A New Model of the Relationship between Number of Entrepreneurs and Factor Substitution

In the new economic era that features speedy advancement in technology, entrepreneurship has become one important element of economic development. In this study, we demonstrate the induction of a hypothesis originated from production theory of economics that predicts as income increase during economic development, the number of entrepreneurs will also increase, provided the elasticity of factor substitution between labor and capital is larger than unity. This hypothesis provides an explanation for the increase importance of entrepreneurship as well as SMEs. The hypothesis is tested with Taiwan manufacturing data in our empirical model. Our study clarifies the relationship between number of entrepreneurs, factor substitution, and economic growth. The findings also echo the rise of entrepreneurial activities in recent Taiwan, and provide evidence about the importance of entrepreneurship during economy development.