Why Entrepreneurs Are Important for the Economy

Interests in entrepreneurship have exploded in the last decades not only by the media, but also by policy-makers and entrepreneurship researchers.

There is a lot of media coverage of successful entrepreneurs and of entrepreneurs as the heroes of our societies.

Policy-makers also cherish entrepreneurship a lot and by various means like providing subsidies and incubators support entrepreneurs in the early stages. In fact, in the last fifty years, the focus of policy-makers has dramatically shifted from large multinationals to small young yet fast growing companies as the engine of the economy. There are several reasons for it.

According to Wennekers and Thurik, a review study already from 1999, there are several ways that entrepreneurs can (not necessarily, depending on their activity) contribute to the economic growth. The most important channel is through innovation. The entrepreneur is the innovator – as the one who transforms inventions and ideas into economically viable entities. Entrepreneurs, as agents of change, take enormous amounts of risk and introduce a new product and service to the market. Innovation is successfully commercializing a new idea or invention so there is, in fact, a market/customer element into it. This element is extremely unpredictable and the main source of innovation risk but also high return for entrepreneurs.

Second, successful entrepreneurs create competition and challenge large companies according to Shane and Venkataraman. You have probably heard the David and Goliath metaphor where a small but agile and flexible venture with limited resources beat a giant company. Challenging large giants and their comfortable monopolistic position, start-ups shift the value to customers which is a great thing for the welfare.

A great example is ZenPayroll (now Gusto), when it entered the multibillion-dollar payroll business. It was a a cloud-based payroll service that, in less than two years, processed more than $400 million in annual payroll for small businesses, in the US, despite the dominance of companies like ADP and Paychex.

Third and probably the most interesting point for policy-makers is that entrepreneurs create jobs for the economy when they grow their business and hire employees. This way they fight against unemployment, a very important indicator of economic health for politicians and policy-makers. Recent studies suggest that a great deal of net jobs (70 out of 100) are created by fast growing companies not Fortune 500 or other large corporations. This is against conventional thinking that large corporations are very important and show the state of the economy.

Lastly, there is a growing trend of born-globals and export-oriented entrepreneurs in the world. Exporting innovative products are always beneficial for the economy because it means that entrepreneurs are able to find overseas markets and bring money to the country to invest in technology and job creation. We now see that Chinese entrepreneurs are more active in exporting their products not only to developing countries but also to developed economies and how the Chinese government supports them.

In sum, entrepreneurs can help the economy to grow through innovation, competition, job creation and export. Nevertheless, not all entrepreneurs equally contribute to economic growth as for example fast growing companies contribute much more than solo self-employed. Hence, it is important to discuss what types of entrepreneurs are more productive and which ones are less productive or even destructive to the economy. This point will be discussed in another article.

 

About pourya

I am an entrepreneurship postdoctoral research fellow at Tilburg University in the Netherlands. My vision is to fill the gap between entrepreneurship research and practice with this website. Research and practice are two separate islands when it comes particularly to entrepreneurship. There are hundreds of papers/articles written every month but we hardly see their contribution to real life entrepreneurship.

1 comment on “Why Entrepreneurs Are Important for the Economy

  1. Pingback: 3 Things you should consider before freelancing – Idea to Start

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