Investopedia/Shobhit Seth: Why Entrepreneurship Is Important to the Economy

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Why Entrepreneurship Is Important to the Economy

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By Shobhit Seth
Updated Jun 28, 2019

Entrepreneurs are frequently thought of as national assets to be cultivated, motivated, and remunerated to the greatest possible extent. Great entrepreneurs have the ability to change the way we live and work. If successful, their innovations may improve standards of living, and in addition to creating wealth with entrepreneurial ventures, they also create jobs and contribute to a growing economy. Entrepreneurship is important for a number of reasons, from promoting social change to driving innovation.
Entrepreneurs Spur Economic Growth

New products and services created by entrepreneurs can produce a cascading effect, where it stimulates related businesses or sectors that need to support the new venture, furthering economic development.

For example, a few information technology companies made up the IT industry in India during the 1990s. The industry quickly expanded and many other sectors benefited from it. Businesses in associated industries, such as call center operations, network maintenance companies, and hardware providers flourished. Education and training institutes nurtured a new class of IT workers who were offered better, high-paying jobs. Infrastructure development organizations and even real estate companies capitalized on this growth as workers migrated to cities where employment was growing.

Similarly, future development efforts in underdeveloped countries require robust logistics support, capital investments, and a qualified workforce. From the highly qualified programmer to the construction worker, entrepreneurship benefits a large part of the economy.
Entrepreneurs Add to National Income

Entrepreneurial ventures help generate new wealth. Existing businesses may remain confined to existing markets and may hit the glass ceiling in terms of income. New and improved products, services or technology from entrepreneurs enable new markets to be developed and new wealth to be created.

Additionally, increased employment and higher earnings contribute to better national income in the form of higher tax revenue and higher government spending. This revenue can be used by the government to invest in other, struggling sectors and human capital. Although it may make a few existing players redundant, the government can soften the blow by redirecting surplus wealth to retrain workers.
Key Takeaways

    Entrepreneurship is important as it has the ability to improve standards of living and create wealth, not only for the entrepreneurs, but also for related businesses.
    Entrepreneurs also help drive change with innovation, where new and improved products enable new markets to be developed.
    Economy wise, higher earnings thanks to entrepreneurship can help boost national income and tax revenue.
    Entrepreneurs contribute in other ways as well, such as investing in community projects and supporting local charities.
    Too much entrepreneurship, i..e high self-employment, can be detrimental to economic development.

Entrepreneurs Create Social Change

Through offering unique goods and services, entrepreneurs break away from tradition and reduce dependence on obsolete systems and technologies. This results in an improved quality of life, improved morale, and greater economic freedom.

For example, the water supply in a water-scarce region will, at times, forces people to stop working to collect water. This will impact their business, productivity, and income. Imagine an innovative and automatic pump that can fill people's water containers automatically. This type of innovation ensures people are able to focus on their jobs without worrying about a basic necessity like water. More time to devote to work translates to economic growth.

For a more contemporary example, smartphones and apps have revolutionized work and play across the globe. Smartphones are not exclusive to wealthy countries or people. As the growth of the smartphone market continues, technological entrepreneurship can have a profound, long-lasting impact on the world.

Moreover, the globalization of technology means entrepreneurs in lesser-developed countries have access to the same tools as their counterparts in richer countries. They also have the advantage of a lower cost of living, so a young entrepreneur from an underdeveloped country can compete with a multi-million-dollar existing product from a developed country.
Community Development

Entrepreneurs regularly nurture ventures by other like-minded individuals. They also invest in community projects and provide financial support to local charities. This enables further development beyond their own ventures. Some famous entrepreneurs, such as Bill Gates, have used their money to finance good causes, from education to public health. The qualities that make one an entrepreneur are the same qualities that help motivate entrepreneurs to pay it forward.
25 Million

The number of entrepreneurs in the U.S. according to Babson College.
Is All Entrepreneurship Good?

Are there any drawbacks to cultivating entrepreneurs and entrepreneurship? Is there a limit to the number of entrepreneurs a society can hold?

Italy may provide an example of a place 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. There may be truth in the old saying, "too many chefs and not enough cooks spoil the soup."
The Role of Government

Regulation plays a crucial role in nurturing entrepreneurship. Unregulated entrepreneurship may lead to unwanted social outcomes including unfair market practices, pervasive corruption, and criminal activity.

Findings from the United Nations University also indicate the possible implications of “over-nurturing" entrepreneurship. European economist Wim Naudé argues that “while entrepreneurship may raise economic growth and material welfare, it may not always result in improvements in non-material welfare (or happiness). Promotion of happiness is increasingly seen as an essential goal.”

Paradoxically, a significantly high number of entrepreneurs may lead to fierce competition and loss of career choices for individuals. With too many entrepreneurs, levels of aspirations usually rise. Owing to the variability of success in entrepreneurial ventures, the scenario of having too many entrepreneurs may also lead to income inequality, making citizens more unhappy.
The Bottom Line

The relationship between entrepreneurship and economic development is important to understand for policymakers and business owners. Understanding the benefits and drawbacks of entrepreneurship allows a balanced approach to nurturing entrepreneurship to be taken, which can result in a positive economic and societal impact.
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