ROLE OF ENTREPRENEURSHIP TO THE ECONOMIC DEVELOPMENT

Why Entrepreneurship Is Important to the Economy

Entrepreneurship is important for a number of reasons, from promoting social

change to driving innovation. Entrepreneurs are frequently thought of as national
assets to be cultivated, motivated, and remunerated to the greatest possible
extent. In fact, some of the most developed nations such as the United States
are world leaders due to their forward-thinking innovation, research, and
entrepreneurial individuals.

Great entrepreneurs have the ability to change the way we live and work, on
local and national bases. 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. The importance of
entrepreneurship is not to be understated.

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.
 Too much entrepreneurship (i.e., high self-employment) can be detrimental
to economic development.

Entrepreneurs Spur Economic Growth

New products and services created by entrepreneurs can produce a cascading
effect, where they stimulate 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.

Similarly, future development efforts in other 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. In the U.S. alone, small businesses created 1.6 million net jobs in
2019.
Entrepreneurs Add to National Income
Entrepreneurial ventures help generate new wealth. Existing businesses may
remain confined to existing markets and may hit a limit 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.

According to the U.S. Small Business Administration, there are 31.7

million small businesses in the U.S. in 2019. 2
Entrepreneurs Create Social Change
Through offering unique goods and services, entrepreneurs break away from
tradition and reduce dependence on obsolete systems and technologies. This
can result 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, force
people to stop working to collect water. This will impact their business,
productivity, and income.

However, with a project such as the U.S. Agency for International Development's
Kenya RAPID program, an innovative and automatic pump powered by smart
sensors fills people's water containers automatically, ensuring more than 184,000
people now have improved access to clean and safe drinking water.3 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 more than 5 billion people have mobile devices around
the world.4 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 developing

countries have access to the same tools as their counterparts in developed
countries. They also have the advantage of a lower cost of living, so a young
entrepreneur from a developing country can compete with a multimillion-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.5 The qualities that make
one an entrepreneur can be the same qualities that help motivate entrepreneurs
to pay it forward through philanthropy, in a later chapter of life.

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?

Assistant Professor of Business at Columbia Business School Tania Babina, in a

report written alongside Assistant Professors Wenting Ma and Christian Moser,
Associate Professor Paige Ouimet, and Assistant Director of the Board of
Governors of the Federal Reserve System Rebecca Zarutskie, found that
"employees at young firms receive lower earnings as compared to employees at
older firms."6

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.7 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."8
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 unhappier.8

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.
7 ROLES OF ENTRENEURSHIP IN ECONOMIC DEVELOPMENT OF THE COUNTRY

Entrepreneurship plays an influential role in the economic growth and standard of living of the
country. As a startup founder or small business owner, you may think that you are simply working
hard to build your own business and provide for yourself and your family. But you are actually doing
a whole lot more for your local community, state, region, and the country as a whole. Here are the
top 7 important roles an entrepreneur plays in the economic development of a country.

1. Wealth Creation and Sharing: By establishing the business entity, entrepreneurs invest their
own resources and attract capital (in the form of debt, equity, etc.) from investors, lenders and the
public. This mobilizes public wealth and allows people to benefit from the success of entrepreneurs
and growing businesses. This kind of pooled capital that results in wealth creation and distribution is
one of the basic imperatives and goals of economic development.

2. Create Jobs: Entrepreneurs are by nature and definition job creators, as opposed to job seekers.
The simple translation is that when you become an entrepreneur, there is one less job seeker in the
economy, and then you provide employment for multiple other job seekers. This kind of job creation
by new and existing businesses is again is one of the basic goals of economic development. This is
why the Govt. of India has launched initiatives such as StartupIndia to promote and support new
startups, and also others like the Make in India initiative to attract foreign companies and their FDI
into the Indian economy. All this in turn creates a lot of job opportunities, and is helping in
augmenting our standards to a global level.

3. Balanced Regional Development: Entrepreneurs setting up new businesses and industrial units

help with regional development by locating in less developed and backward areas. The growth of
industries and business in these areas leads to infrastructure improvements like better roads and
rail links, airports, stable electricity and water supply, schools, hospitals, shopping malls and other
public and private services that would not otherwise be available.

Every new business that locates in a less developed area will create both direct and indirect jobs,
helping lift regional economies in many different ways. The combined spending by all the new
employees of the new businesses and the supporting jobs in other businesses adds to the local and
regional economic output. Both central and state governments promote this kind of regional
development by providing registered MSME businesses various benefits and concessions.

4. GDP and Per Capita Income: India’s MSME sector, comprised of 36 million units that provide
employment for more than 80 million people, now accounts for over 37% of the country’s GDP. Each
new addition to these 36 million units makes use of even more resources like land, labor and capital
to develop products and services that add to the national income, national product and per capita
income of the country. This growth in GDP and per capita income is again one of the essential goals
of economic development.

5. Standard of Living: Increase in the standard of living of people in a community is yet another key
goal of economic development. Entrepreneurs again play a key role in increasing the standard of
living in a community. They do this not just by creating jobs, but also by developing and adopting
innovations that lead to improvements in the quality of life of their employees, customers, and other
stakeholders in the community. For example, automation that reduces production costs and
enables faster production will make a business unit more productive, while also providing its
customers with the same goods at lower prices.

6. Exports: Any growing business will eventually want to get started with exports to expand their
business to foreign markets. This is an important ingredient of economic development since it
provides access to bigger markets, and leads to currency inflows and access to the latest cutting-
edge technologies and processes being used in more developed foreign markets. Another key
benefit is that this expansion that leads to more stable business revenue during economic
downturns in the local economy.  

7. Community Development: Economic development doesn’t always translate into community

development. Community development requires infrastructure for education and training,
healthcare, and other public services. For example, you need highly educated and skilled workers in
a community to attract new businesses. If there are educational institutions, technical training
schools and internship opportunities, that will help build the pool of educated and skilled workers.

A good example of how this kind of community development can be promoted is Azim Hashim
Premji, Chairman of Wipro Limited, who donated Rs. 27,514 crores for promoting education through
the Azim Premji Foundation. This foundation works with more than 350,000 schools in eight states
across India.

So, there is a very important role for entrepreneurs to spark economic development by starting new
businesses, creating jobs, and contributing to improvement in various key goals such as GDP,
exports, standard of living, skills development and community development.
Economic development essentially means a process of upward change whereby
the real per capita income of a country increases over a period of time.
Entrepreneur plays a vital role in economic development. Entrepreneurs serve as
the catalysts in the process of industrialization and economic growth. Technical
progress alone cannot lead to economic development, unless technological
breakthroughs are put to economic use by entrepreneurs.

It is the entrepreneur who organizes and puts to use capital, labour and
technology. Accordingly, “development does not occur spontaneously as a natural
consequence when economic conditions in some sense are right. A catalyst is
needed and this requires entrepreneurial activity to a considerable extent, the
diversity of activities that characterizes rich countries can be attributed to the
supply of entrepreneurs.”

The entrepreneur is the key to the creation of new enterprises that energize the
economy and rejuvenate the established enterprises that make up the economic
structure.

Entrepreneurs initiate and sustain the process of economic

development in the following ways:
1. Capital Formation:
Entrepreneurs mobilize the idle savings of the public through the issues of
industrial securities. Investment of public savings in industry results in
productive utilization of national resources. Rate of capital formation increases
which is essential for rapid economic growth. Thus, an entrepreneur is the
creator of wealth.

2. Improvement in Per Capita Income:

Entrepreneurs locate and exploit opportunities. They convert the latent and idle
resources like land, labour and capital into national income and wealth in the
form of goods and services. They help to increase net national product and per
capita income in the country, which are important yardsticks for measuring
economic growth.

3. Generation of Employment:
Entrepreneurs generate employment both directly and indirectly. Directly, self-
employment as an entrepreneur offers the best way for independent and
honorable life. Indirectly, by setting up large and small scale business units they
offer jobs to millions. Thus, entrepreneurship helps to reduce the unemployment
problem in the country.

4. Balanced Regional Development:

Entrepreneurs in the public and private sectors help to remove regional
disparities in economic development. They set up industries in backward areas to
avail various concessions and subsidies offered by the central and state
governments.

Public sector steel plants and private sector industries by Modis, Tatas, Birlas and
others have put the hitherto unknown places on the international map.

5. Improvement in Living Standards:

Entrepreneurs set up industries which remove scarcity of essential commodities
and introduce new products. Production of goods on mass scale and manufacture
of handicrafts, etc., in the small scale sector help to improve the standards of life
of a common man. These offer goods at lower costs and increase variety in
consumption.

6. Economic Independence:
Entrepreneurship is essential for national self-reliance. Industrialists help to
manufacture indigenous substitutes of hitherto imported products thereby
reducing dependence on foreign countries. Businessmen also export goods and
services on a large scale and thereby earn the scarce foreign exchange for the
country.

Such import substitution and export promotion help to ensure the economic
independence of the country without which political independence has little
meaning.

7. Backward and Forward Linkages:

An entrepreneur initiates change which has a chain reaction. Setting up of an
enterprise has several backward and forward linkages. For example- the
establishment of a steel plant generates several ancillary units and expands the
demand for iron ore, coal, etc.
These are backward linkages. By increasing the supply of steel, the plant
facilitates the growth of machine building, tube making, utensil manufacturing
and such other units.

Entrepreneurs create an atmosphere of enthusiasm and convey a sense of

purpose. They give an organization its momentum. Entrepreneurial behavior is
critical to the long term vitality of every economy. The practice of
entrepreneurship is as important to established firms as it is to new ones.