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THE IMPACT OF ENTREPRENEURSHIP ON ECONOMIC GROWTH

Dr. Ercan EKMEKCIOGLU

Institution/Affiliation: Kyrgyzstan Turkey Manas University E-mail: ercan.ekmekcioglu@gmail.com

Abstract

According to Chell & Ozkan, (2010), an entrepreneur is someone who is willing to bear the risk of a business venture where there is a significant chance for making profit. Entrepreneurship is basically the practice of starting a business in order to earn profit on new found opportunities. Entrepreneurship is a challenging task as many businesses which start fail to take off. Entrepreneurship has many uncertainties especially when new products are created for which there is no existing market. Entrepreneurship affects economic growth in various ways. It is through entrepreneurship that important innovations enter the market leading to new products or production process which eventually increases efficiency through bringing competition in the market. This paper discourses the impact of entrepreneurship on economic growth. Ideas and concepts that emerge from entrepreneurs increase our knowledge and what consumers may prefer through introducing variations of existing products and services in the market. This speeds up innovation of new products in the market as a result of the longer working hours and more efficient nature of entrepreneurs as their income is directly linked with their working input. Entrepreneurship leads to introduction of new goods with new quality and value. Their innovativeness introduces new ways of production and new markets that have not been exploited. It is through entrepreneurship that new source of supply are discovered and creation of new business organisations that directly affect the economy. Creation of new business opportunities through entrepreneurship, productivity and innovation leads to economic growth. This therefore means that when there is more entrepreneurship in an economy more growth is expected.

Keywords: Entrepreneurship, Economic Growth, Innovativeness

1.0 Introduction

There has been a wealth of knowledge on the determinants of entrepreneurship over the last

few decades. Although studies bringing forth this knowledge have rather been based on

theoretical grounds, others have been drawn from drawn from empirical evidence. Scholars

have also been keen in investigating the impact of entrepreneurship in relation to economic

growth which has further led to the explosion of extensive literature in this field (Van Stel,

Carree & Thurik, 2005). It important to note that a significant amount of existing literature

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has been based on the observation of firms, establishments and regions in terms of their

economic performance, growth and survival. The facts that can be derived from these studies

link economic growth with the size and age of the firm or an establishment. According to Van

Stel, Carree and Thurik (2005), newly established firms and very small firms experience

systematically faster growth compared to the already established larger firms. These findings

have been found to hold in the modern industrialized economies as well as across time periods

(Karlsson, Friis & Paulsson, 2004, p.3). The connection between entrepreneurship and

economic growth measured in terms of performance of the firm has been extended even

beyond observing the establishment to accommodate geographic regions. This paper

discourses how entrepreneurship can be related directly economic growth and how

entrepreneurship is at the heart of economic growth of any nation.

1.1 Understanding Entrepreneurship and Economic Growth

In terms of how entrepreneurship has been a stimulant in economic growth, there exist

enormous discussions and debates but it is however eminent to realize the importance of

constant innovations and rivalry enhancement (Todtling & Wanzanbock, 2003). There has

been a problem in defining and measuring entrepreneurial factors and this has further

complicated the exact contributions to economic growth. According to Carree and Thurik

(2002), the concept of entrepreneurship is multidimensional and largely ill-defined.

Understanding the role of entrepreneurship in the process of economic growth will therefore

require a framework because of the nature of intermediate variables and connections which

exist (Bygrave & Minniti, 2000). The best examples of these intermediate variables include

innovation, competition mainly characterized by exit and entry of firms, variety of supply and

particular energy and efforts of invested by entrepreneurs. Other conditions of

entrepreneurship also add up when it comes to their contributions to economic growth

(Robbins, Pantuosso, Parker & Fuller, 2000). These conditions include personal traits, cultural

and institutional factors as shown in Fig 1 below.

Figure 1: Appreciating Entrepreneurship

Entrepreneurship (largely multidimensional)

Intermediate Linkages (Innovation, competition variety and entrepreneurial efforts)

Conditions (Personal traits, institutional and cultural elements)

Economic Growth

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Source: Carree and Thurik (2002).

1.2 Extended Definition of Entrepreneurship in Relation to Economic Growth

While entrepreneurship is all about the activities carried out by individuals, the concept of

economic growth has often been relevant at firm level, industrial, national and regional levels

(Robbins, Pantuosso, Parker & Fuller, 2000). This implies that linking entrepreneurship to

economic growth will be to amalgamate individual to aggregate levels. Considering this

linkage however requires revisiting the definition of entrepreneurship, whereby entrepreneurs,

either as individuals or a team, manifest their willingness and abilities to create new

opportunities in economy (Todtling & Wanzanbock, 2003). In this manner, novel products,

production modalities, organizational schemes and product-market combinations are created.

The entrepreneurs seek to introduce their newly crafted ideas in the existing market in the face

of obstacles and uncertainties. They also make critical decisions in terms of business location,

forms and the utilization of available resources and institutions (Acs & Armington, 2004). In

a nutshell, entrepreneurship refers to the behavioral attributes of individuals and should not be

confused with well-defined professional persons (Lloyd-Ellis & Bernhardt, 2000).

2.0 Forms of Entrepreneurship

According to Carree and Thurik (2002), entrepreneurs in history have often been represented

in many faces and assumed different roles. As identified by scholars such as Schumpeter,

Kirzner and Knight, entrepreneurs can be termed as innovators, profit opportunists and

uncertainties and risk takers respectively. Schumpeter drew his attention to understanding an

entrepreneur as an innovator. As an innovator, the entrepreneur performs new combinations

which Schumpeter called enterprises (Karlsson, Friis & Paulsson, 2004). An entrepreneur

according to Kirzner perceived profit opportunities. This role is what was labeled Kirznerian

entrepreneurship. The last role of an entrepreneur is that of assuming the several risks and

uncertainties which may be associated with running a business. This role is labeled Knightian

entrepreneurship. As the individual introduces a new product in the market or starts a new

business, this entrepreneurial role can be described in terms of the three labels. As posted by

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Audretsch & Lehman (2005), the individual who launches a new firm or introduces new

products can be termed as the innovator and he assumes that he has perceived a previously

uncertain profit opportunity. The innovator also takes risks that the venture or the new product

may eventually turn out to be a total failure (Todtling & Wanzanbock, 2003).

2.1 Entrepreneurial Effects in the Growth of Economy

To sum up the contributions of entrepreneurship to economic growth Carree and Thurik

(2002) have provided five strands of empirical evidence to show their involvement. The first

evidence mainly deals with the turbulence effect of entrepreneurship on the growth of

economy. Turbulence can be viewed as the total entries and exits in regions or industries and

can easily be interpreted as one of the powerful indicators of entrepreneurial activities. The

effect of and changes in size distributions in regions represents the second strand of evidence

as identified by the two researchers (Lloyd-Ellis & Bernhardt, 2000). It is believed that the

change in size distribution and its ultimate effects can have a significant impact on the growth

of economy (Carree, Van Stel, Thurik & Wennekers, 2002). Thirdly, the number of market

participants in any industry will finally have an important effect on economic growth and this

is recognized as another strand of evidence of the role of entrepreneurship in economy

expansion (Chell & Ozkan, 2010). Empirical literature has also identified the effect of the

number of business owners and self-employed individuals in economic growth. This is the

fourth strand of evidence that seeks to appreciate the role of self-employment in the growth of

economy in any state. Lastly, the economic history of previously centralized and planned

economies will also have an influence in economic growth of countries (Carree, Van Stel,

Thurik & Wennekers, 2002). For instance, in Eastern Europe, small enterprise development

served as the most vital part of the transitional process which has seen economic growth in the

area.

The turbulence effect of entrepreneurship on economic growth refers to the entry and exist

which however appears to have minimal contributions to the growth of the economy in the

short run (Bathelt, 2001). Nevertheless, the entry-exit turnover will make a significant

contribution especially in service industry than in manufacturing industry in the long run as

evidence by empirical research done by Bosma and Nieuwen-huijsen (Chang, 2011). The

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effect of size distribution changes of firms on growth performances has also been recognized

particularly when examining the share of small firms in the manufacturing industry in the

European states. Competition among firms which is a commonplace for entrepreneurs has

been shown to have a positive effect in the growth of economy (Carree, 2002). The increased

numbers of participants in the market compounded with entrepreneurial activity are some of

the contributions of entrepreneurship in economic growth (Chell & Ozkan, 2010). In

particular, local competition which is measured in terms of the relative number of businesses

in a region per worker encourages growth of employment in industries thus economic growth.

Entrepreneurship encourages self-employment and this has been found to have an impact in

productivity growth (Chang, 2011). This is however a much contested observation whether

countries should adopt the equilibrium or the elf-employment model which has largely failed

counties such as Italy. According to Chang (2011), the high levels of self-employment in the

country have proved to be inefficient for economic development. Italy has in the past

experienced large negative impacts on the growth of its economy because of self-

employment. Scandinavian countries represent cases of countries with relatively low rates of

self-employment than the equilibrium and have often been characterized by extensive public

sector and low rates of entry and exit. The contrary is seen when analyzing the business

structure in West Germany where they have low rates of self-employment (Van Stel, Carree

& Thurik, 2004a). In Germany, there is a total failure in the restructuring the economic

policies as the United Kingdom has done. The industrial policy in German has repressed the

structural changes by solely supporting large-scale industries with enormous subsidies (Van

Stel, Carree & Thurik, 2004b). This has led to the lack of a vibrant economic growth made of

new industries and firms in German and thus a serious barrier to innovative activity.

2.2 Future Perspective in Analysis

From various strands of literature, there have been many insights that have inspired a number

of frameworks which should be embraced in the analysis of how entrepreneurship plays a

critical role in economic development. Carree and Thurik (2002) found three different levels

of analysis to be evident when associating entrepreneurship to economic growth as this meant

that the individual level could be linked to the macro-economic sphere. These levels include

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the individual, firm and the macro levels of analysis. According to Bruce, Deskins, Hill and

Rork, (2009), entrepreneurial actions usually take place at the level of the firm and thus

require a vehicle which can transform their individual ambitions and qualities into workable

actions (Todtling & Wanzanbock, 2003). In small firms, the entrepreneur usually has the

controlling stake which acts as the vehicle for transformations. Larger firms have also been

found to mimic smaller firms in terms of business units, joint ventures and subsidiaries in

order to introduced entrepreneurship or corporate entrepreneurship. The results of such

entrepreneurial manifestations at the level of the firm must do with how novel processes,

products, innovations, and entry to new markets or start-ups are (Tesreau & Gielazauska, n.d).

At national, industrial and regional levels, entrepreneurial actions are all composed of new

experiments.

3.0 Conclusion and Further Recommendations

Entrepreneurship play a critical role in the development of the economy as this is the key

contributor to innovativeness and product improvement. It is one of the important ingredients

to the creation of new employments and in the building of communities in ways of offering

them jobs. By contributing to local charities, taking part in local business, investing in

projects in communities and creating and participating in different networks in

entrepreneurship, they build up robust communities which contribute to the community

development. Governments should develop policies which will enhance entrepreneurship by

understanding the critical difference existing between small business owners and

entrepreneurship. At the same time, a misconception about entrepreneurs and where

entrepreneurs can be found can also help the local people to create the right picture of

entrepreneurship and thus become aggressive and contribute to economic development.

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