For a long time, the level of entrepreneurship has been evaluated by some quantitative output measure, such as the self-employment rate, business ownership rate, or business start-ups. Over the last decade, the Global Entrepreneurship Monitor’s Total Early-stage Entrepreneurial Activity (TEA) ratio has become a widely used measure of entrepreneurship at the country level.
While these output indicators or ratios have undergone some modification and change to incorporate qualitative measures, like education and high-growth firms, they are basically limited to measuring the quantity of existing or nascent businesses. There are five major shortcomings with these attempts at measuring entrepreneurship:
- While all the definitions emphasise the multifaceted nature of entrepreneurship— including innovation, risk taking, opportunity recognition, high-growth opportunity motivations, and unusual “judgmental” decision-making, they measure only one, and perhaps not even the most important, aspect of entrepreneurship.
- The indexes fail to incorporate the businesses’ differing impacts. A traditional agricultural business established in Uganda or Peru is given equal importance as an Internet-related venture in Silicon Valley.
- The most entrepreneurial nations are defined as those having the largest number of businesses. These are generally the developing countries of Africa or South America.
- These measures do not take into account differences in environmental factors. In fact, the efficiency and sophistication of the institutional setting could have a major influence on the quality of entrepreneurship.
- Since self-employment and the business ownership ratio decline as a country develops, indexes that rely on them appear to show that higher levels of development are associated with decreasing levels of entrepreneurship. This phenomenon is inconsistent with mainstream economic theories which posit a direct connection between entrepreneurship and development.
An output-based index would not necessarily give policymakers good guidance, as it can prompt a focus on increasing the quantity of entrepreneurship when quality is of greater import.
Recent efforts of the OECD and European Union have aimed to provide a sophisticated measure of entrepreneurship encompassing three broad areas: the determinants of entrepreneurship (regulation, R&D, entrepreneurial capabilities, culture, access to finance and market conditions); entrepreneurial performance (firms, employment, and wealth); and the impact of entrepreneurship. While the first two publications of the OECD’s Entrepreneurship Indicator Programme contain many entrepreneurship-related data and indicators, a more highly evolved measure of entrepreneurship is still missing.
The shortcomings of previous entrepreneurship indicators and the need to clarify the role of entrepreneurship in economic development are the two major reasons underlying the creation of the Global Entrepreneurship Index (GEI) and this is the only index to fulfill the three major requirements of entrepreneurship index building, namely,
- Sufficient complexity to capture the multidimensional nature of entrepreneurship;
- Inclusion of indicators encompassing quality-related differences, in addition to quantitative or level-related measures; and
- Inclusion of individual-level as well as institutional variables.
Unlike other entrepreneurship indexes, the relationship between the GEI and economic development appears to be mildly S-shaped, implying a positive relationship between entrepreneurship and economic development. Therefore, the GEI is a potentially useful tool to provide policy suggestions to increase economic development via entrepreneurship. However, it is acknowledged that since economic growth is ultimately the result of many factors in addition to entrepreneurship, the GEI can explain only a part of short-term economic growth.