The importance of entrepreneurship

Posted on 20 June 2015

In macroeconomic perspective:

It seems obvious: entrepreneurs start new businesses, creating more employment, leading to an increase competition among companies which eventually will lead to an increase in productivity through technological change. In the long run, the most important factor for economic growth is technological change (Solow, 1956). So, can we take for granted that a relatively high level of entrepreneurship will lead to a relatively high level of economic growth? Economic growth is a key factor in economic policy making. There is a strong correlation between economic growth (GDP growth) and unemployment. Okun’s Law describes this relationship: every 1% increase in the unemployment rate will lead to a 2% decrease in GDP (Mankiw, 2013). I my last blog, I explained the significant difference between necessity and opportunity entrepreneurship. Opportunity entrepreneurship has a significantly positive effect on economic growth, whereas necessity entrepreneurship has no effect (Acs, 2006). Hence, if we say entrepreneurship is good for economic growth, we especially mean opportunity entrepreneurship.

The more businesses there are, the higher the competition among companies. When competition between companies is fierce, the fittest companies will survive. As a matter of fact, the best companies will improve their performance, such as growth of productivity and innovation. The role of entrepreneurship in the development of innovation is significant and was already stressed in 1934 by Schumpeter. On the other hand, weak companies will weaken or even go bankrupt. Even though companies will fail, in the long run, this accumulation of diversity and the increase of quality among companies, will lead to economic growth (Stel, van, 2008). And according to the aforementioned Okun’s Law, this will have a positive relationship on employment as well.

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