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With the reduced opportunities for employment in larger companies and government, attention has turned to selfemployment and small firms as important sources of new jobs. Entrepreneurship has a vital role to play in creating them.
Entrepreneurs are essential agents of change in a market economy, fuelling the drive for the increasingly efficient use of resources and facilitating trade between parties with different preferences and endowments. Entrepreneurial behaviour is likewise a key to accelerating the generation, dissemination and application of innovative ideas. In societies undergoing rapid economic change, a high degree of entrepreneurship will help to cushion adverse social impacts by facilitating the creation of new employment opportunities as old ones decline. The entrepreneurial function will affect both the rate at which new firms are created and their chances of survival and growth as well as the fate of already existing firms.
But for a number of reasons a statistical link between entrepreneurship and employment is difficult to establish. Entrepreneurship cannot be measured directly. It is often latent, its presence manifested in behaviour which can be taken only as proxies of entrepreneurship (box, right). And how entrepreneurship manifests itself changes continuously. Even if observers were privileged with a direct measure of entrepreneurship, other problems would remain in establishing the link to employment. For example, analysts would face the problem of separating the influence of entrepreneurship from the effects of other variables such as labour-market policies. In addition, the causal connection between entrepreneurship and employment runs in both directions: for example, when unemployment rises and wage-earners are threatened with redundancy, the opportunity cost of becoming an entrepreneur is lowered. What is clear is that entrepreneurship is a necessary condition of economic progress in a market economy, and measurement problems should not detract from efforts to promote it as a part of the solution to unemployment.
One approach governments are using to stimulate entrepreneurship, since unemployment and poverty are increasingly concentrated, often in distressed urban areas, is to target policies geographically, moving from a sectoral to a geographical approach. Self-employment and enterprise-creation can help turn around a local economy that is badly affected by economic decline, from the closure of industrial plants or military bases, say, or other adverse social and economic developments.
In some countries, such...