Entrepreneurship and Unemployment: A Litrature Review

International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 ENTREPRENEURSHIP AND UNEMPLOYMENT: A LITERATURE REVIEW Babangida Muhammad Musa Department of Business Administration, Faculty of Arts and Social Sciences, Gombe State University, Gombe – Nigeria [email protected], [email protected] D.M. Semasinghe Commerce and Financial Management Department, Faculty of Commerce and Management Studies, University of Kelaniya, Sri Lanka [email protected] Abstract A great deal of ambiguity exists in the literature over the relationship between entrepreneurship and unemployment. The simple theory of income choice, which has been the basis for numerous studies focusing on decision confronted by individuals to start-up venture and become entrepreneur i.e. the increase in unemployment will lead to an increase in start-up activity (pusheffect) on the grounds that the opportunity cost of not starting a venture has decreased. This study aims to contribute to the entrepreneurship literature by exploring the relationship between the two conflicting concepts; entrepreneurship and unemployment. In this paper we reviewed the relationship between entrepreneurship rate and unemployment rate using exploratory research. Furthermore, using secondary data we attempt to address the ambiguity between the two concepts empirically. However, we assumed that increase in entrepreneurship activities reduced unemployment, at the same time, high rate of unemployment lead to slowdown or decrease in entrepreneurial activity in an economy. Using available literature, we tried to justify this notion and reconciled the two conflicting concepts, for policy-makers and researchers as well. Keywords: entrepreneurship, unemployment, theory, relationship and literature review. International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 Introduction The relationship between entrepreneurship and unemployment has been covered with ambiguity. On the one hand, the simple theory of income choice, which has been the basis for numerous studies focusing on the decision confronted by individuals to start a firm and become an entrepreneur (Blau, 1987; Evans and Leighton, 1990; Evans and Jovanovic, 1989; and Blanchflower and Meyer, 1994) suggests that increased unemployment will lead to an increase in start-up or entrepreneurial activity on the grounds that the opportunity cost of not starting a firm has decreased. On the other hand, the unemployed tend to possess lower endowments of human capital and entrepreneurial talent required to start and sustain a new firm (Lucas, 1978; Jovanovic, 1982), suggesting that high unemployment is associated with a low degree of entrepreneurial activities. A low rate of entrepreneurship may also be a consequence of the low economic growth levels, which also reflect higher levels of unemployment (Audretsch, 1995). Entrepreneurial opportunities are not just the result of the push effect of (the threat of) unemployment but also of the pull effect of produced by a thriving economy as well as by entrepreneurial activities in the past. In addition to unemployment leading to more or less entrepreneurial activity, the reverse is also the case to some extent. In this case a new-firm startups hire employees, resulting in subsequent decrease in unemployment (Picot et al., 1998 and Pfeiffer and Reize, 2000a). However, we postulated that unemployment slowdown entrepreneurship activity in one hand and entrepreneurial activities reduced unemployment in another. This paper intends to review analytically these assumptions in relation to the theories of entrepreneurship and unemployment. We used secondary data mostly scholarly articles sourced from published and online journals and conference proceedings. We also used the CIA World Bank Fact Book 2012 to drawn the employment rates of the developed and undeveloped or developing countries for our comparism. Theories of entrepreneurship There is no universally accepted definition of entrepreneurship. Some scholars view entrepreneurship as aggressive, ‘creative, and innovative business creation’ (Rogoff, 2008:5). Others simply equate it with self-employment. In the academic literature, a dominant definition views entrepreneurship as the process of pursuing opportunities and mobilizing resources needed to bring new ventures to reality (Stevenson, 1990; Ireland, Hitt and Sirmon, 2003). Thus, International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 entrepreneurs are seen as individuals who create new or explore existing market opportunities and pursue their goals while bearing personal, professional and financial risk. The willingness to venture into unknown and ability to accept risk exposure are important and necessary ingredients in entrepreneurship. This inspired the famous Austrian economist, Joseph Schumpeter to liken entrepreneurs to ‘wild spirits’ who bring innovation and technological change in a nation. At a practical level entrepreneurship has been defined as; The process of using private initiative to transform a business concept into a new venture or to grow and diversify an existing venture or enterprise with high growth potential. Entrepreneurs identify an innovation to seize an opportunity, mobilize money and management skills, and take calculated risks to open markets for new products, processes and services (UNDP, 1999:1). More recently, however, particularly in empirical literature, there has been emerged an increasing tendency to equate entrepreneurship to self-employment and small business ownership. Research on entrepreneurship has always been a controversial topic in economic theorizing. The significance of entrepreneurship is emphasized by almost all authors working on innovation economics; nevertheless, most of the research work comes to an end at a purely appreciative level. Still, a consistent theory of entrepreneurship is missing; a theory that is adequate to combine the various strands of literature in order to come to an empirically testable model, eventually. Besides the early theories that approach entrepreneurship from a rather intuitive perspective, to be traced back to Schumpeter (1939), Kirzner (1973) and Kirzner (1999), a modern evolutionary approach should also contain some specific theories such as the theory of human capital (e.g. Schlutz (1975), social networks (e.g. Granovetter (1983)) and NeoSchumpeterian Economics (e.g. Loasby (1999)). They develop an eclectic approach by designing an analytical model open to be applied to different industries and historical settings. In static theories of competitive equilibrium, the size of the firm is determined by the efficient allocation of given resources, including entrepreneurial resources, under given technologies. Accordingly, the observed firm size is the efficient size, in the sense that long run costs are minimized at that point. Growth follows from the assumption of profit-maximizing behavior and from the shape of the cost functions. A firm will grow until it has reached the size where long run marginal costs equal price, which is assessed as the “optimum” size of the firm. Thus, Lucas International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 (1978) equates the firm with the entrepreneur or manager and he assumes that a firm’s output is a function of managerial ability as well as capital and labour. Lucas postulates therefore one production technology subject to constant returns to scale, and a separate managerial technology with diminishing returns to scale or “span of control.” Managers with higher abilities (i.e., higher efficiency levels) will have lower marginal costs and therefore will produce larger outputs. However, firm expansion will be limited due to decreasing effectiveness of the manager as the scale of the firm increases. An implication of the Lucas model is that, for a small business to grow, the small business owner must be willing and able to relinquish many day-to-day control functions and delegate those tasks to an enlarged, specialized management team. The theories discussed above are static. They say little about how an industry and the firms within it evolve over time and they ignore the fact that individuals can learn their business acumen by acquiring education and operating businesses over time. Jovanovic (1982) addresses these deficiencies by developing a model of the firm life cycle based on learning. According to Jovanovic’s life cycle model, individuals differ in their entrepreneurial abilities (as in Lucas), but they are unsure of their abilities. In his model, production technology is risky (as in Kihlstrom and Laffont), partly because individuals are uncertain about their abilities and partly because production is inherently risky. His model also assumes that individuals learn about their abilities over time by observing how well they perform in a tough business world. Individuals who find out that they have underestimated their abilities in one period will expand output in the next, while those that overestimated their abilities will dissolve their business. Jovanovic’s model has a rich set of empirical implications. Young firms have accumulated less information than older firms about their managerial abilities (experience). Consequently, younger firms have more variable growth rates than older firms because they have less precise estimates of their true abilities. For the same reason it follows that there will be more exits among younger firms, but also that among surviving firms, younger firms will grow faster than older firms. As younger firms tend also to be smaller firms, Jovanovic argues that the same observations hold for small firms as well. Surviving small firms are expected to grow faster than larger firms and to have more variable growth rates. International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 According to the influential theory of Churchill and Lewis (1983), growth is part of the natural evolution of a firm. The authors identify five stages of growth: existence, survival, success, takeoff and resource maturity. In each stage of development a different set of factors is critical to the firm’s survival and success. Growth thresholds may exist as obstacles to the transition from one stage to another. Accordingly, in the take-off stage – most relevant in a study of rapid growth – there are two major concerns or obstacles to firm growth: the ability of the owner to a) hire new people and b) delegate responsibility. The business will also need enough cash to satisfy the greater demand for financial resources brought about by growth. The prevailing theories recognize the attitudes and ability of the business owner (entrepreneur) have an important impact on small firm success and will be reflected in strategic choices and the ways in which he/she operates in business. Entrepreneurship may influence economic performance in different ways. Entrepreneurs often play a vital role in the early evolution of industries by way of introducing new products or processes and, in the long term, enhancing productivity through increasing competition (Van Stel & Thurik & Verheul & Baljeu, 2007). New entrants in the market may also create knowledge about what is technically viable and what consumers prefer by introducing variations of existing products and services in the market. The resulting learning process speeds up the discovery of the dominant design for product -market combinations. The learning does not solely apply to the experimenting entrepreneur (Baptista & Van Stel & Thurik, 2006). Knowledge spillovers play an important role in this process (Audretsch & Aldridge & Oettl, 2006; Audretsch, 2007; Van Stel & Thurik & Verheul & Baljeu, 2007).Finally, self -employed individuals tend to work longer hours than wage-employed people and may be more productive as their income is more clearly linked to working effort (Van Stel & Thurik & Verheul & Baljeu, 2007; Carree & Thurik, 2003; Carree & Verheul & Thuri k, 2007). Concept and theories of unemployment, its nature and magnitude in development Unemployment is one of the most visible indicators of economic activity. The rate of unemployment typically rises considerably during recessions then falls as the economic recovers. People commonly view the typical unemployed worker as suffering long-lasting despair and destitution, so the media publicize high unemployment as a great social problem. Some degree of unemployment is socially and perhaps personally desirable. Much of unemployment consists of International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 new entrants to the labor market seeking their first job, individuals who are voluntarily changing jobs or occupations, and people in jobs for which periodic or seasonal layoffs are normal, expected, and compensated for by higher wages during periods of employment (Parker, 2010). For these individuals, unemployment is not a problem at all. It is merely part of the natural functioning of a flexible and efficient labor market. Economists often view unemployment as one facet of an inevitable process of search in the labor market. Jobs and workers are heterogeneous along many dimensions. Workers differ (among other ways) by intelligence, creativity, education, training, experience, physical size and strength, manual dexterity, ability to sustain repetitive tasks, and preferences about their work environment. Jobs vary in the abilities, education, and experience that are required to perform them, as well as in working conditions, location, opportunities for advancement, and many other characteristics. Rather than simply viewing unemployment as the counter-state to employment, we model it as a process of search. The success that individuals seeking new jobs will have in finding them depends on two broad kinds of circumstances: (1) the general balance of demand and supply in the labor market, and (2) the match between the searchers’ characteristics and those of the available jobs. There are two broad categories of approaches to explaining movements in unemployment that correspond to these two kinds of circumstances. One approach emphasizes the heterogeneity of workers and jobs. Because every worker and every job has unique characteristics, matching them up through a search process is time consuming. Search models examine the propensity of employers and job searchers to achieve matches and how that propensity varies over time. This approach models the flows of workers and jobs between states: a job match that results in a hire transforms an unemployed worker into an employed worker and a vacant job into an occupied one. To complete the model, one must examine the other labor-market flows: job creation and destruction, entry to and exit from the labor force, and the flow of separations of existing workers from their jobs. In the search approach, natural unemployment fluctuates when there are changes in the efficiency of matching in the economy or in the other flows between labor-market states. For example, if structural shifts in the economy make it more difficult to match the characteristics of International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 unemployed workers with those of vacant jobs, then matching will be less efficient and the natural rate of unemployment will increase. It should be emphasized that the kind of unemployment described by the search theories does not require a general excess supply of labor. It stresses the fact that even when the number of unemployed is equal to the number of job vacancies, neither number is likely to be zero. Unemployment in the classical economic theory Wicksell thinks that if wages are sufficiently flexible downward, then this decline can maintain full employment (Jonung 1989). Cheaper credit to businessmen is the most effective measure to fight unemployment. He even thought that the government should support private investment in housing and soils. Government can support the introduction of various inventions as well. Government support should be financed by taxation. Wicksell analyzes technical unemployment due to technological change as well. The introduction of machinery would cause unemployment but the unemployed will search for new jobs, a search that will push wages downward. Hence, full employment is restored again. For the normal (frictional) unemployment, Wicksell thinks that advertisements and employment agencies can reduce the normal rate of unemployment. The cyclical unemployment, as another type of unemployment, is due to the lack of effective demand. He though it would be a good idea to raise wages in order for workers to buy more. But this action may cause workers to lose their jobs as a result of higher wages. Essentially, for Wicksell the cyclical unemployment was due to the wrong investment of capital. Capital was invested in areas where rates of return were low. He concluded that public works is the best measure to fight cyclical unemployment. After World War I, Wicksell thinks the boom and the rise in prices induced by the war would come to an end. Thus, unemployment would rise. Workers would have to accept lower wages. He also thought that government should provide financial support to the unemployed who could not find jobs. After 1921, Wicksell turns to Malthus. He thought that the causes of the unemployment are the surplus people, shortage of capital brought about by the war, and the disorganized state of the monetary system. For the third cause, after the war prices were falling and producers decided to produce lower amounts of International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 production because they knew they would receive lower prices for their products. Thus, they let their money set idle in banks and workers became unemployed. These causes suggest that emigration became one of the important policies for solving the unemployment problem. Wage reduction is not a competent policy to increase employment. The increase in wages is most likely due to increased labor productivity and wage reduction will reduce work intensity and productivity. Wage reduction will not force some capital intensive firms to switch to labor intensive techniques in the short run. Higher wages should stimulate the substitution effect by employing more machines for labor. And this substitution will increase labor productivity and employment in the long-run. Hayek (Nishhiyama and Leube 1984) contends that unemployment is due “to a discrepancy between the distribution of labor between industries and the distribution of demand among their producers. This discrepancy is caused by a distortion of the system of relative prices and wages.” In other words, the unemployment is caused by “a deviation from the equilibrium prices and wages which would establish themselves with a free market and stable money.” This is actually a mismatch between demand and supply of labor, which is usually caused by expansionary monetary and fiscal policies and powerful trade unions. These policies create economic dislocation and structural changes in an economy which misdirect labor and other economic resources to other alternatives. Unions are also able to set higher wages compared to market wages, which generate unemployment, particularly in industries that become less profitable. In short, for Hayek the unemployment problem is caused by resources being in the wrong places at the wrong time and can be corrected if wages and prices are determined by the equilibrium of supply and demand. In line with Hayek theory of unemployment, Trehan (2001) provides an important explanation of the search theory of unemployment. Firms search for the productive workers and workers search for high-paying jobs. So, both agents continue searching until matches are reached. At that point a worker will leave the unemployment pool. But if a worker realizes later on that his/her productivity is worth higher wages and firms are paying high wages on the average, then the worker’s reservation wage will increase. Consequently, the unemployment rate will start rising gradually, indicating a mismatch has occurred again. International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 Unemployment in the theory of innovations Originally, this theory was developed by the German economist Von Mangoldt (Ekelund and Hebert 2007) wrote a book about entrepreneurial profits in 1855 and connected profits to risk. He provided several ways by which the entrepreneur can make profits. These ways are (1) finding particular markets, (2) acquisition of productive agents, (3) skillful combination of factors of production, (4) successful sales policy, and (5) innovations. And it is well understood proposition that entrepreneurial profits will increase employment (Mouhammed 2010). Schumpeter (1934) does not provide explicitly a theory of unemployment but his theory of the business cycle does demonstrate clearly how unemployment can be reduced. Innovation (see also Vecchi 1995) which creates more jobs relative to job destruction is the basic force beyond the increases in employment and the decreases in unemployment. When entrepreneurs innovate something new such as the production of a new product, the finding of a new market, introducing a new method of production and the invention of new technologies and a new organization they increase investments to materialize those innovations. Domestic investment expenditures will increase demand on economic resources and will increase their prices. Other entrepreneurs will imitate the leaders by adopting the new innovations. Labor and materials will be employed to produce the new items. Consequently, wages will be increasing and unemployment will be declining, assuming that employment creation will outweigh employment destruction due to the new innovations (see also Mortensen and Pissarides 1998 and Manuelli 2000). Theoretical nexus between entrepreneurship and unemployment Really ambiguity exists in the literature over the link between entrepreneurship and unemployment. The simple theory of income choice, which focuses on decision confronted by individuals to start-up venture and become entrepreneur trigger many studies. (Blau, 1987; Evans and Leighton, 1990; Evans and Jovanovic, 1989; and Blanchflower and Meyer, 1994) asserts that increased unemployment will lead to an increase in start-up activity on the grounds that the opportunity cost of not starting a venture has decreased. On the other hand, the unemployed tend to possess lower endowments of human capital and entrepreneurial talent required to start and sustain a new venture (Lucas, 1978; Jovanovic, 1982), assert that high unemployment is associated with low degree of entrepreneurial activities. A low rate of entrepreneurship may also International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 be a consequence of the low economic growth levels, which also reflect higher levels of unemployment (Audretsch, 1995). Entrepreneurial opportunities are not just the result of the push effect of (the threat of) unemployment but also of the pull effect of produced by a thriving economy as well as by entrepreneurial activities (Parker, 1996). In addition to unemployment leading to more or less entrepreneurial activity, the reverse has also been claimed to hold. On the one hand, new venture start-ups hire employees, resulting in subsequent decreases in unemployment (Picot et, al. 1998 and Pfeiffer and Reize, 2000a). On the other hand, the low rates of survival combined with the limited growth of the majority of small firms entail that the employment contribution of startups is limited at best, which would argue against entrepreneurial activities reducing unemployment. As Geroski (1995) has documented, the penetration rate, or employment share, of new startups is remarkably low. There is ambiguity in the empirical evidence between these two conflicting concepts. Some studies have found that unemployment is associated with greater entrepreneurial activities, but others have come with the opposite conclusion, that entrepreneurship and unemployment are inversely related. For instance, Evans and Leighton (1990) found that unemployment is positively associated with a greater propensity to start a new firm, but Garofoli (1994) and Audretsch and Fritsch (1994) observe that unemployment is negatively related to new venture start-ups, and Carree (2001) found that no statistically significant relationship exists between the two concepts. Audretsch and Thurik (2000) assert that an increase in the number of business owners reduces the level of unemployment. They identify a ‘Schumpeter’ effect in terms of the positive impact on employment resulting from the entry of new venture start-up activity. Storey (1991) concludes that, the broad consensus is that time series analyses point to unemployment being, ceteris paribus, positively associated with indices of new venture formation, whereas cross sectional, or pooled cross sectional studies appear to indicate the reverse. Attempts to reconcile these differences have not wholly successful. Thus, while there are not just theoretical reasons, but also empirical support as well, that while unemployment leads to increased entrepreneurial activity, entrepreneurship leads to reduced International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 unemployment. Unraveling the relationship between entrepreneurship and unemployment is crucial, because policy is frequently on assumptions that do not reflect this ambiguity. For example, in advocating a greater role for public policy to promote entrepreneurship in Europe, the president of the European Commission, Romaro Prodi (2002), assert that ‘increases in entrepreneurial activity tend to result in higher subsequent growth rates and a reduction of unemployment’. The relationship between entrepreneurship and unemployment The unemployed people tend to possess lower endowments of human and social capital and entrepreneurial talent required to start and sustain a new firm which may lead to early exit (Thurik, 2007; Lucas, 1978; Jovanovic, 1982; Baptista & Van Stel & Thurik,2006) .High unemployment may also imply lower levels of personal wealth reducing the likelihood of becoming self-employed or the survival in the initial stages of business ownership (Hurst & Lusardi, 2004; Van Stel & Thurik & Verheul & Baljeu, 2007). High level of unemployment may correlate with low economic growth leading to a low number of entrepreneurial opportunities (Audretsch & Thurik & Verheul & Wennekers, 2002; Baptista & Van Stel & Thurik, 2006). A low rate of entrepreneurship may also be a consequence of the low economic growth levels, which also reflect higher levels of unemployment (Audretsch, 1995; Audretsch & Carree & Thurik, 2001). While some studies find that greater unemployment serves as a catalyst for startup activity (Reynolds & Miller & Makai, 1995; Reynolds & Storey & Westhead, 1994; Hamilton, 1989; Highfield & Smiley, 1987; Yamawaki, 1990; Evans & Leighton, 1989 & 1990), but many studies have found that unemployment reduces the amount of entrepreneurial activity (Audretsch & Fritsch, 1994; Audretsch, 1995; Audretsch & Carree & Thurik, 2001). If a country prevails high unemployment rate, entrepreneurs face reduced demand of products or services. This reduces the revenue accruing from entrepreneurship, and capital availability, which leads to increasing the risk of bankruptcy. In this way, individuals are "pulled out "of business because the company's bankruptcy case becomes a higher risk than the gainful employment. According to (Lucas, 1978; Javanovic, 1982) who observe that there is an inverse relationship between entrepreneurship and unemployment (high level of unemployment is associated with a low level of entrepreneurship), i.e. unemployed people do not have the necessary expertise to start-ups and International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 do not have intrinsic properties of the entrepreneur. This article authors hold, the prevailing controversial opinions of the past about the relationship between entrepreneurship and unemployment. In addition to unemployment pushing to start-up new firm activity, it has been argued that entrepreneurship influences (un)employment. There is also a lot of claiming that start-up activity influences unemployment. The positive effect of entrepreneurship on economic performance has been referred to as the Schumpeter effect (Van Stel & Thurik & Verheul & Baljeu, 2007). Newfirm startups hire employees, resulting in subsequent decreases in unemployment (Picot et al, 1998; Pfeiffer & Reize, 2000a; Audretsch & Carree & Thurik, 2001). Thurik et al. (2007) examine the relationship between entrepreneurship and unemployment in Japan .They find that, although Japan‘s unemployment rate has been influenced by specific exogenous shocks, the effects of entrepreneurship on unemployment are not different when compared to other OECD countries. They find that entrepreneurship significantly lowers unemployment but that it takes a lag of four yearly data (VanStel & Thurik & Verheul & Baljeu, 2007). VanStel & Baptista & Thurik, (2006), examines the relationship between entrepreneurship and unemployment, as measured by the variation in business ownership rates, and unemployment in Portugal. They concludes that Portugal has been a relative outlier in regard to the effects of entrepreneurship on unemployment when compared whit the OECD average. They found that the industrial re-structuring effects brought about by increases in business ownership rates probably do not have a significant impact on the reduction of unemployment. Thurik (2003), the influence of industrial structure, more specifically of entrepreneurship, is investigated on the level of unemployment in the UK. It will be concluded that the UK is a relative outlier when using a simple model of the relationship between unemployment and the rate of business ownership. The model is calibrated using recent data of some 23 OECD countries. It underestimates the decrease in unemployment in the UK in the period 1982-1990. Moreover, we observed that countries with higher entrepreneurial activity shows low rate of unemployment, for instance, Japan rate of unemployment in 2012 is 4.6%, United Kingdom 8.1%, USA 7.7%, Finland 7.8%, Austria 4.8%, Germany 5.7%, Singapore 2.1%, and Malaysia 3.1%. In the other hand, the countries with lower entrepreneurial activity has high rate of International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 unemployment. Example of these countries are Kenya with 40% unemployment rate, Maldives 14.5%, Namibia 51.2%, Egypt 12.7%, Jamaica 13.0%, Iran 14.1%, Nepal 46%, Algeria 9.7%. (CIA World Fact Book 2012). Thus, while there are not just theoretical reasons, but also empirical support as well, that while unemployment leads to increased entrepreneurial activity, entrepreneurship leads to reduced unemployment. Unraveling the relationship between entrepreneurship and unemployment is crucial, because policy is frequently on assumptions that do not reflect this ambiguity. Findings Our findings are in line with the individual observations of (Lucas, 1978; Javanovic, 1982) who observe that there is an inverse relationship between entrepreneurship and unemployment. We found that high level of unemployment is associated with a low level of entrepreneurship activities, i.e. unemployed people do not have the necessary expertise to start-ups and do not have intrinsic properties of the entrepreneur as well as the capital or collateral to start a business. This can clearly be observed in the following evidences; we examined some countries in the world in relation to the conflicting arguments between entrepreneurship and unemployment. We discovered that countries with high rate of entrepreneurial activity have low rate of unemployment (e.g. developed countries). While in the other hand countries with high rate of unemployment have low rate of entrepreneurial activities (e.g. under-developed or developing nations). Therefore, the interaction between entrepreneurship and unemployment is essentially determined by the country’s position of the labour market. Conclusion and recommendations We finally conclude that entrepreneurship has a significant link with unemployment. This is clearly shown in the findings of this study. Some countries with high rate of entrepreneurial activity have low rate of unemployment (e.g. developed countries like USA, Japan, UK). While in the other hand countries with high rate of unemployment have low rate of entrepreneurial activities (e.g. developing nations like Namibia, Nepal, Kenya). The interaction between entrepreneurship and unemployment is essentially determined by the country’s position of the labour market. An examination of the communal relationship between entrepreneurship and International Conference on Business & Information 2013 ISBN 978-955-4563-17-9 unemployment show that both in theory and practice, there is a "pull" (business reduces unemployment) effects, while we opposed the "push" (unemployment encourages to take business) effect notion. We suggest the development of entrepreneurial skill and potentials and acting based on the promotion of entrepreneurial thought. We also suggest policy makers should promote entrepreneurial thought and skills of their people in order to establish entrepreneurial economies. Small businesses, referring to entrepreneurs, are more able to quickly respond to markets demands because they are not so rigorously rigid and are labour intensive. 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