Successful Entrepreneurs Contribute to the Economy by

Successful Entrepreneurs Contribute to the Economy by

Entrepreneurs and their impact on jobs and economic growth

Productive entrepreneurs can invigorate the economy by creating jobs and new technologies, and increasing productivity.

DIW Berlin, University of Potsdam, and IZA, Germany

Elevator pitch

Entrepreneurs are a rare species. Even in innovation-driven economies, only 1–two% of the work force starts a business in any given year. Yet entrepreneurs, specially innovative entrepreneurs, are vital to the competitiveness of the economy. The gains of entrepreneurship are simply realized, however, if the business concern environment is receptive to innovation. In addition, policymakers need to prepare for the potential task losses that can occur in the medium term through “artistic devastation” as entrepreneurs strive for increased productivity.

Key findings


Entrepreneurs boost economic growth by introducing innovative technologies, products, and services.

Increased competition from entrepreneurs challenges existing firms to become more competitive.

Entrepreneurs provide new job opportunities in the short and long term.

Entrepreneurial activity raises the productivity of firms and economies.

Entrepreneurs accelerate structural alter by replacing established, sclerotic firms.


Merely a few people have the bulldoze to become entrepreneurs.

Entrepreneurs confront a substantial take a chance of failure, and the costs are sometimes borne past taxpayers.

In the medium term, entrepreneurial activities may lead to layoffs if existing firms close.

A loftier level of self-employment is not necessarily a good indicator of entrepreneurial activity.

Entrepreneurship cannot flourish in an over-regulated economy.

Author’s principal bulletin

Entrepreneurship is important to economical development. The benefits to society will be greater in economies where entrepreneurs can operate flexibly, develop their ideas, and reap the rewards. Entrepreneurs respond to high regulatory barriers by moving to more innovation-friendly countries or past turning from productive activities to non-wealth-creating activities. To attract productive entrepreneurs, governments need to cut cerise record, streamline regulations, and prepare for the negative effects of layoffs in incumbent firms that fail because of the new competition.


When an economy is doing well, at that place is less incentive to encourage new, entrepreneurial firms. When people and firms are making coin, why accept a take chances on something new and untested? Entrepreneurs ofttimes claiming incumbent firms, and while this might seem undesirable, unchallenged, established firms tend to get complacent, content to take their profits without investing in inquiry and evolution to improve their concern. These stagnating firms are the outset to suffer when imports arrive—withering apace, unable to respond to the competition. Thus, challenging incumbents to do better during proficient economical times is a benefit of entrepreneurship.

Entrepreneurs are equally, if non more, important when the economy is doing badly. When unemployment is high and the economy is contracting or stagnating, dynamic entrepreneurship could aid plough the economy effectually. Past developing novel products or increasing competition, new firms tin heave need, which could in turn create new chore opportunities and reduce unemployment.

If entrepreneurs are consistently encouraged, in bad economical times as well as good, and so all businesses are kept on their toes, motivated to work continuously to better and suit (see Different types of entrepreneurs). Entrepreneurs are the fresh blood that keeps economies good for you and flourishing even as some individual firms fail.

Capitalist economies are not lone in encouraging entrepreneurs. Managed economies, such as Cathay’s, are first to encourage and facilitate entrepreneurship. They take discovered that entrepreneurial activities, once viewed as a threat to the established arrangement, are crucial for maintaining economic competitiveness and for achieving long-term success.

Discussion of pros and cons

Entrepreneurs introduce innovations and induce economic growth

Entrepreneurs ofttimes create new technologies, develop new products or process innovations, and open up new markets [1]. There are many examples of radical innovations introduced by entrepreneurs such as Pierre Omidyar (eBay), Larry Page and Sergey Brin (Google), Larry Ellison (Oracle), Dietmar Hopp and Hasso Plattner (SAP), Nib Gates (Microsoft), Steve Jobs (Apple), and Stelios Haji-Ioannou (easyJet), to name just a few.

Radical innovations often lead to economical growth [ii]. Entrepreneurs who bring innovations to the marketplace offering a primal value-generating contribution to economic progress. Compared with incumbent firms, new firms invest more than in searching for new opportunities. Existing firms might be less likely to innovate because of organizational inertia, which numbs their responsiveness to market changes, or because new appurtenances would compete with their established range of products. Incumbent firms oft miss out, sometimes intentionally, on opportunities to adopt new ideas because of the fearfulness of cannibalizing their own markets. For inventors and innovators (who sometimes come from established firms) setting up their own business often appears to be the only style to commercialize their ideas.

Entrepreneurs increase contest

By establishing new businesses, entrepreneurs intensify competition for existing businesses. Consumers benefit from the resulting lower prices and greater product variety. Researchers have developed a measure out of market mobility, which identifies the effects of new concern formation on existing firms [3]. A alter in the ranking of established firms by number of employees indicates a transfer of market share and college marketplace mobility. This effect is especially strong when because entrepreneurial activity five years prior to the showtime-up, which points to a substantial time lag in the effect of get-go-ups on market mobility. Furthermore, new business formation has an indirect competition-enhancing event past pushing established firms to improve their performance.

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Entrepreneurs have positive employment effects in the short and long term, and negative effects in the medium term

Entrepreneurs stimulate employment growth by generating new jobs when they enter the market. Research has shown (afterwards disentangling all the potential effects) that beyond this immediate outcome there is a more complicated, S-shaped effect over time (Effigy 1) [four]. At that place is a straight employment effect from new businesses that arises from the new jobs being created. Following this initial phase, there is usually a stagnation phase or fifty-fifty a downturn equally new businesses gain market share from existing firms that are unable to compete and every bit some new entrants fail. After this interim phase of potential failure and displacement of existing firms, the increased competitiveness of suppliers leads to positive gains in employment once more. About ten years after kickoff-up, the impact of new business formation on employment has finally faded away. This type of moving ridge pattern has been found for the US and for a number of European countries, as well as for a sample of 23 Organisation for Economical Co-operation and Development (OECD) countries [5].

New business formation has a positive effect
                        on employment in the short and long term, and a negative effect in the
                        medium term

New businesses boost productivity

Competition between new and existing firms ideally leads to survival of the fittest. Even though overall employment may decline, new firms can foster productivity [vi]. The productivity-enhancing issue of business formation occurs in the medium term, when the employment effect is dominated past the displacement of existing firms (surface area II of the “moving ridge” shown in Figure 1). This happens for two reasons. Commencement, new firms increment contest in the market and thus diminish the market power of incumbent firms, forcing them to become more efficient or go out of business organisation. 2nd, merely firms with a competitive advantage or firms that are more efficient than incumbents will enter the market. The subsequent selection procedure forces less efficient firms (both entrants and incumbents) to drop out of the market.

Entrances, exits, and “turbulence” (the sum of entries and exits of firms in a given year) have been shown to have a positive overall effect on productivity, as measured by various indicators of productivity in several European countries. These furnishings were found for a sample of 23 OECD countries [6], and in single land studies for Federal republic of germany, the netherlands, and Sweden.

In the initial years following entry, the productivity outcome can sometimes be negative, probably a result of adjustments to routines and strategies in response to the new entrants. The overall positive relationship is specially strong for entrepreneurs with high-growth ambitions and a high caste of innovation; the upshot on productivity is weaker for entrepreneurs with low-growth ambitions. This pattern indicates that entrepreneurs generally increment the productive employ of scarce resource in an economy, with the strongest touch on coming from innovative entrepreneurs.

Entrepreneurship encourages structural alter

Existing firms oftentimes struggle to accommodate to new market conditions and permanent changes, getting locked into their former positions. They fail to make the necessary internal adjustments and lack the ability for “creative devastation,” famously described by Schumpeter in 1934 [7]. The entry of new businesses and the leave of worn-out firms tin help to complimentary firms from a locked-in position. Moreover, entrepreneurs may create entirely new markets and industries that become the engines of futurity growth processes.

Only a few people accept the drive to go entrepreneurs

Entrepreneurs share sure traits, such as creativity and a high tolerance for the doubt that comes with developing new products. Iv personality characteristics are peculiarly important for becoming an entrepreneur: willingness to behave risks, openness to experience, conventionalities in their power to control their ain future (internal locus of control), and extraversion [8]. Entrepreneurs are significantly more likely to have these traits for the post-obit reasons:

  • The success of each investment, particularly in innovative activities, is unpredictable. Every entrepreneurial decision is risky, and success is never assured. In contrast to ordinary managers, entrepreneurs often put their own funds on the line and risk losing money if the investment fails. They have to be willing to bear risks.

  • People who are open up to experience—who seek new experiences and are eager to explore novel ideas—are creative, innovative, and curious. These attributes are vital for starting a new venture.

  • Locus of command measures generalized expectations about internal and external control. People with an external locus of control believe that their time to come is adamant randomly or by the external environment, not by their own deportment. People with an internal locus of control believe that they shape their hereafter outcomes through their own actions. Entrepreneurs need to have an internal locus of control to propel them.

  • People who are assertive, ambitious, energetic, and seek leadership roles (in the so-chosen “Big Five” arroyo this trait is called extraversion), tend to be sociable equally well, enabling them to develop social networks more than hands and to forge stronger partnerships with clients and suppliers. All of these traits—being believing, seeking leadership, and developing networks—are important if an private aims to get an entrepreneur.

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While these personality traits affect a person’southward decision to become an entrepreneur, unlike traits or parameter values of these traits affect the success of entrepreneurship and the determination to abandon or persevere in the new endeavor. Empirical research reveals that the about important personality characteristics influencing entrepreneurial success are lower levels of agreeableness, higher levels of demand for accomplishment, college levels of (internal) locus of control, and medium levels of chance acceptance:

  • Conjuration refers to having a forgiving and trusting nature and being donating and flexible. Lower scores on agreeableness might aid entrepreneurs survive by enabling them to bargain more than for their own interest with their partners.

  • For entrepreneurs, a need for achievement is expressed in the search for new and better solutions and the power to deliver these solutions through their own performance.

  • The aforementioned holds for having college levels of internal locus of command. Believing that one shapes one’s own future through 1’s own actions is a very useful trait for entrepreneurial success.

  • Entrepreneurs with a medium range of gamble tolerance take the lowest exit probabilities. The relationship between risk tolerance and the probability of entrepreneurial success is not linear but an inverse U-shape [8]. Likewise depression a adventure tolerance leads to low-risk projects with low expected returns, which makes entrepreneurship an unattractive option to dependent employment, and excessive risk tolerance leads to projects that are very high chance with high failure rates.

A substantial adventure of failure accompanies entrepreneurship

Failure rates are loftier inside the outset five years of starting a business, typically around xl–50%, with the highest failure rate in the showtime year (encounter Figure 2). Recent studies in Frg and in the United kingdom have shown college survival rates for new ventures in innovative industries [nine].

Typical survival rates of new businesses are
                        high in the first five years

There are several reasons why new businesses fail and shut (run across Failure versus closure). Not anybody who tries to showtime a business has the right character traits to become a successful entrepreneur. Other impediments to success are restricted access to capital, lack of customers, and discouraging regulatory hurdles, including unfriendly entry regulations and difficult and time-consuming requirements for registering property and obtaining or extending licenses or permits.

The level of self-employment is not necessarily an indicator of entrepreneurial activity

Cocky-employment is not synonymous with entrepreneurship. The level of entrepreneurial activity offers information about the dynamics of an economic system, while the level of self-employment is not necessarily correlated with economic development. In fact, nearly economies with high levels of cocky-employment are less developed. Less developed economies have fewer large firms (which evangelize economies of scale and scope) and a greater number of small firms and self-employed individuals (delivering fewer economies of scale and scope). Thus, a high level of self-employment does not necessarily correspond with a high level of entrepreneurial activity.

High regulatory burdens and unsecured intellectual belongings rights are detrimental to innovative entrepreneurship

Regulatory obstacles to setting up a business, such as the need to buy permits or licenses and other entry barriers, may discourage entrepreneurship. Overregulation of commerce prevents entrepreneurship from flourishing because information technology increases the costs of starting a business and decreases flexibility and the power to react quickly to opportunities as they arise, thus reducing experimentation. Similarly, frequently changing, complex, unclear, or opaque regulations make it hard to empathize the legal environment for entrepreneurial activity.

Sometimes, overregulation can even make entrepreneurship incommunicable by restricting or prohibiting entry into certain sectors of the economy through strict control of licenses. Permits and licenses can human activity as noncompetition agreements. Overregulated markets tin turn potentially productive entrepreneurs toward unproductive not-wealth-creating activity. And because there are many potential markets for high-tech innovations all over the earth, innovative businesses deterred by overregulation in one market place can go elsewhere.

A high level of corruption can be a side event of overregulation, with directly negative impacts on innovative activities [10]. Success in entrepreneurship and innovation—which are well-nigh new products or services—is uncertain. Thus if intellectual belongings rights are non adequately enforced, this adds to the dubiety, which tin can build up to prohibitively high levels that discourage any potential innovators. Corruption may brand entrepreneurs unwilling to trust the institutions that are necessary to protect intellectual property rights.

Limitations and gaps

Not enough is known about the differences in innovation between entrepreneurs and large (often multinational) firms. While entrepreneurs are hailed every bit the source of radical innovations, it may well be that big firms, which can make huge investments in research and development, are the real innovators. Both parties undoubtedly contribute to innovation, but whether they complement each other is yet unknown.

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Farther empirical assay is also needed of the relationship between entrepreneurial firms and economic growth rates. Only while some truly innovative entrepreneurs create fast-growing businesses (so-called “gazelles”) that take an important impact on economic growth, whether replicative entrepreneurs (run into Different types of entrepreneurs) have a measurable result on economic growth seems less likely. Only farther written report can answer this question.

In that location is likewise inadequate agreement of the kind of economic surround that influences innovative entrepreneurs not only to start their businesses, just likewise to expand them. This is an important result since the quality of starting time-ups— their persistence, growth rate, and innovation— influences their effect on the economy.

And we exercise not know enough nearly failure rates. About half of all businesses close in their first v years. Notwithstanding recent enquiry finds that survival rates could be higher. It is not nevertheless clear whether innovative entrepreneurs survive more than often than noninnovative entrepreneurs. Research preceding that reported hither found the contrary to exist the example. It is likewise not clear whether the human relationship betwixt failure/closure and years of survival is linear. Some empirical analyses discover a linear human relationship, while others find a college failure/closure rate in the first year.

Summary and policy advice

Entrepreneurship is considered crucial to a dynamic economy. Entrepreneurs create employment opportunities not simply for themselves but for others likewise. Entrepreneurial activities may influence a country’s economic performance by bringing new products, methods, and production processes to the marketplace and by boosting productivity and competition more broadly.

Realizing these advantages requires institutions that contribute to an surroundings that is friendly to entrepreneurs. In item, it is of import to protect intellectual and other property rights, streamline and enforce commercial laws, better the concern climate, reduce regulatory burdens, and create a culture of second chances for entrepreneurs who fail. More than specifically, the following policy measures should be considered:

  • Government policies and legislation on property rights are important in shaping a country’s innovativeness. Protecting fabric property rights ensures that whatsoever wealth creation stays with the entrepreneur, while protecting intellectual property rights fosters entrepreneurship and innovation.

  • Bureaucratic obstacles constrain innovation-driven activities in many economies. Entrepreneurial opportunities volition be greater in deregulated economies with freely operating markets and efficient licensing, considering entrepreneurs tin can operate flexibly and their entrepreneurial activities tin can respond to changes in the market. Information technology is as well important that laws and regulations be enforced adequately and evenly.

  • Authoritative burdens for kickoff-ups need to be depression, including the time needed to register a business, the number of bureaucratic steps, and the number of regulations, fees, and reporting requirements. Every bit a criterion, leading business-friendly countries enable companies to register for business concern within one day, without the demand for regular renewal. This tin can be achieved by setting up a state-of-the-art online e-administration for all standard businesses.

  • Conflicting legislation creates doubtfulness, and dubiety discourages business action. Codification means bringing all amendments to a given police force, adopted at different times, into a single legal lawmaking. Swift and comprehensive codification of the legislation eliminates contradictions. Information technology should also include reducing and unifying administrative procedures relating to a particular activity.

  • In many countries, a single failed business organisation effort brands a person for life as a loser. The opposite feel in the United states, where entrepreneurs are more readily given a second risk, fifty-fifty following a bankruptcy, makes articulate that destigmatizing failure is crucial to the development of a rich entrepreneurial culture. Creating such a culture also reduces the fear of failure, which is still the about important impediment to entrepreneurship.

  • The negative effects of layoffs in firms that are unable to compete tin can exist eased by improving search options for new jobs and by supporting vocational training for workers who lost their jobs.

  • Start-upwardly subsidies should be considered to foster entrepreneurial activities. These can reduce the risk of early business concern failure.

If regulatory burdens are reduced and corruption is eliminated, countries volition encourage and retain their ain entrepreneurs and fifty-fifty attract innovators from other countries. Thus, policy tin influence the book of entrepreneurial activeness nearly effectively by adjusting the regulatory environment in favor of entrepreneurship.


The writer thanks an anonymous referee and the IZA World of Labor editors for many helpful suggestions on earlier drafts.

Competing interests

The IZA World of Labor projection is committed to the IZA Guiding Principles of Inquiry Integrity. The author declares to have observed these principles.

© Alexander Kritikos

Successful Entrepreneurs Contribute to the Economy by