What is the relationship between entrepreneurship and economic growth

The Relationship between Entrepreneurship and Economic Development: Is It U-Shaped?

what is the relationship between entrepreneurship and economic growth

The Relationship between Entrepreneurship and Economic Government programs and public policy, Small business and economic growth. I don't know how strong it is but there's definitely a relationship between entrepreneurship and economic growth. Just in Latin America, micro-sized firms. for competitiveness, economic growth and job creation. Policymakers in advanced U-shaped relationship between economic development and the rate of.

The majority of new SMEs do not create any new innovation and as a consequence do not contribute to economic growth.

The Global Entrepreneurship Monitor GEMa body founded by Babson College and the London Business School which intensively surveys entrepreneurship activity around the world has found that the majority of new enterprise start-ups within most South-East Asian economies were of a non-innovative nature [4]. In fact most new firm start-ups occur within the service and retail industries [5].

It appears that very few people actually formally scan the environment for opportunities. If people did, they would not start-up in industries with high competition and low profit margins, like the majority do [6]. Most people have a natural inclination to imitate others employing no innovation whatsoever.

The Global Entrepreneurship Monitor Thailand Executive Report indicates that most of the entrepreneurial ventures in Thailand are small and focus on the consumer service sector in retailing, restaurants, and personal services, such as health and beauty services [7]. Like the rest of the region, these businesses are the prime source of income of most entrepreneurs and operated for the purpose of earning a living.

Local entrepreneurs select an activity that is very locally orientated suggesting that they are opportunistic in the limited sense of the word. There is little, if any value created by these ventures [8].

The reality is that most new businesses formed employ existing technologies and create no new technologies at all. Creating new entrepreneurs does may actually be dampening economic growth, a far sight from the creative economies many governments aspire to develop.

Economic Growth - Entrepreneurship

Although so much entrepreneurship literature focuses on high tech start-ups, these types of firms are only a very small percentage of new firm start-ups.

Entrepreneurship creates less employment than many people think [9]. According to another piece of research most entrepreneur incomes are lower than what they would earn working for someone else, with less benefits [12]and longer hours of work [13]. This is logical given that most entrepreneurial ventures enter into highly fragmented, localized markets, with no source of competitive advantage.

Not only is the average entrepreneur earning less than their salaried counterparts, but income is spasmodic. Income varies from day to day, week to week, month to month, and year to year.

Consequently there is a good chance that a person and their family will drop down into a lower socioeconomic group during their tenure as an entrepreneur [14]. In the region many owner operator firms are seen as part of the marginal or informal economy. The creativity that led to this dramatic progress in the fight against world poverty was the grudging realization by donors that aid planners do not create jobs- small business does.

Entrepreneurship is crucial to economic development because of her demography dividend at the same time it large population which creates a huge market. Entrepreneur paves the way to industrialization; industrialization strategies could better target high-potential entrepreneurial activities to accelerate industrialization. Entrepreneurs play an essential role in bringing innovation to an economy, notably innovative technologies and production methods.

New innovative firms put pressure on older firms to innovate. Entrepreneurship encourages diversification into new economic sectors and adapts foreign technologies to local markets for its growth. Landes express that entrepreneur serves as a solution provider where government failed to function, it is often seen as a mechanize that provides public service left by the governments.

High-potential entrepreneurs also experiment with new products in local markets. They offer fresh ideas and exchange information with other local producers, potentially increasing competitiveness by shifting resources to higher-productivity activities. However, scientific facts on the relationship between economic growth and entrepreneurship is conflicting Van Stel et al.

Entrepreneurship contributes to economic growth and diversification. It drives structural transformation and industrialization leading to inclusive and sustainable socio-economic development. These will result in the promotion of full and productive employment and descent work for all. Sub-Saharan governments should embrace this goal as it advocates for policies promoting job creation and full and productive employment and entrepreneurship can be used as a solution.

Entrepreneurship introduce innovations that induce economic growth Over the last four decades, the level of government interest in entrepreneurship and small business development as potential solutions to flagging economic growth and rising unemployment has increased.

It helped to spawn a new field of academic study and research. Innovation is the key to modern theories of development and growth [ 60 ]. It is evident that with factors such as technological product, costs, and process, innovations have graduated to become one of the keys to competitiveness and business success [ 60 ].

Competition in the global economy has now become knowledge-based and this is what countries in Sub-Saharan Africa need to adapt to grow their economic sectors.

Most countries in the Sub-Saharan are known of traditional economic sectors such as textiles, leather, and food processing [ 60 ], such sectors need innovation and technological advancement for them to support modern entrepreneurship that will bolster economic growth.

Governments need to support entrepreneurship and innovation as a way of removing people from poverty because innovative entrepreneurship act about changes in the structure of the economy, technological upgrading in production, and moving higher value performing global value chains [ 60 ] and this is what impoverished Sub-Saharan African countries needs for development.

If the governments can adapt to technological change that embraces the new modern use of machinery and equipment and modern generation of tech-literate educated workers, the region can experience a shift in their economies and will not need handouts from developed countries.

Meanwhile, about 44 percent of African entrepreneurs start businesses to utilize the chances in the market, although about 33 percent adopt this as a means of surviving because of the level of unemployment in Africa. Unemployment is one of the highly proven challenges that are viewed to have a lot of effect on the Sub-Saharan African countries with a high number of the affected populations being the under 25 youth who are unemployed.

Entrepreneurship stimulates employment growth by generating new jobs when entrepreneurs enter the market [ 61 ]. Research has shown that many Sub-Saharan economies are experiencing slow growth. They are exacerbated by the fiscal crisis; unemployment persists in developing labour markets.

And despite sweeping government stimulus packages directed at large institutions entrepreneurship has emerged as one of a few sources of economic activity that can successfully contradict these trends [ 62 ]. Taking the United States as an example of how efficient entrepreneurship can create employment and reduce poverty. For Africa countries to be committed to promoting sustainable job creation, they must foster entrepreneurship. Sub-Saharan African countries remain most demographical populous continent, which accounts for more than half of her population under age of 25 years and youth unemployment is the largest in absolute terms when comparing other parts of the world.

Job creation for the younger generation is still lingered to be a bottle neck and it is the most critical issue for the future. According to the World Bank [ 63 ], million Jobs are required in the next one and half decades in other for catching up with the growing global workforce majorly among mainly in Asia and Sub-Saharan Africa, however, most of these formal jobs in developing economies are created within the arms of entrepreneur which also employees 4 out of 5 new positions [ 64 ].

This shows that there is a significant relationship between Entrepreneur growth and economic prosperity.

what is the relationship between entrepreneurship and economic growth

Meanwhile regional country has not significantly reduced poverty among youth without experiencing unemployment. In reducing poverty in sub-Sahara, development economic and economic history have previously given series of meaning to poverty and its solution such as [ 6566 ] Strengthen economic prosperity and poverty reduction. Scientific scholars have often geared attention on scale and scope economies and maximizing output [ 67 ]. Although scholars in the field of management and economists constantly observed that entrepreneurship may generate a substantial part of Sub- Saharan Africa solution to poverty due to her unemployment rates.

Entrepreneurship helps in poverty reduction when it is creating employment through the establishment of new entrepreneurship or the developing of existing ones which increase economic wealth by creating new markets, new industries, innovative technology, new institutional forms, new jobs and net increases in real productivity, increases income which pick higher standards of living for the population.

This simply implies that the more the number of entrepreneurs in each country the poverty line will automatically be at a minimal rate [ 68 ].

In order for Sub-sharia Africa countries to get out of poverty, there is the need for entrepreneurial development through new jobs creation and provide income for the people [ 69 ]. The strategic significance of entrepreneurial in national economic development is widely recognized [ 6870 ]. Considering Gambian, where Entrepreneurship business employee 60 percent of its population ranging from 15 to 64 years age and also contributed about 20 percent of GDP [ 72 ].

The report also shows and confirms that 70 percent of her citizens are self-employed. A recent study in Ghana and South Africa also showed the same result. Small and medium sized enterprises contributed to 52 percent to 57 percent of GDP and around 61 percent of employment in South Africa, and 85 percent of manufacturing employment and 70 percent of GDP in Ghana.

Currently, in Nigeria, more than university and colleges are offering entrepreneurship and small business management program when comparing to the number in the college offering the course in the s. Also, 86 percent of the youth are looking forward to becoming entrepreneurs and this shows the positive view by following Nigerians.

According to Governments, n. Generally, in Africa Continent, 80 percent believe that the entrepreneurial culture is animated and Entrepreneurship has been viewed as a good career opportunity [ 73 ]. Presently in the entire world, the continent has the highest share in the world of adults starting or running new businesses.

How entrepreneurs can help develop the economy. The effect of entrepreneur gives extra weight when considering the strength of the market it can operate; Sub-Saharan is dominated by large powerful natural resource sectors and deep-pocketed multinational companies but is forced to contend with series of infrastructure issues.

According to the principal, Country Economist at the Africa Development Bank explores furthermore about Mozambique, their economic growth with foreign investment into capital investment but with a lower employment project. Nigerians, on the other hand, appreciate entrepreneurs more as the drivers of the new economy and as indicators of the positive shift away from dependence on the oil sector.

Discussion Challenges faced by entrepreneurs in Sub-Saharan Africa Challenges of internal capacity building constraint: Every start-up firms globally faced that challenges of finding experienced managerial talent to complement a technical team.

Just because someone is a remarkable engineer or developer does not mean they can make a good CEO or manager [ 74 ]. With little incentive or financing for prospective employees, beginners frequently lose out on the best talent, who get snatched up by larger, well-established companies like as banks and telecoms. According to report, the limited pool of skilled managerial talent is in most situation connected to the education system.

The existence or dearth thereof of entrepreneurship training in the education system plays a significant role in this debate. In Africa, entrepreneurs require education and training to permit them to succeed in opening or growing a business.

Andrew Carnegie was able to build the foundations of U. Steel by capitalizing on the newly developed Bessemer process. The fortunes of Bill Gates rose along with the fledgling personal computer industry. None of these individuals invented the technology that made them wealthy, but they had the insight to take advantage of an entrepreneurial opportunity.

Entrepreneurship and economic growth? - New Mandala

Note, however, that in each case the opportunity was newly developed, and the entrepreneurial opportunity did not go unnoticed for long. Entrepreneurial opportunities are not just lying around waiting for someone to notice them. Rather, they appear and then entrepreneurs rapidly move to take advantage of them. Where do entrepreneurial opportunities come from? Many of them come from the actions of other entrepreneurs.

Henry Ford could not have succeeded in mass-producing automobiles until there was a substantial market, including infrastructure such as roads, gasoline stations, and repair facilities. Bill Gates could not have made his fortune had not Steve Jobs seen the opportunity to build and sell personal computers, and Steve Jobs could not have built a personal computer had not Gordon Moore invented the microprocessor. When entrepreneurs take advantage of profit opportunities, they create new entrepreneurial opportunities that others can act upon.

Entrepreneurship creates an environment that makes more entrepreneurship possible. Yet increasing returns is a problematic concept in an economic framework because it implies that average cost continually declines. Kaldor notes the problems for general equilibrium models when firms are characterized by increasing returns, but another possibility is that the production functions of firms do not exhibit increasing returns, but firms generate positive externalities that lower the costs of production for other firms in close proximity.

Individual firms do not exhibit increasing returns, but the entire economy does. This is easy to visualize as a Smithian idea. The division of labor is limited by the extent of the market, so additional firms in an area enlarge the market and allow all firms to be more productive by becoming increasingly specialized. Increased specialization is but one way in which firms can become more innovative, so a more general way to envision this idea is that the knowledge created by firms benefit other firms in close proximity, so that when one firm innovates, others find themselves in a better position to innovate also.

Romerdepicts the process as a knowledge spillover. Knowledge, embodied in human capital, is the factor with increasing returns, meaning that investments in human capital make future investments in human capital more productive.

Because human capital must be combined with other factors of production, there will be a tendency for productivity increases to be geographically concentrated, which result in some areas manifesting more economic growth than others.

The first is, what conditions cause economic growth to be concentrated in some areas but not in others? A plausible answer, but outside the scope of the present article, is that market institutions make the difference.

what is the relationship between entrepreneurship and economic growth

Kirzner clearly distinguishes between knowledge and entrepreneurship. But as closely as the element of knowledge is tied to the possibility of winning pure profits, the elusive notion of entrepreneurship is, as we have seen, not encapsulated in the mere possession of greater knowledge of market opportunities. These activities can augment factors of production, but by themselves do not provide the insights that lead to new goods and services, or new processes for producing existing goods and services.

If this seems like an overly fine distinction, consider the policy implications. Centrally planned economies tried unsuccessfully for decades to produce growth through investment in research and education, but were missing the institutions that enabled entrepreneurship.

One problem with the analogy is that it is rare to find money on the sidewalk, so there is little incentive to look for it. In contrast, it is not uncommon, for example, to find scavengers with metal detectors on a beach looking for lost watches, rings, and other valuables.

If more money were lying on sidewalks, people would become more alert to the opportunity of finding it. The idea that people will be more alert for profit opportunities when they are more likely to exist helps illuminate the reason why more profit opportunities are seized in growing economies.

Economic growth creates profit opportunities. The ancient Chinese economy had more capital than other economies at the time, had a well-developed legal system, had well-defined property rights, and had advanced the state of knowledge further than any other place in the world. Yet the traditional nature of the economy meant that individuals found their employment dictated by historical factors outside their control, and more significantly, found little change in the status quo over the course of their lifetimes.

Even a substantial opportunity will tend to blend in with the status quo, and because it is familiar, will tend to go unnoticed. This is one reason why economies organized along traditional lines tend not to grow, even when they have substantial endowments of basic factors of production, when they are technologically advanced, and when their population has substantial human capital. This observation holds not only for traditional economies, but for market economies too, if they are unchanging.

Consider the neoclassical concept of general equilibrium in which all firms are pricing at minimum average costs and there are no economic profits to be had. By definition, entrepreneurs have no profit opportunities to find; they have all been exploited already.

what is the relationship between entrepreneurship and economic growth

Starting from this situation of general equilibrium, one can see that if an innovation occurs that disturbs the equilibrium, it opens profit opportunities in other areas of the economy. If a new good is introduced, consumers will shift their purchases toward that good, creating profits for some and losses for others.

Those who sell complementary goods have a profit opportunity, and once a new good is produced, it may produce the opportunity for others to introduce new complementary goods for which there would not have been a market before.

New production processes can be developed for the new goods, and the innovative opportunities go on. This example points toward two shortcomings of analyzing economic growth in a general equilibrium framework. First, the models are not well suited for depicting the process of introducing new goods into the economy.

In the neoclassical framework, growth occurs by producing more of the old goods. Second, because they are equilibrium models, they do not depict the profit opportunities that entice innovation. Thus, innovation tends to be depicted as research-and-development activity that is produced by applying inputs in a production function, rather than as an entrepreneurial discovery process.

If one imagines the activities of those who run the black boxes that are firms in such models, they must be imagined as managers, whose job it is to combine pre-specified inputs into pre-specified outputs in a Pareto-efficient manner, rather than being entrepreneurs who innovate by undertaking production in a previously untried manner, producing goods that have not previously been produced, aiming at markets that do not yet exist.

There is some merit to considering research and development as a component of innovation and entrepreneurship, in the same way that one considers the purchase of a metal detector as a method for finding objects on the beach. But focusing on research and development as the main component of innovation and technological advance misses the point.

In most cases, a metal detector will not help people find lost objects, so one rarely sees people with metal detectors searching for lost objects in shopping centers, apartment buildings, or schools. On the beach, however, lost objects are more likely to be hidden from view in the sand, and because beachgoers do lose objects with some regularity, using a metal detector on a beach may turn up valuable objects. Similarly, research-and-development activity takes place in those areas where entrepreneurial profits seem promising.

Research and development expenditures are not the cause of entrepreneurial opportunities, they are the result of entrepreneurial opportunities. More research and development occurs in the electronics industry than in the garment industry because there are more potential entrepreneurial insights to be found in electronics than in garment manufacture.

Thus, while it is reasonable to consider research and development to be a factor pushing technological change, research and development is not the cause of growth, it is a response to growth opportunities. The question is, what creates such opportunities? In a static setting, where there is little change, there will be relatively little in the way of entrepreneurial opportunities.

Those that might be lying in wait must be relatively obscure to have remained unnoticed, and the static environment precludes the creation of new opportunities. Furthermore, with few opportunities, there is little incentive to devote any resources toward seeking them out. In an environment of economic change, new opportunities will continually be presenting themselves. When entrepreneurs take advantage of some opportunities, the economic environment changes, creating with it additional opportunities.

Thus, entrepreneurship leads to more entrepreneurship. Several factors lead entrepreneurial insights to build on one another.

Entrepreneurship and Economic Growth: Does Entrepreneurship Bolster Economic Expansion in Africa?

First, the changes that result from entrepreneurship alter the economic environment, creating new profit opportunities. This is easy to see even within a comparative static general equilibrium setting. If the equilibrium is upset, the equilibrium condition that eliminates profit opportunities is removed, and profit opportunities arise to lead the adjustment to a new general equilibrium.

The increase in income alone will generate new market opportunities, but an increase in the volume of goods also produces the opportunity for greater specialization. Third, entrepreneurial insights create new market niches that go along with innovation.

This third factor, the creation of market niches, is the key link between entrepreneurship and economic growth. Consider, for example, one innovative insight in the rapidly developing computer industry.

Somebody had the idea that if a computer mouse communicated with the computer via an infrared connection, the mouse could be used without a cord.

It is a small development, to be sure, but it is a good example of an entrepreneurial insight and the capitalization of a previously unnoticed profit opportunity. The profit opportunity arose solely because of a previously nonexistent market niche, and once that market niche appeared, it did not take very long for an entrepreneur to seize on the idea. Notice that this entrepreneurial insight did not arise for either of the first two reasons listed in the previous paragraph.

It did not arise because of a profit opportunity created by a temporary disequilibrium in the market.

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Before personal computers used mice which also is an example of an entrepreneurial insightthere would have been no possibility for the insight, regardless of how far the market was out of equilibrium.

It did not arise because of the second reason either, which is a bigger market. The division of labor has nothing to do with the insight that a mouse could communicate with a computer through infrared technology although it might have something to do with what type of firm produces the technology.

An increase in wealth could not create the demand for infrared mice without the innovation of the mouse as a computer input device. This entrepreneurial insight capitalized on a new opportunity, which was created by other entrepreneurial insights. One can go through a chain of events, seeing that the entrepreneurial insight that led to infrared mice could not have been made without the insight that a mouse could be used as a computer peripheral, and the insight that a mouse could be used to control a computer could not have been made without the insight that there was a market for personal computers.

As is well known, the major computer manufacturers of the s completely overlooked this market, leaving it to entrepreneurial startups. And the insight that there is a market for personal computers could not have been made without the development of the microprocessor, a result of yet another entrepreneurial insight.

The computer industry provides a good example of the way that entrepreneurial insights lead to additional entrepreneurial insights. The economy does not simply offer a fixed set of entrepreneurial opportunities which then can be harvested. Rather, new entrepreneurial opportunities continually arise as the result of past entrepreneurial activity.