How Is Entrepreneurship Good For Economic Growth?
Tuesday, March 28, 2006
Innovations is a new journal focused on the intersection of social enterprise and public policy. The following is an excerpt from an article in the first issue.? Check out Rob’s post for more background.
How is entrepreneurship good for economic growth? This question would seem to have a simple answer: Entrepreneurs create new businesses, and new businesses in turn create jobs, intensify competition, and may even increase productivity through technological change. High measured levels of entrepreneurship will thus translate directly into high levels of economic growth. However, the reality is more complicated. If, by entrepreneurship, one allows inclusion of any type of informal self-employment, then high levels of entrepreneurship may actually mean either that there are substantial bureaucratic barriers to formally creating a new business, or simply that the economy is creating too few conventional wage-earning job opportunities.
Under these circumstances, we might reasonably hypothesize that high levels of entrepreneurship would correlate with slow economic growth and lagging development.
For the past two years I have been the chair of the research committee of a multi-country survey effort known as the Global Entrepreneurship Monitor (GEM) project, which has begun to make headway in understanding how different types of entrepreneurship affect development. The starting point has been to distinguish ?necessity entrepreneurship,? which is having to become an entrepreneur because you have no better option, from ?opportunity entrepreneurship,? which is an active choice to start a new enterprise based on the perception that an unexploited or underexploited business opportunity exists. Analyzing data gathered by GEM researchers in 11 countries, Atilla Varga and I have found that effects on economic growth and development of necessity and opportunity entrepreneurship vary greatly.
We found that necessity entrepreneurship has no effect on economic development while opportunity entrepreneurship has a positive and significant effect.1 After the fall of the Berlin Wall many uneconomical factories were closed in Central Europe as economies became integrated into the global economy. Those workers who had jobs in the plants and factories of the former socialist countries were productive members of society.
For a link to the full-text of this article click here.