Why Is Entrepreneurship Important?
Using any number of sources, you can find statistics about how many small businesses there are, how many workers they employ, and how much of the gross national economic output they’re responsible for. These statistics, as collected by various research firms and government agencies, reflect the economic activity of all small businesses, not just those of entrepreneurial ventures. Because we’ve made a point of distinguishing between small businesses and EVs, these statistics don’t tell the whole story. Let’s try to look at what entrepreneurship contributes. Then the questions become: How can we measure the importance of entrepreneurship? Does entrepreneurship contribute to economic vitality? And how does it do so?
Entrepreneurship is, and continues to be, important to every industry sector in the United States and around the world. Its importance can be shown in three areas: innovation, number of new startups, and job creation and employment.
Innovation
As we discussed in the last chapter, innovation is a process of creating, changing, experimenting, transforming, and revolutionizing. And as we know from our earlier definition, innovation is one of the key distinguishing characteristics of entrepreneurial activity. The “creative destruction” process of innovating leads to technological changes and employment growth.9 Entrepreneurial firms act as agents of change by providing an essential source of new and unique ideas that might otherwise go untapped.
The passionate drive and hunger of entrepreneurs to forge new directions in products and processes and to take risks set in motion a series of decisions that lead to the innovations that are important for economic vitality. Without these new ideas, economic, technological, and social progress would be slow indeed.
Entrepreneurship is important because it leads to innovations such as the new Choose Water eco-friendly and completely biodegradable water bottle developed by James Longcroft. The plastic-free, single-use bottle is made of recycled and natural materials that decompose within three weeks. Longcroft hopes that his innovation will replace single-use plastic bottles and help stop the rise of plastic waste pollution of the world’s oceans.
John Stillwell/PA Wire/AP Images
Number of New Startups
All businesses—whether they fit the definition of entrepreneurial or not—at one point were start-ups. The most convenient measure we have of the role that entrepreneurship plays in this economic statistic is to look at the number of new firms over a period of time. The Index of Entrepreneurial Activity by the Kauffman Foundation tracks the rate at which new businesses are formed. That measure bottomed out in 2013. However, by 2017 (the latest data available), startup activity was up, although the rate in the top 40 largest U.S. metropolitan areas continued to decline.10 Another study of startups showed that from 1996 to 2007, the ratio of new firms to the total number of firms varied between 9.6 and 11.2. The rate in mid 2017 had dropped to 7.8.11 Why is the creation of new firms important? It’s important because these new firms contribute to economic development through benefits such as product-process innovations, increased tax revenues, social betterment, and job creation.
Job Creation
We know that job creation is important to the overall long-term economic health of communities, regions, and nations. A recent research report suggested that business startups play an important role in job creation, but have a more limited effect on net job creation over time because fewer than half of all startups are still in business after five years. Also, the report noted that the influence of small business startups on net job creation varies by firm size. Startups with fewer than 20 employees tend to have a negligible effect on net job creation over time, while startups with 20–499 employees tend to have a positive employment effect.12 So, we can say that yes, EVs are important to job creation.
Global Entrepreneurship
What about entrepreneurial activity outside the United States? What kind of impact has it had? An annual assessment of global entrepreneurship called the Global Entrepreneurship Monitor (GEM) studies the impact of entrepreneurial activity on economic growth in various countries. The GEM 2017/18 report covered 54 world economies that were divided into three clusters identified by phase of economic development: factor-driven economies, efficiency-driven economies, and innovation-driven economies. What did researchers find?13
North America had the highest level of total entrepreneurial activity (TEA) for the 25- to 34-year-old age group at 23.4 percent.
Latin America and Caribbean economies had the highest level of TEA for the 18- to 24-year-old age group at 16.5 percent, for the 35- to 44-year-old age group at 20.6 percent, and for the 45- to 54-year-old age group at 17.9 percent.
Europe had the lowest TEA of all regions in all age groups.