An entrepreneur may be defined as someone who agrees to accept the total risk of a business project as long as there is a considerable chance of making a profit. Entrepreneurship can also be defined as the practice of starting a new business so that one can earn a profit on untapped opportunities.
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Entrepreneurship is risky since the majority of the new businesses are usually unsuccessful. There are many times when the entrepreneur is not certain about the availability of customers for his or her new formed product.
It has been highlighted in various research studies that entrepreneurship has a positive relationship with economic growth in emerging economies.
This paper is a literature review on the research studies conducted on the impact of entrepreneurship on economic growth. Is the economic growth significant and is it possible to quantify the impact?
The impact of entrepreneurship on economic growth
Economists have depended on the neoclassical model as the foundation for determining the drive behind economic growth. The model focuses on human resource, the production processes and capital as the main factors.
Audretsch and Keilbach (2007) have criticized the model arguing that that the knowledge factor has not been included in the theory. Entrepreneurship capital is the main factor in the neoclassical production function which is the ability of economic representatives to start new organizations.
Entrepreneurship should, therefore, be defined as stock capital. This is because entrepreneurship represents institutional, legal and social factors or forces.
Places which promote startup of new organizations are said to be wealthy with entrepreneurship capital while places that inhibit the startup of new organizations lack entrepreneurship capital.
Entrepreneurship capital increases the economic output by acting as a device for knowledge leaks. This is where an individual operates by investing knowledge to create innovative output.
If an inventor working in a university discovers a new product, he or she can choose whether to share the invention with a large corporation or start a new firm. The corporation may absorb the invention and compensate him.
Audretsch and Keilbach found authentic evidence that revealed knowledge spillovers from university research cause more innovative action in small organizations than large companies.
They argue that economic output is increased by the high competition of new ideas among the economic agents.
The new ideas lead to the formation of new enterprises. Entrepreneurship capital creates a high number of enterprises in developing countries. It is a vital factor for economic development.
It shapes the output and productivity of an economy. Audretsch and Keilbach conclude by suggesting that extensive research should be carried out by policymakers on mechanisms to develop entrepreneurship capital.
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Roy Thurik (2009) compares the managerial and entrepreneurial economies models in industry. He examines the entrepreneurial economy model and its role in emerging and developed economies.
The differences between the managerial and entrepreneurial models of the economy are brought about by the differences in external environmental, policy and internal characteristics in both models.
Small businesses were not recognized until the 1980s in communist countries. Large companies were highly accepted. The government felt that they complied with the managed economy that was in place.
Back then entrepreneurship was considered to be illegal, and its character was seen to be aggressive towards the communist ways.
It is noted that these economies collapsed in the 1980s due to lack of entrepreneurial businesses. The market did not support its survival. This paved the way for the entrepreneurial model of the economy.
The emergence of the entrepreneurial model has occurred differently in all the developing countries.
Thurik (2009) observed that the different speed by which these developing countries absorbed the entrepreneurial model had a direct relationship with the growth in economic development. Countries with higher entrepreneurial activities experienced higher economic growth.
It was noted that the timing and size of the small firm did not affect the rate at which a country absorbed the entrepreneurial economy model.
Absorption depended on the policies of the country. The managerial model is still successful in places where regular production remains useful, and innovation is not encouraged.
These places thoroughly exhaust what they have and place no interest at all in what they do not have. Emerging economies nowadays operate on both the managerial and entrepreneurial models.
The slow absorption of the entrepreneurial model by the developing countries has many disadvantages. Thurik (2009) argues that all these disadvantages can be ignored due to the emerging entrepreneurial economy’s ability to learn from the mistakes of the managerial model.
The researcher advocates for more research to be done. His findings indicate a need for further analysis to be conducted to promote the basics of the modern entrepreneurial economy.
Lingelbach, Vina, and Asel (2005) were interested in finding out the impact of growth-focused entrepreneurship in developing countries. Entrepreneurship in developing markets is unique compared to the one practiced in developed countries.
The differences are brought about by the difference in economic growth in both economies. It is mandatory for these distinctions to be recognized and understood especially by the private sector. The private sector brings a lot of development in developing countries.
The small and medium enterprises (SMEs) and entrepreneurship both contribute to economic growth.
They, however, operate on different concepts. Lingelbach, Vina, and Asel argue that entrepreneurs of new and growth-oriented enterprises contributed more to the economy than SMEs. The new enterprise’s main focus is on growth unlike the small and medium enterprises (SMEs).
These new enterprises have a higher ability to form sustainable economic development than the SMEs which have limited growth projection. New enterprises experience high growth rates.
The differences in growth rates between the SMEs in developed and the developing markets are based on the market’s failures found in the developing countries.
The reaction of entrepreneurs to these failures in developing countries is often alarming and unexpected. They do not handle challenges well. Their growth therefore stagnates.
Lingelbach, Vina and Asel’s findings question the approaches advocated by policymakers towards entrepreneurship development. They note the lack of connection between business background and stages of growth-focused entrepreneurship.
They focus on three main factors which are usually not addressed. These are business prospects, financial resources, training, and labor. SMEs that do not handle these resources will tend to cease being growth oriented.
The researchers acknowledge that entrepreneurs contribute to economic growth; however various processes have to be handled well to ensure optimum growth.
Ekmekcioglu(2013) highlights the impact of entrepreneurship on economic development. First of all, he notes that important innovations have been introduced to the market through entrepreneurship.
These new products or innovation bring a lot of competition in the targeted market which is very good for boosting economic growth.
Secondly, the new ideas and models that come up due to entrepreneurship expand our knowledge. Thirdly the consumers are provided with a selection of existing goods and services available in the market.
This gives insight into what the consumers need and value the most out of the selection offered to them. Entrepreneurship, therefore, escalates the speed at which new products are invented.
Inventors will have to put in longer working hours and work more efficiently since their profits or returns are connected directly to their input.
Entrepreneurship guides the economy into introducing new products with new worth and value. The innovation brought about by entrepreneurs charts the path for new styles of production and discovery of untapped markets and opportunities.
New business firms that influence the economy directly have been created. There is an increase in economic growth due to new business ventures as a result of entrepreneurship, production, and modernization.
Ekmekcioglu argues that if there is an increase in entrepreneurship in any given economy, it is natural to expect that the economy will grow.
Vigil and Arcs (2009) propose that economic growth is brought about by change. Entrepreneurial activities are the forces causing the change. Knowledge is usually distributed throughout society. This means that different people possess distinctive information.
The market’s reaction to how the people invest the knowledge and the state of supply of factors of production is communicated through prices. This paves the way for resource allocation.
The government has failed in allocating resources efficiently. This shows the importance of an entrepreneur and the need for a market where an entrepreneur can participate fully.
The entrepreneur was neglected in the economic model. Vigil and Arcs note that Schumpeter realized that growth was a procedure of disturbance and change caused by the entrepreneur.
The Schumpeterian model suggests that an entrepreneur is concerned with innovation. He or she focuses on new ideas and untapped markets and products.
Vigil and Arcs argue that there is a strong relationship between entrepreneurship and economic development. Many countries are focusing on improving entrepreneurship by removing the causes of market failures.
Policy makers need to ensure positive externalities like knowledge and network management to help boost entrepreneurship and economic growth.
In periods of market failures, the entrepreneurs manage to find a way to bridge the gap and still survive. It has been noted that during seasons of market failure many business groups emerged in developing countries which were created to join banking and industrial functions.
They engaged in entrepreneurial mannerisms, but they did not represent the optimal entrepreneurship model. They formed monopolies which generally affected economic growth. It is therefore important to promote entrepreneurship since it is not exploitive.
The above research is very important since all the findings identify entrepreneurship as a major factor in promoting economic development, especially for the developing countries. From a practical and academic perspective, everyone is affected by this research.
The economy affects everyone. Every person should be working towards developing their economy. Entrepreneurship can be practiced by both professionals and students. Policy makers need to promote elements of entrepreneurship and fight the barriers to entrepreneurship.
A research study may be carried out where the level of entrepreneurship activity in developing countries is compared to economic growth. A sample of the developing countries may be chosen to further investigate the relationship between new enterprises and economic growth.
Audretsch, David and Max Keilbach. “Entrepreneurship Capital and Economic Growth” Oxford Review of Economic Policy, 23.1(2007): 63-78. Print.
Ekmekcioglu, Ercan. The Impact of Entrepreneurship on Economic Growth. 2013. Web.
Lingelbach, David, Vina Lynda and Paul Asel. “What’s Distinctive About Growth-Oriented Entrepreneurship in Developing Countries?” UTSA College of Business Center for Global Entrepreneurship Working Paper 1(2005): 1-10. Print.
Thurik, Roy. “Entrepreneurship, Economic Growth and Policy in Emerging Economies”. UNU-Wider Research Paper, 12(2009): 1-20. Print.
Vigil, Nicola and Zoltan Acs. “Entrepreneurship in Developing Countries”. Jena Economic Research Papers, 023(2009): 1-83. Print.