Executive Summary —
This paper examines the historical causes of the wealth gaps between the West and "the Rest." It integrates the business history literature into the current dominant explanations of global wealth and poverty which focus on deficient institutions, poor human capital development, geography, and culture. It argues that there is a "missing gap" between these factors, and the entrepreneurs and firms which create wealth and drive innovation. The paper examines why entrepreneurial catch-up was so challenging in the Rest in the nineteenth century. It shows that nonetheless productive business enterprises were emerging in Asia, Latin America, and Africa by the first half of the twentieth century. However, these were often crippled by the subsequent era of Communism and state intervention. The second global economy from the 1980s provided new opportunities for firms from the Rest to catch up, including easier access to knowledge and capital through returning diaspora, business schools and management consultancies, and smarter state capitalism.
(A revised version of this working paper is forthcoming in Entrepreneurship and Multinationals: Global Business and the Making of the Modern World, Northampton, MA: Edward Elgar, fall 2013). Key concepts include:
- It is important to incorporate entrepreneurs and firms into historical explanations of the causes of global wealth and poverty.
- It was hard for entrepreneurs in most of Asia, Latin America, and Africa to catch up once modern industrialization had got underway because of the societal and cultural embeddedness of new technologies.
- Minorities or immigrants were especially important in new firm creation as many Asian, African, and Latin American countries began to industrialize because of their advantages in capital-raising and trust levels.
- As entrepreneurs in developing countries began catching up with their Western counterparts in the first half of the twentieth century, they were often successful in creating hybrid organizational forms well-adapted to their local contexts.
- The second global economy since 1980 has facilitated entrepreneurial catch-up through easier access to knowledge and capital through returning diaspora, business schools and management consultancies, and smarter state capitalism.
This working paper integrates the role of entrepreneurship and firms into debates on why Asia, Latin America, and Africa were slow to catch up with the West following the Industrial Revolution and the advent of modern economic growth. It argues that the currently dominant explanations, which focus on deficient institutions, poor human capital development, geography, and culture are important but not sufficient. This is partly because recent research in business history has shown that several of the arguments are not empirically proved, but especially because the impact of these factors on the creation and performance of innovative business enterprises is not clearly specified. Modern economic growth diffused from its origins in the North Sea region to elsewhere in western and northern Europe, across the Atlantic, and later to Japan, but struggled to get traction elsewhere. The societal and cultural embeddedness of the new technologies posed significant entrepreneurial challenges. The best equipped to overcome these challenges were often entrepreneurs based in minorities who held significant advantages in capital-raising and trust levels. By the interwar years, productive modern business enterprise was emerging across the non-Western world. Often local and Western managerial practices were combined to produce hybrid forms of business enterprise. After 1945 many governmental policies designed to facilitate catch-up ended up crippling these emergent business enterprises without putting effective alternatives in place. The second global economy provided more opportunities for catch up from the Rest and saw the rapid growth of globally competitive businesses in Asia, Latin America, and Africa. This is explained not only by institutional reforms, but also by new ways for business in the Rest to access knowledge and capital, including returning diaspora, business schools, and management consultancies. Smarter state capitalism was also a greater source of international competitive advantage than the state intervention often seen in the past.