Entrepreneurship is the act of undertaking an initiative towards establishing an enterprise. Some argue there’s an obvious link between entrepreneurship and economic development. Arguably, One of the factors that contributes to economic development is the increase in number of employed people; entrepreneurship provides positions for employment for otherwise unemployed individuals thus increasing the Per Capita Income which in turn affects the economic development of a country. Moreover entrepreneurship increases the economic growth of a country in terms of GDP (Gross Domestic product) since it increases the value of output produced by a country. Hence Entrepreneurship leads to increase in jobs, industrial competitiveness and National output. However such an argument also suggests that High measured levels of entrepreneurship will thus translate directly into high levels of economic growth.
A lot of factors can lead to the economic development of a country such as climate, education, property rights, saving propensity, sports, etc. If entrepreneurship is added to the list; does it mean countries with similar economic development with have similar rate of entrepreneurial activity? However some developing countries such as Brazil and Mexico top the list with high rate of entrepreneurial activity compared to developed countries such as UK and the US. Perhaps high start-up rates in developing countries are perhaps less a sign of economic strength when compared to such rates in highly developed economies.
According to the World Economic Forum’s Global Competitiveness Report (GCR) three major factors are involved in economic growth; efficient division of labour, capital accumulation and technological advance. Concerning technology, factors involved are such as technology transfer (transfer from abroad), and technology innovation. Strong economies are those based on technological innovation, thus the entrepreneurship aspect can be noticed in such an attempt to analyse economic growth. However one could argue Is Technological entrepreneurship the only form of entrepreneurship that affects the economy?
Perhaps it’s the element of innovation that promotes economic growth. It is through exploiting economies of scale and scope can entrepreneurship promote economic growth. Hence may explain why some poor economies do not fully benefit from entrepreneurial activities.
Nature, source and character of entrepreneurship are also observed to be affected by the development of the economy. In the era of industrial revolution in the 19th century, entrepreneurs evolved out of necessity due to few available jobs people had to find means to self-employment. As the economy of a country developed, such lead to the decline of necessity-based factor in turn entrepreneurship evolved due to opportunity. Enterprises emerged since people saw opportunities for new products and new markets.
However, necessity entrepreneurship had less of an effect on economic development while opportunity entrepreneurship has a positive impact on economic growth. Being pushed to entrepreneurship out of necessity because of lack of jobs or unsatisfactory jobs could lead to under development rather that economic development. Although we may argue that both factors can be involved in establishing an enterprise, then the opportunity-necessity ratio should be more lenient towards opportunity, since opportunity ratio has a positive relationship with GDP per capita. Hence suggested that policies in developing countries should focus on strengthening General National Framework conditions and in developed economies policy should focus on strengthening the entrepreneurial framework conditions since the relationship between Entrepreneurship and economic development in developing countries is more likely negative while the relationship in developed countries is more likely positive.
Entrepreneurial framework conditions (characteristics within the existing business environment that influence the decision to start a business) comprise a company’s capacity to encourage start-ups, combined with provision of skills and motivation for those who wish to go into business themselves. General framework conditions comprise of strategies to strengthen Small and Medium Enterprises before focussing on entrepreneurial framework conditions; these policies are focused at firms not at individuals. These include financial assistance, management assistance, training and reducing regulatory burdens.
When attempting to link entrepreneurship to economic development; definition and scope of entrepreneurship is most important. If entrepreneurial activity is aimed for agricultural sector and at a small scale then it’s more likely to have no/ negative effect on the economy. In essence entrepreneurship in developing countries is more likely to result to negative effect on economy than entrepreneurship in developed countries. The ratio between opportunity and necessity entrepreneurship is a key indicator to economic development. Hence in conclusion, entrepreneurship is not always a driver towards economic development, furthermore the nature, source and character of entrepreneurship changes with the economy, so do economic policies.
Dejardin, M. 2000, "ENTREPRENEURSHIP AND ECONOMIC GROWTH: AN OBVIOUS CONJUNCTION?", , pp. 0-14.
Stel, A.V., Carree, M. & Thurik, R. 2004, The effect of entrepreneurship on national economic growth:An analysis using the GEM database, EIM Business and policy Research, Zoetermeer.
Zoltan, J.A. 2007, How is Entrepreneurship Good for Economic Growth?, American Institute for Economic Research (AIER), Massachuttes.