The Importance of Entrepreneurs' Education

Human capital has always been regarded as one of the key driving forces of economic development. Higher social wealth tends to be associated with increasing education. Although the positive feedback between education and economic growth is clear, the channels through which human capital operates are much more obscure. While one can intuitively think that workers' education might indeed represent the most relevant factor of human capital, it turns out that most of the influence on growth and productivity is led by entrepreneurial human capital. This is perhaps the most striking result of Human Capital and Regional Development, an article by Nicola Gennaioli (Department of Finance), Rafael La Porta (Dartmouth College), Florencio Lopez-De-Silanes (EDHEC Business School) and Andrei Shleifer (Harvard University), published in the The Quarterly Journal of Economics (Volume 128, Issue 1, February 2013, doi:10.1093/qje/qjs050)

Interestingly, the impact of entrepreneurial human capital has received little, if any, attention by economic research. However, anecdotal evidence suggests that the distinction between entrepreneurs and workers is critical to fully understand the impact of human capital on the level of productivity of firms across different regions, especially in developing countries. Indeed, while workers education directly affects production, the human capital of the entrepreneurs impacts on the firm-level productivity independently. As such, by decomposing human capital effects into those of workers' education, entrepreneurial education, and potential externalities, it might be easier to understand the effective linkages between returns on education and differences in regional economic growth.

In their article, the authors investigate the determinants of regional development using a newly constructed database of 1569 sub-national regions from 110 countries covering 74 percent of the world's surface and 97 percent of its Gross Domestic Product. More prominently, the authors explore the influences of geography, natural resource endowments, institutions, human capital, and culture by looking within countries, combining this analysis with an examination of productivity in several thousand establishments covered by the World Bank Enterprise Survey. A combination of regional and establishment-level data has then be used to investigate some of the key channels through which human capital operates, including education of workers, education of entrepreneurs/managers, and externalities.

As we would expect, the authors find that human capital measured using education emerges as the most consistently important determinant of both regional income and productivity of regional establishments. Crucially, however, the authors show that focusing on workers education, disregarding the effect of entrepreneurial human capital, substantially underestimates both private and social return to education. In sum, the authors point out that, entrepreneurial human capital, and perhaps human capital externalities, largely influence the level of regional productivity.

These results point decisively to the role of the supply of highly skilled/educated entrepreneurs for the creation of productivity of firms. As far as the level of productivity of an economy is concerned, the findings provided by the authors seems to suggest that having highly educated entrepreneurs might be more beneficial than having educated workers.