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The demographic structure of a country matters for economic growth. Equally important, entrepreneurship matters for economic growth. Countries with younger populations or those tilted toward the aged are shown to have decreased entrepreneurial activity according to new research by Professor Maria Minniti of SMU Cox and co-author Moren Levesque. Important implications arise for governments in aging developed countries such as Germany, Italy and Japan that are attempting to catalyze growth and in developing countries with younger populations seeking greater levels of entrepreneurship. Entrepreneurs are part of the never-ending creative destruction story. “Our argument is simple, but important as in the last few decades, failure to take this into account has had costly consequences for countries and international aid organizations,” the authors write. In other research, Minniti and Levesque show that entrepreneurs act as lubricators of economic activity by exploiting opportunities and mobilizing unused and underutilized activity.
“Everything else being the same, a country with a large cohort of older citizens is likely to exhibit lower rates of entrepreneurship than an otherwise identical one. We know that in Western Europe and Japan, the population structure is changing,” says Minniti. “Because people live longer, these countries are aging significantly. The same is true in the U.S., but up to a point. The U.S. case looks different because of immigration.” Minniti continues. “Immigrants tend to be younger. If the birth rate of a country is too low, younger people may be imported. Some countries in Europe are changing their immigration policies out of necessity.” Past research has been unable to articulate why there are diverging rates of entrepreneurship in countries with similar socio-economic characteristics, or why certain countries have higher rates of innovation and competitiveness in spite of low levels of R&D and education. Minniti states, “Age has a strong correlation with entrepreneurship. People in the age bracket between 25-34 years old are more likely to start or be involved in new business ventures. This is true across all countries.” Age may be even more important than education, according to the research. Minniti says, “You need energy, ambition, exposure and willingness to take risks and seize on new opportunities.” Entrepreneurship matters for grow because it is a vehicle for creation of new business and innovation into the economy.” And younger people start businesses in larger proportion. The authors developed a model revealing that if a country has a skewed distribution, whether on the young or old side, this may be problematic for entrepreneurship levels and, possibly, for growth. Of course, age is not the entire story. One assumes the younger populations in Africa would be good. But this neglects the lifecycle effects of spending and saving. “You need both — the older people who can provide savings and the young ones to do the work,” she explains. In countries with populations skewed toward the young, there may be a shortage of financing capital and experienced workers. Thus, the returns attached to capital and experience would be high and would attract capital and experienced individuals from abroad. Conversely, in countries with populations skewed toward old people, we might find abundant savings but a shortage of potential entrepreneurs. An availability of savings would attract entrepreneurial talent from abroad. But resource markets are slow to clear across borders and, oftentimes, do not clear at all, say the authors with respect to entrepreneurial talent. Resources do not flow freely across borders because of structural, institutional and political barriers. Entrepreneurial opportunity is often specific and localized and as a result, difficult to transfer. When these constraints exist, the relative distribution of people across age cohorts matters. Importantly, if the market for capital and labor is free, then the distribution of the population is not a problem in theory, says Minniti. An example of this would be capital flowing to Africa (with its young) from Japan and Northern Europe or flowing to South America and Southeast Asia. “Protectionist arguments will make everything worse,” says Minniti. “Open borders do come with costs, but in the long run they increase the standard of living for the population. Of course, it is painful when people lose jobs, but jobs get lost due to poor productivity not competition. We don’t want to become North Korea.”
“In aging countries, it seems plausible that people would begin to think beyond the 65-year-old benchmark as the endpoint of their working lives. This has implications for governments who are thinking of imposing or removing mandatory retirement laws,” the authors write. Minniti declares, “Every time you waste someone’s productivity, that’s a loss, especially because we live longer. It would be desirable to give options on retirement ages, not just age 65. I take a holistic view of economic growth. People are happier when they work.” Growth is more than just technology and innovation. “You need more than that—you need creativity, new ideas, and services,” declares Minniti. “Those offerings are often not high tech and you need experience. I think that leveraging the experience of older workers will have a positive effect on growth.” Some countries, especially smaller or poorer ones, may exhibit a dominant industrial sector. The relationship between age and entrepreneurship may be influenced by the characteristics of that sector. Consider a rich country with a focus on technology. The high-technology sector tends to attract people with more years of education. So the age of becoming an entrepreneur is likely to be higher in a country focused more towards high-tech entrepreneurs. The “able” workforce would then start at a later age and, given the less physical nature of the work, would likely end later.” This could bolster the case of Japan and Korea, for example. If Population A focuses on high-tech and Population B on manufacturing, an aging Population A would be less likely to experience a decrease in its total entrepreneurial activity than an aging Population B would, the research suggests. The negative consequences of population decline can be avoided, particularly if policies aimed at increasing technological innovation and efficiency are effective. In young countries or in countries that are getting younger, the problem of sustaining entrepreneurial activity may be more difficult. A large number of young individuals compete for a limited amount of resources. Insufficient funds and collateral to obtain credit becomes one of the most serious impediments to the creation of new businesses and for self-employment. Undesirable effects of the age-entrepreneurship conundrum could be mitigated with policies that mobilize savings and redistribute from the relatively old to the relatively young. Capital markets that are in sync with the age distribution of the workforce could overcome institutional rigidities that prevent such redistribution. Around the globe, we see investors flocking to India, as if they were aware of this age-growth story. But Minniti says we are mostly unconscious about this phenomenon. Prior to the disasters that struck Japan, the government was committing to new high technology and green energy ventures abroad with its countries’ wealth, ie., using its capital abroad to invest in growth at home. Age matters in more fine-grained ways than we have imagined and calculated. With governments looking for the next frontier of policy tools, perhaps considering age-related nuances can shed more light. The paper “Age Matters: How Demographics Influences Aggregate Entrepreneurship” by Maria Minniti, Professor and Bobby B. Lyle Chair of Entrepreneurship at SMU Cox and Moren Lévesque of York University is forthcoming in Strategic Entrepreneurship Journal. Written by Jennifer Warren.
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