RESPONSIBLE ENTREPRENEURSHIP VISION DEVELOPMENT AND ETHICS

80 RESPONSIBLE ENTREPRENEURSHIP
terpoint to the determinism of the vulnerability/resilience approach (see also Breznitz & Zimmerman,
2008).
Human capital development
Secondly, the endogenous growth models of human capital show the comparative advantage
that investment in education, training and learning by doing (LBD) can bestow on a
smaller state (Armstrong & Read, 2003). The development of the concept of human capital
theory is attributed to Becker (1964) and Mincer (1974). This can be defined as the knowledge,
skills and abilities (KSAs) embodied in people (Coff, 2002). It includes not just factual,
‘how to’ KSAs but also tacit KSA’s which are difficult to articulate (Polanyi, 1966 cited
in Crook et al., 2011). The appeal that human capital development can have for a smaller
state becomes evident when it is unable to generate significant investment in physical capital
due to market size constraints. The appeal increases when it is further realised that human
capital – in terms of knowledge creation and diffusion – is not only not size constrained but
is also not subject to diminishing returns. Human capital investment, in these circumstances,
will increase the collective ‘absorptive capacity’ (Cohen & Levinthal, 1990) in the economy,
thus compensating for the smaller state’s lack of investment or scale in R&D (Briguglio, 1995;
Armstrong & Read, 2003).
Indeed, human capital development is of such importance to small state growth that the
states relative size, far from being an impediment to growth, sometimes can act as a further
stimulant of human capital development. As greater social cohesion is expected to exist in
smaller states (compared to larger states), this social cohesion can lead over time to the development
of considerable social capital (Putnam et al., 1993; Baldacchino, 2005). However,
this increased cohesion can also have some negative side effects leading on occasion to
increased levels of cronyism, corruption, insider dealing and inefficiency. This is likely if the
appropriate democratic, legal and regulatory frameworks (governance structures) are not sufficiently
independent and robust (Transparency International, 2009; Kaufmann et al., 2010).
Income volatility and terms of trade volatility
Related to the degree of openness of the small economy is the volatility that attaches to
the state’s income. This can be particularly acute in developing countries (Ramey & Ramey,
1995). The equation for growth for the small economy then must ensure that the positive effects
of openness to trade and the high levels of human capital investment overcompensate for the
negative effects of income and terms of trade volatility in the medium to long term. The effects
of the trade multiplier can be seen most starkly in smaller states with high degrees of trade
openness (Ashoff, 1989).
Another issue that impacts income in the smaller, open economy is its ability to affect its
terms of trade (Easterly & Kaay, 2000; WTO, 2003, Jansen, 2004). This is particularly true
for states which depend heavily or exclusively on indigenous industry to develop international
trade. Those small states hosting significant foreign direct investment (FDI) face different
issues around the structure of their exports and thus their terms of trade. Positive local
linkages and spillover effects however would be expected to emanate from this mobile for-