Entrepreneurship has a significant role in economic development. Entrepreneurs, after all, do more than just start businesses and increase their personal wealth; they also have an economic influence by creating new employment and opportunities, spurring innovation, and inventing new markets, goods, and services. This article provides a comprehensive review of the function of entrepreneurship in the economic development of a country.

Entrepreneurship is a broad term that refers to the process of launching a firm. However, its precise meaning has long been a source of contention among academics and politicians.

“Despite widespread interest in the topic and widespread recognition of its importance to the economy,” the nonpartisan Centre for American Entrepreneurship observes, “there remains a lack of consensus about how to specifically define entrepreneurship.” “‘Entrepreneur’ is an English derivation of the French word ‘entreprendre’ (to undertake), leaving wide latitude for interpretation and application.”

“At its most basic level, entrepreneurship refers to an individual or a small group of partners who strike out on an original path to create a new business,” according to the Stanford Centre for Professional Development at Stanford University. An aspiring entrepreneur deliberately seeks out a certain business venture, and it is the entrepreneur who bears the majority of the risk involved with the initiative. As a result, if the project is successful, this person stands to benefit the most.”

There are nine key findings from the role of entrepreneurship in economic development:

1. Raises Standard of Living

A significant role of entrepreneurship in economic development is that it can greatly enhance the standard of living for individuals and communities by setting up industries and creating wealth and new positions. Entrepreneurship not only provides large-scale employment and ways to generate income, it also has the potential to improve the quality of individual life by developing products and services that are affordable, safe to use, and add value to their lives. Entrepreneurship also introduces new products and services that remove the scarcity of essential commodities. 

2. Economic Independence

Entrepreneurship can be a path to economic independence for both the country and the entrepreneur. It reduces the nation’s dependence on imported goods and services and promotes self-reliance. The manufactured goods and services can also be exported to foreign markets, leading to expansion, self-reliance, currency inflow, and economic independence. Similarly, entrepreneurs get complete control over their financial future. Through their hard work and innovation, they generate income and create wealth, allowing them to achieve economic independence and financial security. 

3. Benefits of New Firms and Businesses

Entrepreneurs identify market needs and develop solutions through their products and services to begin their business venture. By starting new firms and businesses, entrepreneurs play a key role in shaping the economy and creating a more dynamic and diverse business landscape. Entrepreneurship also promotes innovation and competition, leading to new and improved products and services that contribute to economic growth and development. 

4. Creation of Jobs

Entrepreneurship is a pivotal driver of job creation. Running the operations of new businesses and meeting the requirements of customers results in new work opportunities. Entrepreneurship also drives innovation and competition that encourages other entrepreneurs and investments, creating new jobs in a wide range of industries, from manufacturing and construction to service and technology sectors. 

5. Encourages Capital Formation

Capital formation is the process of accumulating resources, such as savings and investments, to fund new business ventures and support economic growth. Entrepreneurship can encourage capital formation by attracting investment. In addition, the creation of new businesses and the growth of existing firms can also contribute to the development of a more diverse and dynamic economy that encourages capital formation and opens the door to a wide range of investment opportunities.

6. Elimination of Poverty

Entrepreneurship has the potential to lift people out of poverty by generating employment and stimulating economic activity. Entrepreneurship also contributes to the development of local economies and helps improve the overall standard of living. 

7. Community Development

Entrepreneurship promotes economic growth, provides access to goods and services, and improves the overall standard of living. Many entrepreneurs also make a positive impact on their communities and improve their well-being by catering to underserved areas and developing environment-friendly products. Their work can help build stronger, more vibrant communities and promote social and economic development. 

8. Optimal Use of Resources

Entrepreneurship can help identify market opportunities and allocate resources in the most effective way possible. Entrepreneurs also play a key role in developing innovative products and services that meet the needs of customers while optimizing the use of available resources.

9. Increases Gross National Product and Per Capita Income

Entrepreneurship can play a significant role in increasing economic growth and prosperity by increasing Gross National Product (GNP) and Per Capita Income (PCI). GNP measures the total economic output of a country while PCI calculates the average income per person. The increase in GNP can lead to a rise in PCI. Entrepreneurship can contribute to GNP by creating new businesses and industries, which can lead to job creation, increased consumer spending, and higher tax revenue. 

Read Also: Impact of Startups on Local Economies

Entrepreneurship fosters economic growth and diversification while also contributing to wealth creation. Before we get into the specifics of entrepreneurship’s involvement in economic development, let’s summarise its significance. The following factors contribute to the importance of entrepreneurship:

• Drives economic growth and creates new job 
• Encourages innovation by bringing new ideas, products, and services to the market 
• Contributes to social change by developing products or services that reduce people’s dependence on outdated technologies 
• Addresses social and economic problems by creating solutions that meet the needs of society
• Enables competition which improves business efficiency and lowers prices for consumers

Innovation and entrepreneurship undeniably contribute to economic growth, making them a particular area of interest for economists and policymakers worldwide. However, some scholars say that the growth created by entrepreneurship can be exaggerated.

For one thing, growth from entrepreneurial activity doesn’t occur evenly across an economy. Studies of economic growth have pointed toward an apparent paradox in which the growth in productivity overall in the U.S. has been only modest in recent years, despite the pervasiveness of entrepreneurship, innovation, and innovation ideology. According to studies by the National Bureau of Economic Research (NBER), this is because innovation affects industries very differently, having a large impact in some sectors of the economy but little impact in others.

While generally positive, the link between entrepreneurship and improving societal welfare is also complicated, influenced by factors such as regional population, entrepreneurship density, and the specific industry in which the entrepreneurial activity is taking place, according to the scholarly literature.

What’s more, some studies have suggested that economic growth may be correlated to an increase in overall inequality in certain circumstances. Scholars say that in the U.S. income inequality and economic growth have been linked since the 1970s.

One interesting way to look at entrepreneurship is to divide it into two broad categories. “Necessity entrepreneurship” is the launching of a business by people who lack other opportunities. “Opportunity entrepreneurship” is the creation of an enterprise in response to a new or previously overlooked opportunity.

In countries where entrepreneurial activity is largely in the form of necessity entrepreneurship, it can be a signal that the economy isn’t creating enough jobs or wage opportunities for workers. It may be connected to slow economic growth or lagging economic development overall, scholars say.

The level of economic development of a country can also affect whether entrepreneurship will lead to greater economic growth there.

In the 20th century, driven by the decline in manufacturing and the shift toward service businesses, industrialized market economies in later stages of economic development—like the United States and parts of western Europe, such as Germany and Sweden—were able to benefit greatly from entrepreneurship, the economist and management professor Zoltan Acs has noted. Starting in the 1970s, those countries saw a rise in entrepreneurship, which reversed the previous trend in their economies, when workers favored high-paying jobs with big companies over self-employment.

Other factors may be relevant as well. Scholars point out that the U.S., in particular, has benefited from a large and competitive domestic market, a highly developed financial system, and a high level of long-term government support for basic science.

For developing countries, on the other hand, entrepreneurship isn’t a panacea for growth. A study of 74 economies across a six-year period concluded that less developed countries should not base their economic policy on “generic entrepreneurship” if they desire to stimulate economic growth. The authors argue that focusing on programs that develop human capital, take advantage of economies of scale, and entice foreign capital are more effective in spurring economic growth.

Italy may provide an additional example of a country where high levels of self-employment have proved to be inefficient for economic development. Research has shown that Italy has experienced large negative impacts on the growth of its economy because of self-employment.

What are the Benefits of Entrepreneurship in Economic Growth?

Its important to look at entrepreneurship and how it is important to recognize its contribution to economic development. Entrepreneurs are not only provided with opportunities that benefit themselves, but their work also develops the economy.

1. Entrepreneurs provide job opportunities

One of the main reasons why individuals tend to become entrepreneurs is because they are unable to find suitable jobs. Entrepreneurs create new businesses and in turn create opportunities of employment for people. Many people have been made redundant due to COVID-19, thus starting a business is an opportunity to either work for themselves or they can help support and develop an entrepreneur’s business. Not only are entrepreneurs able to generate an income for themselves but they also employ other individuals in their business operations. Therefore, people who did not have a job before will have a chance to have a career.

2. Entrepreneurs increase competition & boost productivity

Entrepreneurs challenge existing firms to become more competitive as they often enter the market with lower prices and greater product variety. This can cause existing players in the market to re-assess their operations, increase their value, lower costs, and become more efficient.

Increased competition in an economy is advantageous because firms and individuals will source methods to better improve their operations. The new business formation of entrepreneurs with high-growth ambitions and innovation will push established firms to increase their productivity and enhance their performance.

3. Entrepreneurs create new business & new markets

As the trends in the world continue to change, people’s demands will change, giving entrepreneurs an opportunity to start new businesses.

If a marketplace is saturated, this can result in entrepreneurs seeking new markets for their services and products, which can be considered as a positive impact on the economy. Entrepreneurs may even create entirely new industries that become the engines of future growth.

4. Entrepreneurs add national income

The new products or services created by entrepreneurs result in new wealth from the new markets. Additionally, higher earnings due to entrepreneurship can help boost national income. This is in the form of higher government spending and tax revenue, resulting in investment in struggling sectors and human capital.

5. Entrepreneurs introduce innovative technologies

Individuals often resort to entrepreneurship to provide niche solutions or to use their creativity, technological knowledge, or finances to generate their own income. Innovative ideas and inventiveness are foundational driving factors for entrepreneurs which result in great contributions to the economy.

Like some of the legendary names in business, Bill Gates (Microsoft), Larry Ellison (Oracle), Steve Jobs (Apple) and many more, entrepreneurs create innovations. New and improved products enable new markets which often lead to economic growth.

Final Words

The relationship between entrepreneurship and economic growth is multifaceted and varies by country based on economic development level. Entrepreneurs can increase growth in highly developed economies, but they may have less of an impact in less developed ones.

Some entrepreneurial endeavors, known as social entrepreneurship, hold out the prospect of new solutions that will address issues such as climate change and systemic racism while potentially earning a profit.