethnic
groups within different countries.

Finally, there are other cultural considerations which are outside the
scope of the present work but which are relevant to the
entrepreneurial climate in New Zealand. These include New
Zealand's cross-cultural relations, and in particular, the issue of
whether New Zealand is a hospitable base for direct foreign
investment.

For these reasons, it cannot be overemphasised that the approach

presented in this section is only a heuristic device. It is a very tentative
starting point supplied for illustrative purposes only and in this spirit
the table is presented. The scores should very definitely not be
accorded empirical significance. However, an important item on the .
agenda for future research could be to obtain data on each of the
variables depicted in the tables. This could be undertaken by
employing sociological methods which involve obtaining New
Zealanders' responses to attitudinal questionnaires.19 At a later
stage, it would then be possible to empirically test hypotheses about
the entrepreneurial content of New Zealand culture.

4.4.1 Technical aspects of New Zealand culture

In comparison with most other countries under consideration, New

Zealand has a weaker scientific culture (see Table 4.1). The systems
view of production and marketing - which is particularly prominent
in Japan - is also in general underdeveloped in New Zealand. In
terms of its level of sophistication, decision-making in New Zealand
is generally below par. This applies especially to managerial
decision-making. In general, the division of labour has not been
scientifically and extensively applied to management in New
Zealand, largely because of the relatively small size of most New

19. See the work by Gold and Webster (1990).

52
Zealand businesses and the low levels of formal (management)
education and specialist skills of most owner-managers of small
businesses [Campbell-Hunt, Harper and Hamilton 1993]. These
managers rarely have any functional specialisation: the manager is
usually responsible for production, finance, sales, personnel, and
purchasing.

Two further points need to be made regarding the division of labour

in New Zealand. First, in comparison with the US, the degrees of
interaction between specialist groups (including academics,
scientists, technicians) and between specialist groups and business
managers are much lower in New Zealand. This is surprising given
the small size of the New Zealand population. There may thus be
many untapped opportunities for transferring, adopting and
commercialising new scientific, managerial and organisational
technologies in New Zealand.

Second, the emphasis on do-it-yourself and the jack-of-all-trades

mentality limit the division of labour and specialisation in New
Zealand. These cultural characteristics may superficially be
interpreted as indications of personal ingenuity and innovativeness.
However, they typically imply only very low-level entrepreneurship
(pragmatic incremental tinkering) rather than heroic high-level
innovations that Schumpeter had in mind. They also usually involve
a very low economic return once one takes account of the
opportunity cost of the person's time spent in working on the project
(i.e. quasi-wages). Furthermore, these cultural attitudes arose
historically as the result of regulations (especially import protection)
and geographical isolation.

4.4.2 Moral aspects of New Zealand culture

Commitment to the philosophy of voluntarism is weaker in New

Zealand than in the US but stronger than in Japan, France and Italy
(see Table 4.1). Since the early 1980s, political conunitment to this
philosophy has intensified in New Zealand. Accordingly, in recent
years regulatory changes in transaction rights have increased the

53
 Table 4.1 : Entrepreneurial rating of national cultures

Characteristic Weighting US Japan UK France Canada Sweden Italy NZ

Technical
Scientific attitude 1 2 2 1 2 1 2 1 1
Pre-occupation with measurement -1 1 0 0 1 0 0 0 0
Systems view 1 1 2 0 1 1 1 1 0
Sophisticated decision-making 1 2 1 1 1 1 1 1 0.5
WEIGHTED SUBTOTAL 4 5 2 5 3 4 3 1.5
Moral
Voluntarism 2 2 0 1 0 1 1 0 1
Commitment (see Table 4.2) 1 6 7 1 ·4 2 3 2 3.5
Achievement (see Table 4.3) 1 4 6 3 3 2 5 3 2.5
WEIGHTED SUBTOTAL 14 13 6 7 6 10 5 8.0
TOTAL 18 18 8 12 9 14 8 9.5
Source: Casson 1990, p.91,

NOTE:
(1)New Zealand assessment based on my own subjective judgement.
(2)A high score is relative to that particular criterion. Some criteria are negatively correlated with entrepreneurship, so
that a high score for a particular item does not necessarily mean that the respective country is entrepreneurial in this
regard.
 Table 4.2: Rating of national cultures by their legitimation of various moral commitments

Type of commitment WeIghting US Japan UK France Canada Sweden Italy NZ

Principles
Objects of respect
Truth 1 1 1 1 1 1 1 1 1
Other people's interests 1 0 1 1 1 1 1 0 1
Property 1 2 1 1 1 1 1 0 1
Prompts
Formal law 1 2 1 1 1 1 1 0 1
· <.n Informal custom 1 0 2 2 1 1 1 2 1.5
<.n
Personal evaluation 1 0 0 1 0 0 0 1 1
Group mission ,
Progressive outward-looking 1 1 2 0 2 0 1 0 1
Static inward-looking -1 0 0 2 1 1 1 0 2
Permanence of relations 0 0 1 1 1 1 2 2 0.5
Roles emphasis -1 0 0 2 1 1 1 1 1
Inappropriate attachment to -1 0 1 2 1 1 1 1 1
specific locations, roles, people, etc
TOTAL 6 7 1 4 2 3 2 3.5
Source: Casson 1990, p.95.

NOTE: (see Table 4.1)

 Table 4.3: Rating of national cultures by various aspects of the ethic of achievement

Aspect of achievement Weighting US Japan UK France Canada Sweden Italy NZ

High norms 1 1 2 1 1 1 1 1 1
Confidence 1 1 2 1 2 0 1 2 0
Perseverance 1 1 1 0 0 1 1 0 1
Asceticism 1 1 1 1 0 0 2 0 0.5

TOTAL 4 6 3 3 2 5 3 2.5
Source: Casson 1990, p.97.

NOTE:
(l)New Zealand assessment based on my own subjective judgement.
(2)A high score is relative to that particular criterion. Some criteria are negatively correlated with entrepreneurship, so
that a high score for a particular item does not necessarily mean that the respective country is entrepreneurial in this
regard.
freedom with which individuals are able to transact with whom they
like. An important qualification must not be overlooked, however.
Although industry policy has changed, there is an important sense
in which public attitudes have lagged behind policy change. More
specifically, there is still a suspiciousness of spontaneous economic
orders (i.e. the invisible hand) and about the morality of "free"
markets. There is still a general belief that the market economy,
when unchecked, generates a pattern of income distribution that is
"unjust" or "unfair". Philosophically, this belief has its roots in naive
Cartesian rationalism: the view that cultural institutions which are
the product of deliberate design are necessarily superior to
spontaneous, self-organising orders (which are the unintended
result of human action but not of conscious human design). Anti-
entrepreneurial attitudes are the result: the belief that the economic
system needs to be regulated to prevent economic inequality,
injustice and exploitation. In summary, many New Zealanders
reject, or at least do not recognise, the basic principle of voluntarism:
"that most individuals are sufficiently intelligent to be able to defend
their own interests through participation in a market system,
provided they are given sufficient rights to begin with" [Casson 1990,
p.101; emphasis added].

New Zealand culture is typified by a moderate set of moral

commitments (some of which, however, are given a negative
weighting because they inhibit entrepreneurship). According to Table
4.2, commitments to tell the truth and to respect other people's
interests and property are on the same moderate levels as in most
West European countries. However, in the wake of corporate failures
following the sharemarket crash, the public perception of the strength
of these commitments may have been eroded somewhat, intensified
by media coverage of speculators' abuse of other people's life-time
savings. The increased incidence of crime, including white-collar
crime, also weakens these moral commitments. Unlike that in the US,
the commercial ethos in New Zealand does not rely solely upon
compliance with formal law: respect for customs and traditional
commercial practices are also important prompts which supplement
the formalities of the law.

57
Outside the realm of sport, New Zealand culture is not characterised
by a strong sense of group mission. The only discernible sense of
group mission is the rather negatively oriented one of standing up to
intimidation from superpowers, such as the US and France (cf. New
Zealand's nuclear policy). At the national level, it could be
hypothesised that New Zealand culture has relied more heavily on
static commitments which entail resistance to change in order to
preserve things as they are rather than upon progressive group
commitments which imply adapting to change in the external
environment. Furthermore, at the danger of gross generalisation, it
could also be said that New Zealand culture has largely been typified
by inward-looking group objectives, such as equality in the distribution
of income and an emphasis upon a high degree of conformity rather
than individuality (as characterised by the tall-poppy syndrome).
Such objectives impede spontaneous entrepreneurial activity. There
has been less emphasis upon outward-looking objectives, such as
superior national economic performance, beating rival overseas
producers in the international trading arena, and developing empires
of trade and investment. The history of high levels of import
protection (by way of licensing and tariffs) and of market
interventions (including exchange controls, pegged exchange rate) can
be interpreted as the result of inward-looking objectives which
encouraged a defensive reactive posture aimed at isolating domestic
markets and the economy from outside disturbances and external
realities. Although these controls have largely been swept aside, it
may take at least a generation before old cultural attitudes
(engendered by and conducive to the previous regulatory regime) are
replaced.

In New Zealand, commitments to particular friends and partners are

longer-term than in the US but not as enduring as in Sweden and Italy
(and I would add Japan), perhaps because of the greater mobility of
the New Zealand population both domestically, across the Tasman
and internationally.

A further anti-entrepreneurial aspect of New Zealand culture is that it

has encouraged people to identify with particular roles in a social
group or organisation. This has created social rigidities. A high

58
commitment to specific roles within a group inhibits economic
adjustment and structural change because people do not adapt by
taking over other people's roles, or by redefining their own role so
that they can better satisfy other member's requirements. In the past,
New Zealanders have adopted anti-entrepreneurial policies, such as
making irreversible commitments to specific working practices.
Commitments to people and to roles have been emphasised more than
commitments to group mission. Industrial relations have historically
been organised on the basis of coalitions of individuals performing
similar roles in different enterprises rather than on the basis of
enterprise-based bargaining. In large firms, employees have been
more committed to the interests of their occupational group than to
those of their employer. The result is that the relationship between
management and workers has often been confrontational and
antagonistic rather than cooperative and participatory. This has
manifested itself in intra-firm conflict and lower productivity than is
achievable. The commitment to economic roles, however, has been
diminishing since the implementation of the Employment Contracts
Act with the result that this aspect of culture will become more and
more entrepreneurial as time goes on.

Closely related to the commitment to specific roles in New Zealand is

the anti-entrepreneurial attitude towards innovation. Although there
has been an increasing awareness of the need to be internationally
competitive, people still generally fail to perceive the legitimacy of a
strategy of continuous innovation. For innovative competition in New
Zealand to be effective and sustained, change in attitudes towards
innovativeness has to occur collectively. The number of individuals
changing their attitudes and behaviour towards innovativeness must
reach a 'critical mass' so that existing norms and customs which work
against innovation lose dominance.

The final moral aspect of New Zealand culture to be considered is the

ethic of achievement. The ethic of achievement in New Zealand is not
constant across activities. For example, it may be argued that
performance norms are exceptionally high in the sporting sphere
whereas the academic and business realms are characterised by only
Iow or moderate achievement ethics and performance norms (see

59
Table 4.3). The pervasive "she'll be right" attitude (apologies for the
sexism) is representative of this feature of New Zealand culture. In
domestic manufacturing, this is at least partly the historical result of
New Zealand firms having used each other's performances as
reference points in a protected domestic market rather than looking at
the performances of overseas firms for examples of what is possible:
That is, inappropriate aspiration levels with respect to productivity,
design, quality and innovation have been chosen by New Zealand
business people (studies of British attitudes in industrial management
came up with similar findings). In comparison with the Japanese,
French and Italians, New Zealand businesses may also lack
confidence so that they are discouraged by large discrepancies
between their actual performance and international requirements.
Finally, unlike the characteristic disposition in Sweden at least, the
commercial ethos in New Zealand is also certainly not typified by a
strong ascetic attitude: the easy-going life-style to which most New
Zealanders aspire does not encourage giving up material comforts
and leisure in order to achieve high standards of economic
performance.

Overall, "the assessment of New Zealand culture shows a low degree

of entrepreneurial content when compared with the likes of the US
and Japan. This is the outcome of years of antipathy or at best
ambivalence towards business in general and entrepreneurship in
particular. However, it must be remembered that a nation's culture is
not static but dynamic: it is an evolutionary phenomenon which
undergoes unpredictable, though often slow, change. Political and
economic developments over the last decade may eventually succeed
in shifting New Zealand culture further towards the entrepreneurial
pole of the continuum, in which case these ratings will need to be
revised at some later date. However, even though economic reform
has proceeded at a fast pace, cultural change is likely to be a much
slower process. In addition, as a result of CER and more intensive
trade and investment linkages between Australia and New Zealand,
some movement towards greater cultural similarity seems inevitable.

Increasing the entrepreneurial content of New Zealand culture is

crucial for the future performance of the economy. In the next chapter,

60
I consider the prerequisites, including the cultural prerequisites, for an
entrepreneurial environment. One feature of Casson's framework (as
described in this chapter) is that it tends to focus on those aspects of
culture which conceivably are capable of being influenced - however
indirectly - by public policy in the longer term. That is, it is capable of
being operationalised. The cultural dimension of entrepreneurship is
examined further in the discussion of public policy in Chapter 6.

61
5. PREREQUISITES FOR AN ENTREPRENEURIAL
ENVIRONMENT

This section follows on from the theoretical approaches specified in

previous sections. It asks the question: What do each of the
approaches imply are prerequisites to the creation, discovery and
exploitation of en~epreneurial opportunities? The discussion sets the
stage for the next section which describes a public policy framework
for entrepreneurship.

In this discussion of the prerequisites for an entrepreneurial

environment, it is clear that the focus is purely on increasing
entrepreneurship per se. The approach at this stage does not take into
account potential conflicts offer important objectives of public policy,
most notably equity-related objectives. This is a severe limitation of
the analysis.

5.1 The functions of a competitive discovery procedure

In delving into the prerequisites for an entrepreneurial environment,

it is worth keeping in mind the functions of a resource allocation
mechanism or a competitive discovery procedure [Harper 1989]. A
competitive discovery procedure is a problem-solving process which
involves particular means of generating trials (e.g. rival
entrepreneurial ideas) and particular methods for eliminating errors
(i.e. particular methods of controlling the trials). More specifically, the
functions of a competitive discovery procedure are:

• to provide incentives for identifying new opportunities;

• to provide incentives to spur the exploitation of perceived

opportunities;

62
• to provide a pool of resources upon which entrepreneurs can draw
in the exploitation of opportunities;

• to provide information on the costs and benefits of using resources

in the exploitation of opportunities;

• to provide a selection environment in which entrepreneurial ideas

are subjected to critical testing (Le. the environmental test of fitness);

• to eliminate inferior entrepreneurial ideas;

• to coordinate actions aimed at exploiting opportunities.

The ex ante prospect of profit creates an incentive for identifying

problems and for developing solutions to them. The price
mechanism provides information for evaluating tentative solutions,
and factor and product markets operate as selection environments
for proposed new solutions. Entrepreneurial losses serve to
eliminate inferior solutions, whereas ex post entrepreneurial profits
reward solutions better suited to their problem situations.
5.2 The environment as a pool of resources

Because the prior ownership of resources is not a prerequisite to

entrepreneurship (see Section 1.7.1), and because necessary
resources cannot all be generated internally, entrepreneurs. must
typically enter into transactional relationships with others. For
entrepreneurial activity to flourish, resources must be available with
potential for improved coordination and exploitation [Casson 1990,
p.130]. In entrepreneurial research the most frequently cited
environmental factors and critical resources are:

• the availability of capital (including the existence of specialised

sources of venture capital);

63
• the presence of successful, experienced entrepreneurs and
established innovative organisations, providing examples of
entrepreneurial action and creating an awareness of past
entrepreneurial action;

• a technically skilled labour force: the entrepreneur needs to be able

to select, to subcontract to, and to hire, people who have specialised,
detailed, and localised information;

• accessibility of suppliers, customers or new markets (including a

network of local market contacts);

• transportation and communication infrastructures which economise

on the entrepreneur's labour used for exchanging custody of goods
and for communicating;

• availability of land, suitable premises and facilities (industrial

space);

• availability of raw materials;

• availability of external supporting services (individuals and

institutions that might provide financing, technology, management
consulting, and productive capacity) [Bruno and Tyebjee 1982, p.288];

• attractive cultural and living conditions to attract and to retain the

highly skilled work force who are young, mobile and in demand.
Included here are proximity to recreational amenities, good climate,
thriving cultural environment, and a well-developed and vigorous
professional environment;

• favourable social attitudes towards business and entrepreneurship.

The exploitation of possible profit opportunities can be frustrated if

entrepreneurs cannot find access to the necessary resources in the
required quantities and qualities.

64
5.3 Prerequisites at the level of individual entrepreneurs

It is clear that in order to achieve a vigorous entrepreneurial climate,

it is necessary that a pool of human resources exists which
encompasses the appropriate mix of personal qualities conducive to
entrepreneurial endeavour. The type of individuals required and the
mix of talents and skills called for are clearly variables which are
affected by public policy regarding human resources (including
education and immigration). The economics literature on
entrepreneurship suggests that, other things being equal,
individuals and groups of individuals are required who have the
following range of characteristics:

• an intemallocus of control (see Chapter 3);

• a high need for achievement (see Chapter 3);

• ability to recognise exogenous changes in consumer tastes,

technological knowledge or resource availabilities, and superior
foresight in predicting market developments;

• sufficient alertness to profitable opportunities overlooked by others;

• the ability to learn spontaneously without planning or deliberate

search for information, and the ability to support spontaneous
learning with intentional learning. The latter in turn requires that the
entrepreneur be a specialist in taking sophisticated, judgmental
decisions. This calls for: analytical ability for deriving decision rules;
computational skill in applying the data to the decision rules;
communication skills in formulating instructions for agents during the
implementation of the entrepreneurial idea; and practical knowledge
of the constraints on decision-making and problem-solving.

• the right coverage of information and of information sources, and

the ability to synthesise diverse types of information (on preferences,
technology, factor supply, transport services, and constraints etc.);

• imagination for generating rival solutions to a problem;

65
• sufficient managerial skills for successfully exploiting profit
opportunities, including the ability to lead and to delegate;

• marketing skills and experience with the market;

• ability to break down environmental resistance to change (which in

turn requires good communication and public relations skills and
endurance for overcoming setbacks).

5.4 Institutional prerequisites

The institutional framework affects the entrepreneurial alertness in

which decisions are embedded and determines the incentives for
discovering and exploiting instances of imperfect coordination. In
this section, I focus upon the institutional prerequisites for an
entrepreneurial environment. It must be noted at the outset that
although they are conducive to producing individuals with a
heightened entrepreneurial alertness, the following factors may
clash with other policy objectives. This applies, for example, to the
suggestions made below with respect to the structure of the taxation
system. It must be emphasised that the fulfilment of these
entrepreneurial prerequisites is a matter of degree and will itself be
limited by significant political, social and cultural constraints.

According to the argument developed in Chapter 3, an environment

which is most likely to produce entrepreneurial individuals is one
that calls for and encourages highly intemallocus of control beliefs.
Such an environment is likely to be characterised by the following
factors:

• decentralisation of decision-making in the economy;

• a system of private property rights which grant individuals the

rights to control, to benefit from, and to dispose of, resources;

• institutional arrangements that secure consistency of rewards and

that make individuals' rewards dependent upon their own actions
rather than upon the actions of the state;

66
• stable and neutral monetary and fiscal policies - including a stable,
transparent, consistent and neutral taxation policy which imposes low
levels of taxation on businesses and individuals;

• minimal regulatory constraints on the behaviour of individuals and

firms, but any regulations which are implemented should be both
stable and predictable;

• minimal government participation in production, trade and

investment so as to avoid crowding out private-sector activity;

• freedom of decisions and actions - including the freedom to choose

ends and means, and the freedom of participation for all individuals,
irrespective of gender, race, sexual orientation, political and religious
beliefs and so on.

In Chapter 2 it was noted that scope for entrepreneurship is

provided by the ignorance of market participants, incomplete
adjustment of their plans and the resultant multiplicity of prices for
the "same" good. Prices are useful signals to entrepreneurs in so far
as they reveal interlocal and intertemporal discrepancies [O'Driscoll
and Rizzo 1985, p.106]. An implication of this is that government
interference in the price mechanism which compulsorily eliminates
interlocal or intertemporal price differences for the same good (i.e.
an enforced Law of One Price) reduces scope for entrepreneurship
(though it does not eliminate it completely as entrepreneurial
adjustment is then directed to other elements of the marketing mix).

Thus, an environment is required which is free of political

interventions that disturb interlocal and intertemporal prices. Stable
monetary policy is required so as to avoid creating the illusion of
shifts in preferences (from present to future consumption, for
example) through effects on intertemporal prices. Government
policies must be designed so that they do not impair entrepreneurs'
ability to perceive and to exploit changes in economic conditions
(e.g. changes in consumer preferences). From such considerations,
we can derive further institutional prerequisites for an
entrepreneurial environment:

67
• freedom to adjust prices, quantities and product characteristics (and
other elements of the marketing mix, such as distribution and
promotion) in response to new market conditions so as to fill in gaps
in coordination;

• freedom to adjust the bundle of inputs and methods of production

so as to improve coordination between factor markets and product
markets;

• freedom to exploit imperfect coordination between transactions in

different markets in different countries (i.e. freedom to exploit
international price differentials);

• freedom to choose the ownership form (partnership, limited liability

etc) most appropriate to the individual circumstances of an
entrepreneurial venture;

• freedom to make mistakes and to fail, and the freedom to bear the
consequences of one's own entrepreneurial errors [Baumol 1983,
p.190];

• freedom of entry and exit, that is, the freedom of potential

competitors (including outside entrepreneurs and merged enterprises)
to discover and to exploit profit opportunities, thereby allowing new
organisations and industries to emerge, displace and possibly destroy
pre-existing organisations and industries which fail to adapt to their
environment;

• freedom to make profits, that is, to appropriate the rewards of

arbitrage, speculation and innovation;

• freedom to choose a suitable location when starting a venture;

• a mechanism, such as the price system, which facilitates the

communication of agents' localised knowledge of consumer tastes,
technology and resource availabilities.

68
5.4.1 Non-price constraints on behaviour

The institutional prerequisites so far have tended to emphasise

maximising entrepreneurial freedoms. To this extent, they have been
rather obvious and unsurprising. Just as important, and less
obvious, however, are the non-price constraints on behaviour,
including entrepreneurial behaviour. It should be noted that in the
real world, a high-level entrepreneurial environment requires more
than just an anonymous price system comprising faceless traders.
The communication of information on markets and the governance
of entrepreneurial transactions also require a diverse set of
supporting institutions:

... (P)rices and markets function as part of a social system,

not in isolation. A social system generates many kinds of
signals and rules besides prices .. .Nonprice constraints are
as much a part of a decentralised economy as are the
prices they help to generate. These constraints are
reference frameworks and orientation points, in terms of
which actors form expectations. Prices are formed on
markets composed of contracts, rules, and customs,
which are part of the constraints and basis for observed
behaviour ...[Nonpricel constraints are often necessary
accompaniments to markets. For example, it is strictly
impossible to imagine a 'price system' devoid of contracts
and property rights [O'Driscoll and Rizzo 1985, p.106].

Non-price constraints on behaviour (which include morals and

social values) are often important in fostering competition.
Institutional factors are important for setting bounds to the
uncertainty that entrepreneurs face. First, some sort of social order is
needed to provide uniformities and regularities in social
phenomena. Informal custom and social norms (especially moral
commitments, business practices, rules, social values and norms of
reciprocity) are required to impose restrictions on individual actions
and hence on the kinds of behaviour the entrepreneur can expect
from others. Second, entrepreneurs rely upon a system of property

69
rights, contracts, money and other institutions of the market (such as
networks of relationships, conventions of collaboration) in order to
cope with uncertainty, reduce their transaction costs and facilitate
the coordination of their plans.20

Some institutional structures, such as goodwill, reputation and

traditional connections, permit close collaboration between
entrepreneurs and promote the growth of entrepreneurial firms. For
example, Loasby [1989, p.26] pinpoints an institutional arrangement
between supermarkets and their suppliers which has been
conducive to entrepreneurship: "Supermarkets can thrive on
negative current assets, selling most of their stocks long before they
have to pay for them - an institution which has assuredly helped to
finance their rapid growth, and the development of which is worth
investigating". The entrepreneur can thus benefit from such market
routines.

By relying upon institutions of the market, entrepreneurs are often

able to exploit profit opportunities efficiently by close relationships
with other participants in separate firms, without having to
vertically integrate. For example, successful franchise systems rely
upon mutual interdependence and trust based upon standing
relationships and an entire web of linkages between members of the
franchise system.

In addition, via networking small entrepreneurial firms are able to

grow through co-operative relationships with external organisations.
Such ventures often do not require significant direct investments.
The existence of these constellational structures suggests that small
entrepreneurial firms do not survive as isolated entities in a sea of
market relations; rather they can be tied strongly to supportive
quasi-infra structural networks. An excellent example of such an
evolving network of interfirm linkages is the textile manufacturing
area of Prato in Italy, where all firms specialise in the production of

20. Space constraints prevent us from investigating market institutions in

detail, but the interested reader is referred to the works of Brian Loasby,
Alfred Marshall, George Richardson and Oliver Williamson.

70
fabrics derived from a single raw material. In the 1940s, this district
was dominated by large integrated firms manufacturing heavy
blankets and uniform cloth. It has since been replaced by a fashion
industry that' is not only bigger overall but is also very
deconcentrated and vertically disintegrated. In 1981, there were over
10,000 firms with an average of 6 employees per firm, Apart from
pure market relationships, independent firms which perform closely
complementary functions cooperate and coordinate their actions
with each other in response to the quickly changing fashion market.
Network firms form partnerships with, or invest capital in, other
small firms in order to expand horizontally or vertically. Networks
established in this way are stable, involving reciprocity and high
levels of trust. They encourage the launching of new products and
facilitate access to new markets and technologies.

5.5 Cultural prerequisites

In realising their ideas, entrepreneurs rely upon the cultural

infrastructure. Similarly, Casson [1990, p.l31] argues that to foster
entrepreneurship and the process of development a culture is
required which provides an economy with flexibility, especially the
structural flexibility to cope with changes in the division of labour
which may arise from autonomous changes in technologies or
resource availabilities.

The following discussion generates a check-list of prerequisites for

the creation of a high-level entrepreneurial culture in a nation. These
necessary conditions for long-run successful economic development
draw upon and expand Casson's [1990, pp. 90-97, 131] framework.
This discussion attempts to describe the sort of culture and
sociopolitical climate which would provide a favourable
environment for the development of entrepreneurial qualities and
the effective exercise of entrepreneurship.

5.5.1 Technical prerequisites

• the culture must have a "scientific attitude", defined to include a

systems view of marketing and production, an awareness of the

71
principle of the division of labour and wide recognition of the
importance of allocating resources in accordance with comparative
advantage;

• the culture should encourage the development of sophisticated

decision-making and judgmental skills, including:
(i) an ability to simplify
(ii) confidence to experiment
(iH) detached evaluation of risk
(iv) understanding of delegation and management
(v) communication skills;

5.5.2 Moral prerequisites

• voluntarism and toleration: a commitment to voluntary methods of

social and economic coordination and a culture which is tolerant of
business activity in general and of entrepreneurship in particular
[BaumoI1983];

• a non-interventionist mentality - a sociopolitical climate which

discourages business people lobbying for protective government
intervention to inhibit the competitive process and the entrepreneurial
successes of rivals;

• institutions of formal law, informal custom etc;

• association with trust, including:

(i) general commitment to the principles of honesty,
stewardship and respect for other people's interests, for their
property and for contracts, thereby reducing a nation's
transaction costs relative to those of its trading partners;
(ii) sense of group mission which is progressive, outward-
looking, and not hostile to change;
(Hi) versatile personal bonding (i.e. friendship and reciprocity
are not confined to kin and they do not depend on stability and
immobility of group membership);
(iv) weak attachments to specific locations, roles etc;

72
• high norms ~n respect of effort, quality of work, accumulation of
wealth, social distinction etc;

• cultural values are required which stimulate the development of

individual personalities capable of performing specific
entrepreneurial functions, such as arbitrage, speculation and
innovation.

I shall now elaborate further on some of these cultural prerequisites.

A culture is required which encourages individuality, individual

initiative and choice and spontaneous creativity rather than
conformity and coercion. Individualism maintains that individuals
are the best judge of their own interests and that everyone has the
intelligence to look after his or her oyvn interests in dealing with
others [Casson 1990, p.132, 138]. It is consistent with an internal
locus of control in that paternalistic interference in other people's
affairs is unacceptable.

Casson identifies four aspects of individualism which promote

entrepreneurship and the process of economic development:

(0 the alienability of property, which fosters markets in both

products and labour. People are able to separate themselves from the
things that they produce, so that they do not have to consume their
own output. Thus, they are willing to break the link between
production and consumption in order to obtain gains from trade. The
product of their labour is depersonalised and objectified, so that it is
acceptable to make it available for use by others and to claim
ownership of goods that one did not produce oneself. private
property rights to natural resources are also acceptable.

(ii) freedom of entry and exit (already discussed in previous

sections);

73
(Hi) respect for contract, and the existence of a trilateral governance
structure (e.g. the courts) to which traders have the right of recourse
in the event of contractual disputes, thereby reducing transaction
costs.

(iv) the existence of a specialised and stable medium of exchange

used in trading goods and services.

According to Hofstede [1980], individualism is a dimension along

which national cultures vary substantially. In his approach,
individualism stands for a preference for a loosely knit social
framework in which people are supposed to take care of themselves
and their immediate network of personal relationships. In contrast,
group orientation relates to a preference for a tightly knit social
framework in which individuals are emotionally integrated into an
extended family, clan, or village community, which will protect
them in exchange for unquestioning loyalty [Shane 1990, p.8]. In a
group-oriented society, activities are coordinated by relations of
reciprocity between individual members and by members' common
sense of obligation to each other. A major disadvantage of such
coordination mechanisms is that they depend crucially upon
stability of membership and so hinder economic adjustment when
this calls for personal mobility [Casson 1990, p.140].

Because a purely competitive form of individualism induces high

rates of inter-group mobility, and because it can thereby result in
problems of intra-group coordination, it is suggested that the
individualism which best promotes entrepreneurship must be based
upon voluntary association. The kind of individualism required for
successful entrepreneurship should not be confused with the culture
of unrestrained personal competitiveness and assertiveness. A
shared sense of group mission and a climate of cooperation are
required. "Widening the range of an individual'S legitimate
commitments from mere respect for property and contract to
generate trust by instilling a sense of corporate mission significantly
modifies the moral basis of individualism. The resulting philosophy
is essentially one of voluntary association" [Casson 1990, p.141]. In
the context of entrepreneurship, this philosophy emphasises that the

74
contract of team membership involves acceptance of discipline
imposed by the entrepreneur. For example, individuals have some
freedom in choosing which firm they want to work for but do not
have full freedom once a choice has been made and if they wish to
remain employees of the chosen firm. This form of individualism
attempts to augment the minimal commitment of competitive
individualism with other commitments. These commitments are
required to reduce transaction costs. .

75
6. POLICY IMPLICATIONS

The objective of this section is to provide a starting point for the

development of a public policy framework aimed at bring about an
environment closer to that described in the previous section. This
section is only exploratory. It does not aim to come up with detailed
policy recommendations. The objective is to provide insights and to
suggest directions for further policy analysis. Before we can begin to
develop potential policy recipes for encouraging entrepreneurship, it
is necessary to outline how we can take the effect of policy on
entrepreneurship into account. This is best illustrated by offering a
critique of current government policies in terms of their (often
unintended) effects on entrepreneurship.

Furthermore, it cannot be overemphasised that this policy analysis is

concerned solely with increasing entrepreneurship in isolation of
other objectives. The trade-offs between increaSing the level of
entrepreneurial activity in New Zealand and other objectives of
public policy is a high priority for future research.

This section is organised as follows. I first sketch some general

principles which should be addressed in evaluating present and
prospective public policies. I then apply those principles to evaluate
the current policy framework.

6.1 General principles

In this section, 1 offer a set of general principles as a way of

highlighting the sorts of factors that need to be considered in
examining public policies which impinge on entrepreneurship.
Amongst the factors which must be taken into account are:

76
• the effects upon the incentive for entrepreneurial discovery. In other
words, does the policy encourage people to seek out profit
opportunities, to perceive the usefulness of new information, to
identify opportunities for mutually beneficial exchange that have
hitherto been overlooked or to learn spontaneously without planned
deliberate search? What are the effects of policies upon the costs of
exploiting an opportunity? Do the policies increase the cost side of
entrepreneurial ventures (cf. compliance costs, administration costs)?

• the effects upon the incentive for, and ability of, entrepreneurs to
exploit the opportunities that they have discovered. Does the policy
create barriers to entry which bar outside entrepreneurs from
exploiting the possible profit opportunities that they have discovered?
Does the policy prohibit the discoverer of an entrepreneurial
opportunity from participating in its exploitation? Do the policies
widen the gap between discovery, exploitation and rewards?

• the effects upon the pattern of entrepreneurial discovery (that is, the
allocation of entrepreneurial talent). Does the government policy
induce an alteration in the pattern of opportunities that is created and
discovered? Is that alteration superfluous? Is it likely to create new
opportunities for arbitrage, speculation or productive creativity? Are
these new opportunities less desirable? Will it eliminate other
opportuni ties?

• the long-term effects upon the degree of entrepreneurial alertness of

members of society. Is this policy likely to intensify or reduce the
internal locus of control of individuals? Does the policy or policy
change intensify the paternalistic view of Government, does it
contribute to the idea of Government as a "powerful other" that
arbitrarily interferes in the affairs of individuals? Do the policies
reinforce cultural and social attitudes (e.g. individualism) which are
conducive to internal locus of control (LOc) beliefs?

• do the policies foster an educational environment in which individuals

develop internal LOC beliefs and acquire the desire, confidence and
endurance to achieve high performance norms (cf. education policy)?

77
Do public policies limit or enhance the availability of entrepreneurial
role models (cf. immigration policy)?

• is the direction of public policy towards increased decentralisation of

economic decision-making and improvement of the system of private
property rights, or is the trend in the reverse direction, ever-increasing
centralisation and the augmenting of institutional barriers which
prevent the full operation of private ownership?

• does the mix of policies create a climate which encourages arbitrage,

speculation and innovation?

6.1.1 General implications for the role of government

Not surprisingly, the policy implications described in this section

gravitate towards the liberal end of the spectrum (liberal in the 19th-
century sense). The neo-Austrian theory of the market process and
behavioural-economic approaches to entrepreneurship (including
the application of Rotter's theory of locus of control) place a high
value on the freedom of the individual. From the sole perspective of
increasing the level of entrepreneurial activity (Le. without
consideration of other policy objectives or trade-offs), the implied
role of government is necessarily more modest than the present
extent of government involvement in the New Zealand economy.
Among other things, the role of government is: to encourage a
responsive and growing economy; to promote the competitive
market process, by removing (government-imposed) barriers to new
entry and by strengthening the system of private property rights; to
cultivate growth by providing the appropriate environment in
which individual entrepreneurs can discover and respond to new
opportunities for arbitrage, speculation and innovation; and to
protect and to enhance the freedom of economic agents to interact
with each other and to form contracts. All in all, then, to promote
entrepreneurial activity the government must minimise the
disruption it creates for the private economic affairs of individuals.

78
However, an important qualification needs to be made. The policy
implications of the cultural approach (outlined in Chapter 4) are
likely to be less individualistic in orientation, though the approach
does acknowledge the importance of the philosophy of voluntarism
which supports the freedom of individuals to interact with each
other. From the cultural perspective, the role of government is to
reinforce the institutions of trust and co-operation and the ethics of
achievement which are conducive to entrepreneurship.

In particular, the role of government is to promote entrepreneurship

by public policies which reinforce moral commitments to tell the
truth (e.g. via laws against libel, defamation, false advertising,
auditing and disclosure laws etc) and commitments to respect other
people's property and interests (e.g. via the specification and
enforcement of property rights, criminal law and the law of torts
etc). The government also has a part to play in maintaining the
integrity of the legal system (including abstaining from political
interference). Government actions to encourage a high degree of
moral commitment help to reduce transaction costs. The role of
government also extends to encouraging the development of
progressive, outward-looking group objectives and the development
of high ethics of achievement (including high performance norms
and quality standards).

In this connection, an interesting point is whether it is sufficient for

government to focus its entrepreneurial policies upon short-run,
low-level entrepreneurship, such as arbitrage, or whether policy
must be directed at short-run and long-run, low-level and high-level
entrepreneurship. Kirzner is adamant that long-term entrepreneurial
processes, such as innovation, are simply an extension of short-run
entrepreneurial processes:

.. .1 shall argue ... that in attempting to formulate policy

that should encourage (or at least release) the long-run
processes of entrepreneurial discovery necessary for
vigorous growth, it will be highly useful to bear in mind
the linkages that prevail between these long-run and

79
 short-run processes. In other words, the way to permit
long-run entrepreneurial growth processes to take off is
to recognise and encourage the kinds of entrepreneurial
discoveries that make up the short-run processes
[Kirzner 1985, pAl].

However, it is also possible that the presence of low-level

entrepreneurship in an economy is only a necessary but not a
sufficient condition for high-level entrepreneurship. It is accepted
that high-level entrepreneurship is very difficult to achieve without
an environment of low-level entrepreneurship within which large-
scale ventures can prosper [Casson 1990, p.90]. But public polices
aimed at encouraging low-level entrepreneurship cannot guarantee
that high-level entrepreneurship will be forthcoming.

6.1.2 Enhanced normative standards

From a normative point of view, government policies should be

judged not (solely) by their effect upon the efficiency of the
allocation of given resources at a point in time, but by their impact
upon the speed with which members of society discover and
respond to new entrepreneurial opportunities over time. A key
feature of this normative standard is that is does not invoke the
notion of aggregate welfare as does the norm of Paretian welfare
economics. (It must also be noted that the normative standard
proposed here does not encompass traditional equity criteria either,
a point which cannot be overlooked in the construction of a balanced
policy framework.)

The normative yardstick, against which an economic system is

evaluated, is the degree to which currently known information is
optimally deployed [Kirzner 1973, p.235]. A change (including a
policy change) is therefore welfare enhancing if it improves the
coordination of information currently available [Reid 1987, p.14]. A
successful public policy framework is one in which different
members of society successfully coordinate their actions and are able

80
to respond quickly to their uncertain and ever-changing
environments.

According to this new benchmark, one system is superior to another

if, other things being equal, new products and techniques are
discovered, exploited and diffused sooner. The implication is that
even if entrepreneurs use up resources in trying to obtain a
temporary monopoly position (i.e. rent-seeking), this is not
necessarily undesirable if it means that new ideas and products are
available sooner than they would otherwise be.

This normative standard also implies a different view of profit. In

the traditional equilibrium framework, profit is assumed to be due
to monopoly and as such is not only wasteful but also the cause of
waste in other firms. The role of public policy is therefore to
eliminate profit by controlling mergers, for example. In the
competitive process framework, however, entrepreneurial profit is
no longer regarded as the necessary or inevitable result of monopoly
power. Rather it is now considered the result of successful
entrepreneurial alertness, the reward for discovering imperfect
coordination in the market: "... (I)nsofar as profits reflect successful
entrepreneurial awareness, they are a measure of consumer satisfaction,
an indication that some co-ordination has been achieved where none
existed before" [Littlechild 1978, pp.4S-46; emphasis added].
Consequently, limiting entrepreneurial profits may reduce economic
welfare by removing the incentives to create, notice and exploit
opportunities of mutual benefit to producers and consumers, or at
least by delaying the introduction of innovative ideas [LittlechiId
1978, pp.29, 46-47; 1981, pp.357-362].

6.2 Critique of existing public policies: effects on entrepreneurship

The purpose of the discussion is to give a flavour of the sorts of

issues that need to be addressed in formulating and evaluating
public policies to encourage entrepreneurship. It does not intend to
be either comprehensive or exhaustive. Nor does it attempt to
grapple with equity issues.

81
Consequently, the scope of the following discussion is necessarily
limited. The focus is mostly upon microecoI)-omic aspects of public
policy, so that a major omission is an analysis of the effect on
entrepreneurship of macroeconomic policies (including tight
monetary policy and fiscal stabilisation). In addition, we do not
examine in detail public policies relating to state-owned enterprises
or those policies dealing with externalities. The effects of social
policy on entrepreneurship are also not within the ambit of this
study.

Though crucial, increasing the level of entrepreneurial activity in

New Zealand can only be one of many competing objectives of
government policy. As mentioned earlier, my discussion is limited
in that it does not emphasise the trade-offs between the objective of
increasing entrepreneurial activity and other policy objectives.

At the outset it should be made clear that the New Zealand economy
has undergone a radical program of economic liberalisation which
has involved deregulation of key factor markets, the removal of
international capital controls, widespread industry deregulation and·
major reform of the public sector. From an entrepreneurial point of
view, this process of reform has been a major shift in the right
direction. (As a benchmark, one can compare the situation now with
that described by the Economic Monitoring Group [1985] in their
report on the regulated New Zealand economy). Among other
things, the program of liberalisation has involved the removal of
regulatory entry barriers in many cases, removal of extensive
controls on wages, prices and interest rates, removal of ownership
restrictions, removal of quantity licensing on almost all industries,
removal of quality regulation in most industries, removal of most
state-regulated monopoly rights, termination of restrictions on shop
trading hours, removal of some occupational licensing, a more
liberal efficiency-based regime for governing mergers and takeovers,
the phasing out of import licensing, reduction of import tariffs,
removal of special protection for specific sectors and deregulation of
foreign exchange trading.

82
Liberalisation has had a major impact upon the environment for
entrepreneurship in New Zealand. It has exposed domestic
producers to overseas pressures, expertise and opportunities, as well
as increasing consumer choice and the sophistication of consumer
markets. It has made business people more alert to opportunities
both domestically and internationally. It has given firms greater
flexibility to adjust their organisational forms, size, management
practices, input and output mixes, and a host of other strategic
factors. (These changes are documented fully in Baird and Savage
[1990] and Harper and MaIcolm [1991]). Particular aspects of
liberalisation (especially the deregulation of financial markets, the
reduction of tariffs and the privatisation and corportisation of state-
owned trading enterprises) have also generated transitional
opportunities and given a major spur to entrepreneurial activity,
including some spectacular entrepreneurial failures. The process of
reform has also had a major impact upon New Zealand culture,
increasing the extent to which it is progressive and outlooking.

6.3 Regulation

Regulation is one of the most intrusive forms of government

intervention in the market economy. Like other interventions,
regulation modifies market outcomes: prices, production, quality
and/ or the mix of inputs. Focusing on regulations seems reasonable
if we take heed of Leibenstein's suggestion that for policy purposes
economists interested in entrepreneurship should devote their
attention to identifying the gaps, obstructions and impediments in
the market network of the economy [1968, p.83]. Accordingly, in the
following sections we present a brief overview of the regulations
which are most likely to impact upon the entrepreneurial climate in
New Zealand.

6.3.1 General comments about the regulatory environment

It is by no means suggested that a wholesale dismantling of all

government regulations should be undertaken. There is no

83
presumption that all government regulation is wrong or inefficient.
Several points must be emphasised. The first is that government
regulation often imposes hidden costs in terms of its stifling impact
upon the entrepreneurial process of discovery. The second point is
that these costs of regulation are by their very nature impossible to
measure or quantify. The third point is that, in spite of the second,
these and other costs of regulation must somehow be weighed
against whatever benefits regulators perceive to be derived from
these interventions.

An emphasis on the perils of regulation that arises out of

concern for the market process does not, in and of itself,
justify the absolute condemnation of government
regulation of the market process. Such condemnation
would require full consideration, in addition, not only of
other perils ..., but also of the hoped-for benefits sought
through regulation of the market. Ultimately, public
policy must depend on the value judgments of
policymakers or of those they wish to serve [Kirzner
1985, p.149].

A fourth point is that regulations may be motivated not by the desire

to benefit consumers but by the politically expedient wish to benefit
what Baumol calls "runners up", unsuccessful entrepreneurs whose
enterprises are being systematically displaced by their more
successful counterparts who perceive market conditions more
accurately.

In spite of extensive reforms, there remains a plethora of

government regulations which in some areas may hamper and even
completely inhibit the operation of the competitive market process.
These regulations arise from what are perceived and expected to be
unsatisfactory market outcomes.21 These regulations change the

21. The expositional approach in this section owes an obvious and deep debt
to Kirzner 1985.

84
constellation of inputs utilised, outputs consumed and their prices,
quantities and qualities from what they would otherwise be in the
absence of governmental intervention:

Government controls constrain and constrict; they

rearrange and repattern the structure of incentives; they
redistribute incomes and wealth and sharply modify
both the processes of production and the composition of
consumption ... Government regulations drastically alter
and disturb opportunities for entrepreneurial gain, but
they do not eliminate them [Kirzner 1985, pp.134-135].

Kirzner [1985, p. 136] is at pains to note that even if there is

widespread agreement that current market outcomes are in some
sense unsatisfactory this does not constitute a prima facie case for
government intervention, even if government intervention could be
guaranteed to "correct" the immediate problem in market conditions.
The reason is that government intervention in the market may stifle
desirable processes of entrepreneurial discovery which might have
arisen spontaneously and which could have resulted in outcomes
superior to those of deliberate government intervention. In addition,
government intervention might impede entrepreneurs correcting
gaps in economic coordination which policy-makers have not
noticed. Although regulators presumably design specific regulations
with the explicit intention of blocking particular actions, it is likely
that these very regulations also block profitable entrepreneurial
activities and ventures which had not been foreseen by anyone at the
initiation of the regulatory endeavour.

A further point is that the imposition of regulatory constraints on the

market (and changes in existing regulations) may generate new, and
often unintended and undesired, processes of entrepreneurial
market adjustments: "... government regulation may influence the
market by creating opportunities for new, and not necessarily
desirable, market discovery processes which would not be relevant
in an unregulated market" [Kirzner 1985, p.137]. Restrictive and
arbitrary regulatory constraints on otherwise profitable activities
tend to divert entrepreneurial talents into different, and distinctly

85
less desirable channels (including figuring out imaginative ways
around such legislation). For example, although censorship and
drug laws are designed to block particular activities, they also tend
to create unintended opportunities for entrepreneurial profit (e.g.
the black market for banned pornographic videos, underground
drug rings etc).

Because the economic future is indeterminate and knowledge is

imperfect, regulators will usually not be able to predict what new
profit opportunities they will generate by their own regulatory
actions. Kirzner [1985, pp.144-145] refers pejoratively to this
unplanned and even undesired pattern of outcomes of regulation as
"the wholly superfluous discovery process". Because government
regulations are extremely unlikely to impose equilibrium
configurations they will introduce a pattern of profit opportunities
that would otherwise not have emerged. They will also
simultaneously reduce or eliminate other entrepreneurial·
opportunities that in an unregulated market might have existed.
They thus unintentionally rearrange the opportunities for pure
profit and may induce a possibly major alteration in the pattern of
entrepreneurial discovery. However, market ignorance is such that
this distortion is unlikely ever to be well-understood by policy-
makers and economic researchers.

It will be remembered from Section 2.2.1 that the interface between

factor markets and product markets is considered to be a crucial
juncture requiring entrepreneurship, a juncture presenting many
opportunities for "arbitrage" (widely defined). The implication of
this insight for policy is that regulations which control the use and
exchange of inputs and outputs may constrain the ability of
entrepreneurs to exploit opportunities for improving coordination
between transactions in factor markets and those in product
markets.

By way of an overview, Table 6.1 attempts to summarise the impacts

of actual and potential regulatory changes upon the level of

86
 Table 6.1 : Act!Jal and potential regulatory changes and their Impact upon
entrepreneurship

Regulations by the type of Extent to which Extent to which

market characteristics previous deregulation further deregulation
that they constrain has encouraged could encourage
entrepreneurship entrepreneurship

Regulation of the use of land • ...

and other natural resources
-t tt
Regulation of the use of
localised, inside information
Restrictions on investment ... ..
entry and exit
Regulation of labour inputs
Regulation of R&D inputs
•
•
·•
Restrictions on occupational • •
entry
Regulation of production
quality
• ·
Information requirements • •

Regulation of mergers and .. ..

takeovers
Restrictive trade practices ... ...
Structure of personal income • •
tax system (i.e. progressivity)

Key: • small positive effect upon entrepreneurship

.. moderate positive effect upon entrepreneurship
... strong positive effect upon entrepreneurship
• negative effect

87
entrepreneurial activity. It identifies the significant regulatory
impediments which may still operate to inhibit entrepreneurial
endeavour in New Zealand. The first column describes the
particular type of regulation that is being considered. The second
suggests the extent to which recent deregulation, if any, in this area
has given rise to increased levels of entrepreneurship in this country.
The third column attempts to forecast the extent to which further
major deregulation in this area could promote entrepreneurship. The
tabulations are indicative only, and are based upon my own
subjective assessment <together with some comparative appraisal by
colleagues). They are not based upon any empirical evidence.

It is appropriate at this stage to make a few brief comments

regarding the effects of regulation on entrepreneurial activity. First,
given that a number of major constraints on business activity has
already been removed, the dismantling of remaining regulations is
unlikely to be the panacea which will markedly boost
entrepreneurial activity in New Zealand.

The second point, however, is that five areas of possible further

deregulation can be identified as potentially important to
encouraging entrepreneurship. These are: regulation of the use of
land and other natural resources; regulation of mergers and
takeovers; restrictive trade practices; regulation of the use of
localised, inside information; and restrictions on investment entry
and exit. Each of these (and the other regulations in the table) are
discussed in detail in the following sections.

6.3.2 Regulation of the use of land and other natural resources

As in most western economies, the use of land is highly regulated in

New Zealand. Major limitations arise from the implementation of
district schemes and the accompanying zonin~ restrictions which
local authorities formulate and administer. 2 In addition, the

22. This section draws freely upon, and updates considerably, Economic .
Monitoring Group 1985 and Ayto and Bollard 1987.

88
regional policy statements of regional councils set broad guidelines
on how resources are to be used and specify the parameters within
which district schemes can operate. Specific resource constraints for
water (Resource Management Act) and for minerals (Mining Act)
also exist. Other restrictions on land use (e.g. the Conservation Act
1987) include the establishment and control of national parks,
reserves and other recreational areas. There are also a number of
other specific instances of private land rights being r~stricted by
particular "public-interest" type policies, such as those which
prevent the felling of native trees. There are thus likely to be some
significant areas of conflict between an "entrepreneurial policy" and
an "environmental policy".

In line with the Resource Management Act 1991, restrictions on land

use are designed to reduce the negative external effects of certain
types of use on the surrounding land, environment and people.
Although based on less arbitrary categories than previously, local
body by-laws will still restrict the locations in which entrepreneurs
are able to produce, market, advertise and distribute their product.
For example, entrepreneurs are prevented from setting up an
industrial plant in a residential area. Building regulations,
particularly as they govern the conversion of premises, also pose a
bureaucratic obstacle to entrepreneurial location decisions. The
entrepreneur who is prevented from setting up a new retail outlet in
a particular geographic area is prevented from exploiting a
perceived unsatisfied demand for a particular location, that is,
disequilibrium in distribution (cf. a controversy arising from
opening up a funeral parlour in a residential district). Similarly,
entrepreneurs who face difficulties and delays in obtaining planning
approval for new premises on suitable sites (including retail outlets)
may miss out on timely exploitation of profit opportunities.23

23. In addition to the restraints on the way in which entrepreneurs ·can use
labour and land, there are sometimes restrictions on other ineuts and joint
outputs. As with labour inputs, these regulations are typically related to
health and safety issues but tney can be aimed at 'protecting third parties (e.g.
passers-by) just as much as contracting partIcipants. "Examples inclucfe
controls on the production and disposal of waste, including air, water and
noise pollution, the storage and handling of dangerous substances, the

89
Of all the existing regulations on land-use, zoning controls under the
Resource Management Act are considered to impose the greatest
constraints on entrepreneurship. They are the most all-embracing in
that they:

(i) cover all land within New Zealand, both private and public;

(ii) impose delay in approval procedures;

(Hi) impose costs in conditions attached to approvals;

(iv) create uncertainty as to outcome for innovative cases which

involve doing something radically different from the present use of
the land;

(v) result in total prohibition of some types of entrepreneurial

activity.

6.3.3 Regulation of the use of localised. inside information

In the large modem corporation, alert corporate executives may

discover, and have sufficient discretionary scope to exploit,
opportunities for personal gain. Such behaviour represents an
important type of entrepreneurial activity in a modem capitalist
system. This behaviour may manifest itself in concrete situations as,
for example, insider trading or as the buying and selling of
complementary assets.

In New Zealand, according to Part I of the Securities Amendment

Act 1988, a director, employee or substantial security holder of a
listed company faces penalties (civil rather than criminal sanctions)
if he or she trades securities of that company on the strength of

structural and material qualities of buildings, the provision of safety to

consumers and third parties, and the provisIOn of amenities (e.g. samtary
conveniences) and hygienic conditions (including hygiene requirements for
the processing, storage and display of food products).

90
inside information or assists others to do so. However, the buying
and selling of securities by insiders is allowed under limited
circumstances and according to a fonnal procedure approved by the
Securities Commission.

Laws against insider trading must thus operate to block the

incentives to "intrapreneurship", that is, entrepreneurial discovery
on the part of corporate executives [Manne 1966; Kirzner 1985,
p.117]. These laws must hinder the exploitation of entrepreneurial
opportunities (opportunities for improved coordination of economic
transactions) by those who are the most alert to them and who are in
the best position to utilise their information.

However, alert corporate executives are not barred from using their
inside information in all circumstances. Consider the case of a
manager in a listed company which is undertaking secretive R & D.
The entrepreneur may wish to exploit an opportunity for personal
gain by investing in complementary assets. (A complementary asset
is an input or end-product whose price will rise once the R & D
result is revealed to the market). For example, a manager may buy
land which is commonly thought not to be suitable for production of
a particular crop because of a soil deficiency. However, the R & D
may uncover that the deficiency can be overcome, thus increasing
the price of the land. Directors, managers and employees are able to
acquire complementary assets at low prices and sell them at higher
prices once the R & D is complete and knowledge of it is
disseminated, thereby capturing entrepreneurial profits. The
entrepreneurial profit arises because the executive has superior
inside information on the attributes of the R & D results, information
which is not available to the rest of the market.

The fact that there is no corresponding legislation in New Zealand to

prohibit insiders from using inside information for the trading of
complementary assets means that the pattern of the entrepreneurial
process is distorted. Managers and directors may be barred from
exploiting some entrepreneurial opportunities in securities markets,
whereas they are relatively free to exploit profit opportunities hi
other markets on the basis of their inside information. (This claim

91
must be qualified by noting that they are subject to fiduciary duties
on directors, the requirements of which are covered by common law,
thereby providing plenty of scope for equivocation and costly
enforcement.)

6.3.4 Restrictions on investment entry and exit

Investment entry restrictions refer to specific conditions imposed on

those. wishing to enter a particular industry and compete with
incumbents. To be in the business, the potential entrant must fulfil
specific criteria related to the ownership structure or siz~ of the firm,
the method of operation or reputation before a licence will be
officially granted. An example of such a restriction is the licensing of
dispensing pharmacies. Ownership restrictions limit the degree of
cross-ownership, that is, they prevent registered pharmacists having
a controlling interest in a number of pharmacies (except in very
limited circumstances). They also restrict the involvement of non-
pharmacists [Ayto and Bollard 1987, p.70]. In addition, although
there are no specific restraints on undertaking banking business,
there are restrictions on using the word ''bank'' in a company's name
(registration being required from the Reserve Bank). Furthermore,
overseas investment regulations restrict the entry of overseas
investors who want to set up ventures (or acquire a New Zealand
business) involving the acquisition of rural land for farming, the
holding of offshore islands, broadcasting or commercial fishing in
the exclusive economic zone.

Investment entry restrictions in some industries represent regulatory

barriers to entry. (Statutory agricultural marketing boards with
export monopolies are a case in point). They restrict the freedom of
potential competitors to discover and to exploit opportunities for
entrepreneurial profit (which is one of the prerequisites of an
entrepreneurial environment mentioned in Section 5.4). Because
entry is frustrated, there are likely to be potential entrepreneurial
opportunities which will never be discovered either by incumbents
or regulators in these industries, or by outside entrepreneurs who
might have discovered such opportunities were they permitted to
exploit what they had discovered [cf. Kirzner 1985, p.142]. This

92
 particular form of control tends to block the creation and adoption of
improved services or products and/or more efficient production
technologies which potential new entrants might have brought to
the industry. All in all, investment entry restrictions thus tend to
stifle the competitive market process. A similar pattern of outcomes
arises from occupational entry restrictions described below.

One aspect of exit restrictions which may inhibit entrepreneurship

significantly is bankruptcy law. The New Zealand legislation in this
area tends to follow the British tradition, with its punitive overtones
and an emphasis upon the protection of investors and debtors. In
contrast, the tradition in the USA is far more pro-entrepreneurial
and less punitive. It enables entrepreneurs to learn from their
mistakes and in some cases to carry on existing operations.

·6.35 Regulation of labour inputs

In spite of radical reform in the labour market (namely, the

Employment Contracts Act), entrepreneurs still face a host of
regulations which constrain the manner in which they may hire and
utilise labour. Constraints on the use of labour inputs cover a wide
range of issues including: minimum rates of pay (minimum wage
coverage has recently been extended to young people); the safety of
the place of employment and other working conditions; the
provision of protective clothing and equipment; equal pay and other
nondisCriminat01: provisions; terms of dismissal; and holidays and
other concerns. 4 (In addition, the Employment Court's
interpretation of employment legislation is leading to the
development of a body of case law which is limiting contractual

24. See the following Acts and their amendments: the Employment Contracts
Act 1990, Equal Pay Act 1972, the State Sector Act 1988, Holidays Act 1981,
Parental Leave Act 1987, Way,es Protection Act 1983, Trade Unions Act 1908,
the Human Rights CommiSSion Act 1977, and the Factories and Commercial
Premises Act 1981. In addition, the Minimum Wage Act 1983 and its
regulations flace a floor on the low prices that certain would-be sellers of
laoour migh receive.

93
freedom with respect to terms relating to redundancy and
dismissal. 25)

These regulations reduce the flexibility with which entrepreneurs

can exploit opportunities for improved coordination in product
markets and between labour markets and other factor markets
(including other regional labour markets). They are especially
constraining when labour inputs are a major component of the
entrepreneur's new production function (whether for an existing
good or a new good). In such cases, the entrepreneur experiences
difficulties in arranging production in the most desirable way. They
thereby inhibit arbitrage and innovation. However, relaxing labour
regulations further in order to promote entrepreneurship may well
conflict with other major objectives of government policy, especially
equity-related objectives. In addition, removing remaining labour
market regulations is unlikely to result in a remarkable spur to
entrepreneurial activity. Furthermore, the deregulation of the labour
market, although it definitely has consequences for entrepreneurial
adjustment, is most likely to affect the managerial function to a
greater extent (especially the quantities, qualities and prices at which
managers hire labour).

6.3.6 Regulation of R & D inputs

The traditional argument is that patents provide an inventor (i.e. not

necessarily an entrepreneur) with a temporary monopoly position
on the use of an invention, in return for the disclosure of the
knowledge of the invention to society as a whole. Furthermore, it is
conventionally argued that they encourage innovation (one type of
entrepreneurship) because they increase the appropriability of R&D
output by giving the patentee a monopoly over the invention
including exclusive use of the patented item for a limited period,
and helping the patentee license the R&D result to others. The
theoretical impact of patents from the traditional point of view are

25. See the study by the New Zealand Business Roundtable and the New
Zealand Employers Federation (1992J.

94
discussed in detail in Bollard and Harper [1987, pp.50-55] and need
not be pursued further here.

I would, however, like to present a rival argument which has

received less attention in the literature. According to this argument,
patents on balance inhibit entrepreneurship. Patents and other
government-created intellectual property rights may prevent
potential entrepreneurs who would like to compete from doing so.
Conferring this special property right restricts entry and prohibits
the early exploitation of that innovation by other entrepreneurs. It
also precludes other entrepreneurs from developing improvements
of this innovation.

It may be true that, without the protection of a patent,

less money would be spent on research and development
in hitherto protected areas, and innovation there might
be reduced. On the other hand, resources used there have
an opportunity cost: they would otherwise be used in
other directions. Research and innovation would by no
means cease altogether, for there is still a gain (a
temporary monopoly profit) to be made from being first
in the field [Littlechild 1978, p.47].

The argument is that the entrepreneurial profits resulting from first-

mover temporary monopoly positions are a sufficient incentive for
innovation. Patents are superfluous to the requirements of the
competitive process. They not only distort the allocation of R & D
resources into protected areas, and hence the pattern of innovation,
but they also inhibit the exploitation of entrepreneurial ideas.

The policy recommendations emanating from the officials' review of

intellectual property law have almost been finalised, so there may
soon be some changes in this area. The general thrust is to improve
responSiveness to new technological and economic developments.
The fact that New Zealand is bound by international agreements,
systems and conventions, however, limits the extent to which
entrepreneurship can be stimulated by regulatory changes in this
area.

95
At this juncture, it is worthwhile to note that government actions to
change the property right constraints within which economic
transactions take place, including government interventions which
are intended to reduce transaction costs, do not automatically give
rise to further welfare-enhancing transactions (see Section 2.2.3). For
the possibilities for new mutually beneficial transactions (to
exchange rights to resources) created by government interventions
must first be discovered by alert entrepreneurs. The supply of
entrepreneurial services is not perfectly elastic (see Section 3.3).

6.3.7 Occupational entry restrictions

These restrictions involve the registration or licensing of specified

occupations. They are particularly common in the services sector.
There are still more than fifty occupations subject to entry
restrictions of sorts.26 Most extremely, they take the form of
compulsory qualifications for admission to the industry and
compulsory registration before a person is permitted to practise that
profession, trade or craft. Less intrusive occupational entry
regulations do not make registration a necessary requirement before
an individual can practise, but the individual is excluded from
describing him- or herself by the title of that profession. For
example, individuals can undertake the work of an architect but
may not call themselves an architect unless they are registered.

Occupational entry regulations give rise to wholly superfluous

entrepreneurial adjustments. There is an incentive for incumbents to
price their services in such. a way that they can exploit their
regulated exclusivity, thereby capturing entrepreneurial profits by
"buying" human capital inputs from themselves at low prices

26. Apart from the obvious cases, such as the professions of accounting, law,
medicine and architecture, there are occupational entry restrictions with
resEect to: pharmacists, plumbers, gasfitters and drainlayers, engineers,
artIfact dealers and collectors involved in trade, artificial insemination centre
supervisors, real estate agents, car dealers, auctioneers, patent attorneys,
dispensing opticians, massage parlour operators and managers.

96
(including the costs of training) and selling their services at
relatively high prices. Occupational entry restrictions, and the
accompanying government-granted monopoly position in some
industries, also give rise to restrictive practices of sorts.

Occupational entry restrictions also bar outside entrepreneurs from

unearthing and exploiting opportunities for profit which exist for
supplying services of differential quality to customers at lower
prices. It also reduces the incentive for suppliers to discover new
and profitable ways of promising consumers a certain standard of
service and an avenue of redress if problems arise.

There is, however, one respect in which occupational entry

restrictions may in fact unintentionally promote high-level
entrepreneurship. Occupational entry regulations may intensify the
external displacement effects or negative situational factors which
push people into entrepreneurship. Occupational entry regulations
(and the associated formal qualifications) increase the motivation to
become an entrepreneur for those who do not meet these criteria.
They do this by blocking established paths of social advancement or
by cutting off significant sections of the market from individuals not
registered. If entrepreneurs are blocked from going into certain
activities, they may perceive a smaller sacrifice in setting up an
entrepreneurial venture.

6.3.8 Production quality regulations

In New Zealand, many legislated requirements regardin

production quality relate to primary export commodities.2 9
Producer marketing boards are granted monopoly powers to export
to overseas markets, or the sole right to grant export licences. They
also have the power to set, monitor and enforce quality standards

27. Examples of relevant legislation in this context are: the Meat Act 1981 and
its amendments; the Meat Export Control Act 1921/22; the Dairy Industry Act
1952, the Dairy Industry Regulations 1990, and the Dairy Board Act 1961 and
the 1990 amendments. The impact of the producer marketing boards has been
investigated elsewhere and need not be discussed in detail here.

97
for exported products. At least in some cases they have compulsory
powers for acquiring domestic produce which does not fulfil those
standards (e.g. the New Zealand Dairy Board).

Not only do these producer marketing boards each constitute a

"powerful other" which limits the development of an internal locus
of control among industry participants, but they also preclude
individual entrepreneurs discovering new marketing options which
can be exploited by promoting new brand images in overseas
markets. This control of production quality insulates existing
marketers of primary export commodities from new competitors. It
thus clashes with the entrepreneurial prerequisite of freedom of
entry, described in Section 5.4.

In addition, the Consumer Guarantees Act 1993, which replaces the

Sale of Goods Act 1908, introduces new consumer rights and quality
standards. It says goods sold must be of acceptable quality, defect-
free, and suitable for the purpose for which the buyer has told the
seller they will be used.

Furthermore, many safety and design standards are cited in acts or

regulations. It should not be assumed, however, that the inclusion of
a particular standard implies that it is legally mandatory to comply
with all the requirements of that standard in all circumstances.
Furthermore, a mass of standards is cited in local authority building
and general bylaws and local authority general bylaws. New
Zealand standards cover a wide range of inputs and outputs sold on
the domestic market: for example, tractor safety frames, pesticides,
children's night clothes, child restraints and seat belts, life jackets,
synthetic resin adhesives for wood and the installation of solid-fuel
burning domestic appliances.

These regulations of production quality prevent the entrepreneur

from supplying new products to buyers, for whom safety is not such
a paramount consideration, or who perceive lower risks from using
the product, and who are prepared to trade-off high safety
standards for a lower price. These mandatory standards have the
result that some consumers either will have to pay too high a price

98
or will not purchase the product at all. Furthermore, product
regulation may create superfluous entrepreneurial opportunities
and change the direction of entrepreneurial activity. In particular, it
leaves open the possibility that entrepreneurs will endeavour to
lobby the regulatory authorities to adopt their particular product
specifications as the standard, thereby excluding their competitors.

6.3.9 Information requirements

On the output side, information requirements stipulate that the

entrepreneur must supply specific information about the content,
price or effects of the product to the potential buyer. Perhaps the
most significant piece of legislation in this context is the Fair Trading
Act 1986, which imposes controls on advertising, unfair practices
and consumer information. Such controls can prevent or at least
dissuade entrepreneurs from exploiting short-run profit
opportunities which arise from misleading packaging, labelling,
marking and advertising. This is of course one of the Act's major
intentions. What is less recognised, however, is that such legislation
may discourage entrepreneurs and groups of entrepreneurs from
discovering better, and as yet unthought of, ways of offering
prospective customers protection against unfair and deceptive
practices.

The Fair Trading Act is not the only constraint regarding the supply
of information which is imposed upon entrepreneurs. Although
there is no explicit law prohibiting comparative advertising in New
Zealand,28 the code of practice of the Advertising Standards
Authority limits the ability of individual entrepreneurs to exploit
profit opportunities from comparative advertising (such
opportunities could consist in providing consumers with
information on the objective superiority of their own products when
compared with rival brands). Among other things, entrepreneurs are
also restricted in their use of sexual appeal and sexist stereotypes in

28. The code of practice of the Advertising Standards Authority is, according
to the Broadcasting Act, approved and potentially enforced by the
Broadcasting Standards Authority in respect of broadcasting media.

99
advertising messages transmitted via broadcasting media. The
entrepreneur is also restricted in the advertising of liquor and
cigarettes.29

6.4 Competition policy

In New Zealand at present, competition policy has two major aspects:

• policy on mergers and takeovers30

• policy on restrictive trade practices.

We discuss the potential impact of each of these upon

entrepreneurship in turn. The focus is on competition policy as it
affects the environment for entrepreneurship.

6.4.1 Regulation a/mergers and takeovers

The neoclassical microeconomic theory of competitive equilibrium

(and its offspring, the structure-conduct-perforrnance paradigm) has
been used to justify government policies of merger control and even
forcible deconcentration of industry. The theory is that high
industrial concentration facilitates collusion between firms, which in
turn leads to higher prices, higher profits and lower output (the so-
called 'concentration doctrine').

29. Other restrictions regulate how or to whom an entrepreneur, producer or

distributor may sell his or her output. In addition to generating economic
costs from compliance, these restrIctions can preclude entrepreneurs from
completing profitable transactions which involve selling particular types of
products to particular types of potential consumers or at particular times and
places.
30. The Commerce Act 1986 also contains provisions to control the prices of
particular goods and services. The Commerce Commission is empowered to
administer price control. The price control powers of the Commerce
Commission have not as yet been exercised, though we can only flag the
possible disincentive impacts on entrepreneurship of the legislative potential
for such control.

100
A theory of competitive market processes has radically different
implications for competition policy. The argument is that those firms
will tend to grow fastest which discover and exploit profitable
opportunities before others do so. Consequently, an industry wi,lI be
more highly concentrated the wider the differences in alerhless
between firms (or more precisely between those persons who set
them up and run them). Variations in profit rates are to be explained
by differences in the perception of, and speed of reaction to, changes
in market conditions. It thus rejects the 'concentration doctrine' [cf.
Brozen 1971; Demsetz 1973; Uttlechild 1978, pp.36-37].

Business acquisitions in New Zealand are regulated by the

Commerce Act 1986, as amended by the Commerce Amendment Act
1990. Under this regime, the acquisition of the assets of a business or
of shares in a company is prohibited if the acquisition results in the
creation or strengthening of a dominant position in a New Zealand
market. Pecuniary penalties and divestment orders (Le. a court order
to divest shares or assets) can be imposed if the business acquisitions
sections in the Act are breached, where prior Commerce
Commission approval has not been obtained (a voluntary system of
merger notification now exists). The Commerce Commission lists 39
industries in which it believes business acquisitions wo;tld raise
"competitive concerns". It is expected that parties to business
acquisitions in these industries should seek prior clearance or
authorisation from the Commission.

It should be noted that such regulations designed ostensibly to

prevent (increased) dominance and to create and to maintain
competition in the static sense may have potentially anticompetitive
effects in the dynamic sense. In the short run, the potential
prohibition of mergers or takeovers (or more extremely, the
potential break-up of newly merged firms to deconcentrate an
industry via "divestment orders") blocks the entry of a new merged
enterprise which may operate at a more efficient size and which may
be able to offer lower prices to consumers. It might prevent the
replacement of a number of relatively high-cost producers by a
single low-cost producer. From another perspective, it might hinder

101
the capture of pure entrepreneurial profit which could be derived
from exploiting hitherto overlooked economies of scale and of scope.
In the long run, this form of control is likely to discourage firms
from noticing and exploiting opportunities to reduce costs or to
introduce new products. "To prevent mergers is to protect other
firms from competition, perhaps to prevent the adoption of some
new technique or mode of organisation and thereby to impede the
competitive process" [Littlechild 1978, p.48).

Although it is acknowledged that in assessing proposals, the

Commission takes into account the "public benefit" resulting from a
proposed business acquisition, it is not clear that the Commission, or
anyone for that matter, has the information about underlying market
data to be able to make definitive judgments in this regard. Nor is it
obvious that members of the Commission have the entrepreneurial
alertness to foretell what possibilities mayor may not exist for
lowering the price to consumers so as to take advantage of as yet
undiscovered economies of scale. The Commission's estimates of the
future configuration of prices and quantities are simply not profit-
motivated estimates. The question remains: how are they able to
assess entrepreneurial profit opportunities which have not yet been
discovered or exploited?

6.4.2 Restrictive trade practices

From the perspective of entrepreneurial impacts, the Commerce Act

1986 and the Commerce Amendment Act 1990 are in some respects
relatively liberal in that this legislation contains no express provisions
against price discrimination, production limitation agreements,
market sharing agreements, or exclusive dealing between
manufacturers and suppliers or distributors.

However, other aspects of the Act are not so conducive to

entrepreneurial endeavour. For example, certain restrictive trade
practices need to be authorised. Essentially, firms must satisfy the
Commerce Commission that there is sufficient "public benefit"
attaching to the trade practice to outweigh any "anti-competitive"
effects. From the cultural point of view, laws prohibiting a range of

102
agreements between entrepreneurs stifle inter-firm cooperation and
undermine institutions which have spontaneously developed to
support trust and interactions between entrepreneurs. Restrictive
trade practices ·and other types of inter-firm cooperation may be a
transaction-cost efficient way of exploiting potential profit
opportunities, especially if specific assets are required. These
practices provide an inducement to make large, risky, transaction-
specific investments which otherwise might not be made
[Schumpeter 1950; Richardson 1960; Littlechild 1978, p.49].

There is also an important respect in which the uneven treatment of

restrictive trade practices (in Part II of the Act) relative to that of
business acquisitions might significantly distort the pattern of
entrepreneurial opportunities that are discovered and exploited.
Section 27 prohibits practices which have the purpose or effect of
"substantially lessening competition". This threshold is much lower
than dominance, the threshold applied in the .case of business
acquisitions. These trade practices provisions may therefore
encourage the integration of business units in place of cooperative
non-standard contracts between separate entities or may even
discourage particular forms of cooperation between firms altogether
[Begg and Jennings 1989, pp. 9-10]. The Commission's and High
Court's interpretation of "substantially lessening competition"
provides an incentive for entrepreneurs using vertical contractual
devices as a means of exploiting profit opportunities to use vertical
integration instead so as to reduce the risk of exceeding the
competition threshold applied to trade practices. These provisions
may also bar firms from exploiting entrepreneurial profits
obtainable from using particular contractual arrangements rather
than other types of contracts. Firms forced to vertically integrate
may suffer substantial diseconomies of scale and consequent
entrepreneurial losses. '

From a neo-Austrian point of view, although restrictive trade

practices impede the competitive entrepreneurial process to some
extent by their attempt to prevent new entry, in the longer term, the
possibility of new entry, especially future competition from
unexpected sources, can be relied upon to overcome barriers created

103
by restrictive trade practices. To rely on this possibility is better than
explicit laws against restrictive trade practices.

6.5 Taxation

The first point to note is that pure entrepreneurial profit, and thus
the disincentive impacts of profit taxation, may arise at three distinct
levels: arbitrage, speculation and innovation. Disincentive impacts
may well differ depending on the particular context in which
entrepreneurship is being exercised. Unfortunately, however, we
have as yet little knowledge about these matters. We lack a well-
articulated economic theory explaining the precise disincentive
impacts of different patterns of profit taxation upon the competitive-
entrepreneurial process of discovery. What follows are some
preliminary insights.

In New Zealand there is taxation of individuals, of companies and of

other entities (such as partnerships, joint ventures, trusts etc). There
is no capital gains tax as such, but certain "capital" gains are deemed
to be "income" for tax purposes. For example, pure entrepreneurial
profits obtained from the purchase and sale of real and personal
property (including shares) acquired for the purpose of selling at a
profit are subject to income tax at normal rates (profits on the sale of
real property are also taxable in other circumstances). This kind of
profit taxation must surely have a disincentive effect on
entrepreneurial endeavour at the level of arbitrage and of pure
speculation. It means that at least in some cases entrepreneurs will
be turned away from exploiting profit opportunities which involve
improving coordination within and between the markets for real
and personal property. Instead, entrepreneurs are likely to be
attracted to opportunities in other markets and to devote their
talents to other channels for pure profit. Hence, this form of taxation
affects the pattern of the process of entrepreneurial discovery.

The compliance costs imposed on the entrepreneur by the tax

system can be substantial, raising the opportunity cost side of setting
up a proposed venture and decreasing the perceived profit. They
increase the subjective cost to the entrepreneur of embarking on a

104
venture with uncertain outcomes. After taking into account the
taxation of profits and compliance costs, entrepreneurs may no
longer see an opportunity where in the absence of taxation they
might have seen a profit. It should also be noted that compliance
costs are not proportional to the size of the firm or entrepreneurial
venture. Unlike their large-firm counterparts, small firms do not
have professional staff to respond to a governmental agency's
requirements for information. "By treating large and small alike, one
treats them very differently" [Galbraith 1978]. .

According to Kirzner, the orthodox economic theory of taxation is

based on the dubious assumption that taxes are introduced into a
world in which available opportunities are given and known to
economic agents. Consequently, the theory and public policies
derived from them fail to consider the potentially significant
negative impact of taxation upon entrepreneurs' discoveries of
opportunities which are not given or known to anyone. As a .result,
the wrong conclusions can be drawn about the effects of specific
taxes upon people's actions.

In contrast, Kirzner puts forward an approach which suggests that

taxation may affect the incentive and ability of individuals to
successfully discover their true situations and to discover their past
errors. He emphasises the linkage between the amount a person is
taxed and what opportunities that person discovers to be available
[Kirzner 1985, pp.93-94].

Kirzner's insights are highly relevant to taxation policy, though he

admits that as yet he is not offering an alternative theory of taxation
[1985, p.114]. The fundamental insight is that pure entrepreneurial
profit is an "incentive of the second kind" which is to be
distinguished from "incentives of the first kind" [1985, pp.94ff].
Incentives of the first kind (type-I incentives) involve !' ... the
provision of an encouragement for a decision maker to select a
particular one out of an array of already perceived alternatives"
[Kirzner 1985, pp.94-95]. For example, to encourage work rather
than leisure, the tax authorities may deem it necessary to increase
after-tax labour income. This enhances the total rewards the

105
decision-maker anticipates from working in such a way as to
outweigh the perceived opportunity costs of working (i.e. the
rewards of leisure). It operates by overcoming the cost to the
decision-maker of the desired option.

On the other hand, incentives of the second kind (Le. type-II

incentives), such as pure entrepreneurial profit, spark
entrepreneurial alertness and hence the discovery of possible but
hitherto overlooked courses of action that might otherwise have
escaped notice [Kirzner 1985, pp.96-98, 108]. Instead of altering the
relative desirability of alternative courses of action, type-II
incentives enhance the potential of a course of action to attract
attention.

According to this novel distinction, often-proposed tax-based

incentives for R & D (induding income tax credits, tax exemptions
and write-offs etc) do not constitute type-II incentives. They are
type-I incentives since they only induce decision-makers to
undertake deliberate search into already perceived opportunities. Like
all type-I incentives, they enhance the relative attractiveness of an
already perceived course of action (the specific R & D project). They
do not induce the discovery of new opportunities; they do not
encourage entrepreneurial activity.

In New Zealand, tax-based incentives of the first kind include:

specific tax provisions which relate to the deductibiIity of
development and exploratory expenditure in mineral mining;
provisions for the deduction of specific classes of development
expenditure against income derived from ventures in agriculture
and forestry (ordinarily such expenditure would be classified as
capital and would accordingly be nondeductible}j and schemes of
special taxation incentives (e.g. accelerated depreciation proviSions)
for investment in new plant and machinery.

Corresponding to type-I and type-II incentives are type-I and type-II

disincentive effects of taxation. Type-I disincentives involve
discouraging the decision-maker from choosing a particular action
from a set of already perceived actions (e.g. imposing higher taxes

106
upon cigarettes, luxury goods or imports). In contrast, type-II
disincentives weaken the incentive to discover as yet unnoticed
opportunities or courses of action. Given that the pure profit
inherent in an entrepreneurial opportunity provides an incentive for
the very discovery of that opportunity, to tax pure entrepreneurial
profit is therefore to weaken the incentive to discover opportunities
for improving the coordination of resources. "The complete taxing
away of pure entrepreneurial profit can, it is clear, succeed only in
removing from potential entrepreneurs all incentive for paying
attention to anything but the already known ..... [Kirzner 1985, p.111;
emphasis added]. The standard economic theory of taxation and
mainstream discussions of taxation policy only analyse type-I
incentive and disincentive effects of taxation. Type-Il disincentives
are not taken into account at all.

There are a number of theoretical and practical problems which

complicate the development of taxation policy. One difficulty is that
the disincentive impacts on discovery of partial taxation of profits are
much less clear than those of complete profit taxation. One
argument is that if profits provide incentive for discovery, then any
reduction in the prospective profit received must be presumed to
weaken the incentives for entrepreneurial discovery. The partial
taxation of profits means that entrepreneurs can expect only a
portion of the pure profits from their own alertness: their antennae
will therefore not be as fully switched on as in the total absence of
any profit taxation. In terms of Rotter's locus of control theory, there
is less incentive to be alert to opportunities for gain when the fruits
of one's own alertness are expected to largely accrue to "powerful
others" (such as the government). More theoretical and empirical
research is required into the extent to which the partial taxation of
profit affects entrepreneurship before any definitive
pronouncements on this issue can be ma_de, however.

Among the difficulties in evaluating the New Zealand taxation

system are the practical problems of measuring pure profits and the
associated empirical problem of identifying which parts of the
conventional accounting categories are pure entrepreneurial profits.

107
This in turn creates measurement difficulties in determining the
type-II disincentive effects of existing taxes.

For policy purposes, any propositions concerning the

disincentive effects of the taxation of pure profits must be
translated into corresponding statements referring to
measurable accounting categories. But...accounting
profits are both wider and narrower than the category of
pure entrepreneurial profit. .. Accounting profits are wider
than the category of pure profits, since the former may
include implicit interest on invested capital aI1d other
nonentrepreneurial categories. Accounting profits are
narrower than the category of pure profits insofar as the
latter may include elements of entrepreneurial receipts
won by the owners of resources, including labour. All
this means that the empirical identification of the profit
base with respect to which policy pronouncements are to
be made calls for careful and insightful research ...

But the measurement problem touches on deeper

theoretical issues as well as policy issues. The category of
pure profit is, after all, one that is linked essentially to
decisions. Accounting categories, on the other hand, are
linked specifically to periods of time ...Within any given
accounting period ... the bare amount of accounting profit
recorded reveals little definitive concerning the timing
and the nature of the entrepreneurial decisions inspired
by these profits [Kirzner 1985, pp.117-118].

The new approach is thus not restricted to taxes explicitly levied

upon accounting profit. It extends to most kinds of taxes, to a greater
or lesser degree, since income categories other than accountin~
profit may also include an element of entrepreneurial profit.3
Consequently, the taxation of these other income categories may

31. Much of the above argument also applies to subsidies and the levies
imposed by industry associations and producer groups. .

108
constitute a disincentive for a variety of economic agents to capture
entrepreneurial profit. For example, in the taxation of individuals in
New Zealand, assessable income includes, among others,
investment income, dividends, salary and wages, bonuses and a
share of any partnership income. Any of these categories could well
include an entrepreneurial component, and the taxation of them
could discourage entrepreneurship. The more progressive the
personal income tax structure, the weaker the incentives for workers
to be alert to wage differentials and to the most desirable
employment opportunities available to them. High marginal
personal income tax rates sap the incentive to discover new
opportunities.

However, for the pragmatic purposes of tax policy, it may be

necessary to confine economic analysis to the impact of taxation
levied upon more or less empirically identifiable classes of economic
receipts. Thus, it is reasonable to limit the analysis to the impact of
taxation of accounting profit, since a significant part of the latter is
likely to be entrepreneurial profit.

6.6 Other policies to increase entrepreneurial activity within the existing

regulatory framework

The scope of our discussion has necessarily been limited. Apart from
the discussion of taxation, most of the analysis has focused upon
increasing the incentives for entrepreneurial discovery rather than
on increasing entrepreneurial activity within the existing regulatory
environment. From a policy point of view, it is often of interest to
know which policies are likely to be more effective within the
bounds of a given set of regulatory constraints, since these are
unlikely to be altered substantively in the medium term. The
following types of policies can be identified as falling into this
category: taxation policy; education policy (widely defined to
include both formal and informal education, on-the-job and off-the-
job training etc); immigration policy; research, science and
technology policy (including the organisation of publicly-funded
and/or provided R&D, and the transfer and dissemination of R&D

109
results etd; social policy (e.g. possibility of using benefits as capital
to set up small businesses etc); and arts and cultural policies. The
following section comments upon human resources policy since this
is one of the most effective set of policies for increasing
entrepreneurial activity within the given regulatory framework. An
analysis of other policies is a priority item for future research.

6.6.1 Education policy

In Section 1.7, we mentioned that owing to transaction cost factors,

entrepreneurial and managerial functions are typically embodied in
the same physical person. This has implications for public policy
with respect to human resources. In particular, unlike
entrepreneurial alertness, managerial skills can be deliberately
acquired via education and training (i.e. explicit investment in
human capital). Consequently, education policies which emphasise
management may contribute to the successful exploitation of
entrepreneurial opportunities. Thus, although training cannot
increase the supply of entrepreneurship, it may be able to build
capacities which are complementary to carrying out the
entrepreneurial role, as Leibenstein has recognised:

... (I)t may be .difficult to train people to spot

opportunities, but it is possible to train them to assess
such opportunities once perceived. Similarly, certain
managerial skills are trainable, but without them new
firms might not survive because of their inability to
overcome initial managerial difficulties [1968, p.83].

However, this presupposes the timely and accurate discovery of

opportunities - the crux of entrepreneurship - which cannot be
taught or deliberately acquired. Good management is not a
sufficient condition for entrepreneurial success.

In general, education may have an ambiguous impact upon the

entrepreneurial attitudes and character of a population. On the one
hand, it should be noted that in his theory of entrepreneurship,
Schultz has produced evidence on the effects of education on

110
people's ability to perceive and react to disequilibria. He writes:
'There is enough evidence to give validity to the hypothesis that the
ability to deal successfully with economic disequilibria is enhanced
by education and that this ability is one of the major benefits of
education accruing to people privately in a modernizing economy"
[Schultz 1975, p.843].32 In Schultz's framework, the extent of high-
level entrepreneurship can be hypothesised to be a function of the
quality of educational investment over a period. A recent empirical
study has also suggested that secondary and tertiary education may
be important factors in entrepreneurial success [Bates 1990, p.551].
This study investigated self-employed males who had set up small
businesses. According to the findings, highly educated
entrepreneurs are most likely to create viable firms that remained in
operation. That is, the entrepreneur's educational background was
able to differentiate active firms from those that had discontinued
operations.

On the other hand, formal education may have dysfunctional side-

effects upon the supply of entrepreneurship. For example, higher
formal education may raise the opportunity costs of becoming an
entrepreneur and hence may decrease the supply of
entrepreneurship [Leibenstein 1968, p.82]. On balance, however, I
think that this factor is likely to be outweighed by the positive
impact of education upon entrepreneurship, especially when the
effects of education upon the entrepreneurial content of a nation's
culture are taken into account.

Another important point relates to the technical and moral aspects of

culture which were described in Section 4. It will be recalled that
education, both informal and formal, is one of several media
through which the economic content of culture is transmitted.
Casson's framework suggests that public policies, such as education

32. Compare too 5chultz {1975, p.835J: "Although the problem-solving abilities
that students acquire pertain to classroom work, the abilities that are
developed by this work seem to have general properties that contribute
measurably to their performance as economic agents in perceiving and
solving the problems tnat arise as a consequence of economic changes".

111
policies, which contribute to the sophistication of decision-making,
ethics of achievement, high performance norms, and confidence and
perseverance in the achievement of high standards, can have a
positive impact on the entrepreneurial content of a nation's culture:

Cultural change can also be engineered through

education - including business education. In this context,
the moral and religious content 'of education and range of
fundamental scientific concepts covered is more
important than the specific technical expertise it provides
[Casson 1990, p.89].

Education is a vehicle for transmitting the human values and

motives that can encourage people to shape their own destiny (Le.
an intemallocus of control) and to discover and exploit favourable
trading conditions. Education policy can promote entrepreneurship
by fostering achievement-oriented ways of thinking: the need to do
well in problem situations in which the individual expects to be
evaluated in terms of standards of excellence. At the national level,
McCIelland recommends measuring the frequency of achievement-
related ideas in literary documents, such as children's readers and
school textbooks, to obtain a comparative measure of a country's
achievement focus. Achievement-oriented thinking has implications
for the methods of assessment (internal versus external etc.), the
emphasis placed upon objective standards and examinations within
the educational system, and the severity of the examination system
(Le. whether students pass or fail or whether they receive innocuous
gradings of degree of success).

The content of curricula can have a major impact upon the degree to
which New Zealand culture is progressive and outward-looking and
favourable to entrepreneurship. At the primary and secondary level,
the teaching of foreign languages at an early age and the study of
foreign cultures (together with scholarships for overseas study and
for foreign students to study in New Zealand) can all contribute
towards fostering an outward-looking orientation and an alertness
to international opportunities. There is much scope for introducing
enterprise into secondary school subjects. Currently, history

112
curricula tend not to stress the positive role of entrepreneurs in New
Zealand's economic development. Commerce subjects at secondary
school presently lack an "entrepreneurial flavour". The emphasis is
mainly upon the mechanical aspects of commercial operations.

At the tertiary level, it is interesting to note that only one of the MBA
courses currently offered at New Zealand universities is designed
for small businesses. Indeed, the emphasis of formal business
education in New Zealand is upon the managerial function and the
acquisition of technical expertise for the execution of it. Apart from
courses on business and marketing strategy, there is rarely explicit
recognition of the entrepreneurial function. As far as I am aware, no
polytechnic, university or community institute in New Zealand is
offering "entrepreneurship courses" or programs, as in the United
States. Indeed, in the USA one university is using "entrepreneurship
courses" as a capstone, a role usually performed by business policy
courses in commerce degrees. Another American educational
institution has even gone so far as to adopt a grading policy (in its
entrepreneurship course) under which any student who manages to
raise $US 10,000 or more on the basis of a venture plan developed in
the course receives an automatic "A"! The lack of supply of
"entrepreneurship courses" in New Zealand of course may reflect an
absence of demand at current prices.

It should be noted that the culture of New Zealand's education

system is generally not conducive to enterprise. Addressing this
must be a top priority issue. Changes in the organisation of funding
and the provision of educational services offer scope for reinforcing
entrepreneurial attitudes. For example, the involvement of
successful entrepreneurs and businesspeople within the community
in schools (e.g. sponsorship of certain activities, prizes, as guest
speakers, teaching of commercial studies) could have an impact
upon the attitudes of educators and students towards the business
world and entrepreneurial success.

Another point which must not be overlooked is that training courses

and government funding of retraining can have important

113
implications for internal corporate entrepreneurshi p
("intrapreneurship").

A remaining issue which touches on education policy is that many

entrepreneurs create multiple ventures and thereby lengthen the
duration of their entrepreneurial careers. As a result of spontaneous
learning by doing, the entrepreneur who is able to perceive
profitable opportunities and to exploit them successfully may
discover further profitable activities along the way. This is in fact an
instance of what Ronstadt calls the "Corridor Principle", which states
that "the mere act of starting a venture enables entrepreneurs to see
other venture opportunities they could neither see nor take
advantage of until they had started their initial venture" [1988, p.31].
Consequently, entrepreneurial activity may be cumulative; it may
thus take some time to gain momentum after a process of
liberalisation.

6.6.2 Immigration policy

It will be recalled from Section 2.3.3 that public policy-makers

cannot identify entrepreneurs ex ante. Entrepreneurial alertness has
a tacit dimension, so that entrepreneurs are either not aware that
they possess alertness or cannot prespecify the nature or content of
their alertness. Consequently, no market exists for hiring
entrepreneurial services. Similarly, public policy-makers are not able
to identify a particular pool of individuals with a specific set of
characteristics or abilities for discovering profit opportunities.
Furthermore, in their role of trying to specify criteria for potential
immigrant entrepreneurs, public policy-makers are themselves
acting entrepreneurially. This applies particularly to business
immigration policies which stipulate that applicants for residence
invest funds in areas or purposes approved by policy-makers. In
addition, by requiring that prospective business immigrants have a
successful business background and substantial investment capital
available for transfer to New Zealand, current business immigration
policy limits the potential pool of business applicants to those who
are first and foremost capitalists rather than entrepreneurs. But
Section 1.7.1 emphasised that resource ownership is definitely not a

114
prerequisite to the entrepreneurial function. Pure entrepreneurship
does not include the provision of capital. Thus, current policy
hinders the separation of ownership and control which can promote
entrepreneurship and economic development.

From the cultural perspective, one would also expect that the greater
the diversity of immigrants and ethnic groups in a society, the
higher the level of entrepreneurial activity that can be expected. The
close proximity of different cultures facilitates exposure to
alternative modes of behaviour and allows experimental
combinations of established thought and value systems into novel
patterns. It also creates many opportunities for arbitrage. Such
differentiation engenders innovation and permits individuals to try
out unconventional ideas.

Besides cultural diversity, another relevant aspect is the size of a

country's population. In large market economies, there is greater
occupational and industrial differentiation and specialisation, so that
the level of entrepreneurial activity might be higher. However,
smaller economies can mitigate such limitations of a small
population through maintaining openness and developing well-
developed international linkages.

6.7 Conclusions

Entrepreneurship is the mainspring of the process of economic

growth and development. It is crucially important for the market
process and affects firms' responsiveness to new market conditions,
especially the changing requirements of consumers and the
strategies of other firms both here and overseas. As a consequence,
processes of entrepreneurial discovery have significant effects on the
nature, direction, coordination and efficiency of economic activities.

This study has aimed to identify the possible effects, both direct and
indirect, of existing public policies on the entrepreneurial process of
discovery. The intention has been to promote a more critical stance
in all policy analysis so that future policy decisions will be more
sensitive to their likely consequences for entrepreneurship. It has

115
been argued that a better appreciation of the costs of government
intervention, including any negative impacts on entrepreneurship, is
required as a basis for policy decisions regarding such intervention.

Because many government actions affect entrepreneurial discovery,

public policy-makers cannot afford to take entrepreneurship for
granted and neglect its role in both short-run and long-run economic
processes. A deeper understanding of the institutional framework
within which entrepreneurial processes can thrive is central to
designing policies which are more conducive to economic growth.
Among other things, entrepreneurship requires a stable policy
environment free from special privileges or blockages against new
entrants or any other participants.

These comments are of particular relevance in light of reccnt

developments in the political debate in New Zealand. Ways of
thinking are' emerging that are potentially detrimental to
entrepreneurship. In particular, there is a widespread assumption
that no new initiatives are needed to encourage entrepreneurship in
this country because all barriers to enterprise have been removed.
More extremely, the argument is also made that public policy
initiatives implemented in recent years are too radical and need to
be reversed or significantly curtailed (regardless of whether such
action would inhibit entrepreneurship).

However, this study illustrates that the process of working towards

an internationally competitive enterprise economy is by no means
over. While major advances have been made, there are still a
number of opportunities for removing impediments to
entrepreneurship in New Zealand. Regulatory policies and other
factors have been identified that may inhibit or totally block
entrepreneurship in potentially profitable activities. Included here
are the statutory marketing boards with export monopolies in the
agricultural sector, the general level of tariffs for goods made in
New Zealand, the implementation of the Resource Management Act,
judicial interpretation of the Employment Contracts Act,
occupationalliccnsing, securitics legislation, and insolvency law.

116
The existence of these impediments to entrepreneurship suggests it is
important for New Zealand to press on with economic liberalisation if
we are to secure a higher standard of living for New Zealanders. This
means it is important that the Government ensures overall stability
and consistency in its regulatory, fiscal and monetary policies and that
it does not attempt to dilute or reverse the policy initiatives of the past
decade. And it means that the Government should do what it can to
ensure that the structure of economic incentives in the external
environment better stimulates the perception and exploitation of new
opportunities. In sum, if New Zealand is to capture the benefits of
recent policy initiatives, it must maintain and enhance the emergent
entrepreneurial drive within the economy.

117
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 NZIER BOARD OF TRUSTEES

Elected:

Professor C. A. Blyth ,
De partment of Econo mics, Auckl and Uni ve rsity.
Sir Peter Elworthy,
Company Directo r , C anterbu ry .
J. B. Macaulay,
Company Directo r, A uckl and .
T. K. McOonald (De puty Chairman),
Manag ing Di rec tor , Co malco Ne w Zeal and.
W. J. Shaw,
Company Director , Wellington.
R. W. Steele ,
Co mpany Direc to r, We llington.
G. W. Valentine ,
C ha irman, AMP Soc iety .
Kerrin M. Vautier (Cha irman),
Research Economi st & Company Direc tor, Auckl a nd .
M. Walls
Barri ster and Soli c itor , Wellington
Sir Roderick Weir,
Company Directo r, We llington.
R. W. R. White ,
Company Director, We llington .

Ex Officio:

Or J. Yeabsley,
Directo r of the In stitute.
Or O. T. Brash ,
Governor of the Reserve Bank.
Professor V. Hall ,
De partment of Econo mics, Victoria U ni vers ity of We llington.
Professor A. W. Mann , nominee of
Vice-Chance llor of the Victoria Uni vers ity of Wellington.
INZIERI

I.