What impact do entrepreneurs have on economic growth?
An entrepreneur is someone who creates or invests in a business or businesses, taking on the majority of the risks involved and gaining most of the rewards. Promoting entrepreneurship is a priority in most developed countries, motivated primarily by views that small businesses create a disproportionate share of new jobs, represent an important source of innovation, boost national productivity, and alleviate poverty. In developing countries fostering entrepreneurship is widely perceived to be critical for expanding employment and earning opportunities and for reducing poverty. Differentiating between “necessity” entrepreneurship (where someone has no other opportunity for work) and “opportunity” entrepreneurship (where someone explores a potentially lucrative opportunity) is important.
What can governments do to attract entrepreneurs?
The benefits of entrepreneurship have been found to be greater in economies where entrepreneurs are able to: operate flexibly, develop their ideas, and reap the rewards. To attract productive entrepreneurs, governments need to cut red tape, streamline regulations, and prepare for the negative effects of layoffs in existing firms that may fail because of the new competition.
In post-Soviet countries, well-functioning institutions are needed to foster productive entrepreneurial development and growthRuta Aidis, August 2023Since the collapse of the Soviet Union, the differing impact of institutions on entrepreneurship development is undeniable. Several post-Soviet countries benefitted from early international integration by joining the EU, adopting the euro, and becoming OECD members. This process enabled entrepreneurship to develop within institutional contexts where democratic and free market principles were strengthened. In general, however, post-Soviet economies continue to be characterized by higher levels of corruption, complex business regulations, weak rule of law, uncertain property rights and often, lack of political will for institutional change.MoreLess
New businesses are essential to keep unemployment low, but start-ups need loans in order to create jobsHenry R. Hyatt, November 2022Entrepreneurship is essential for a healthy labor market. Recent evidence shows that young businesses (at most ten years old) have, on average, accounted for all of US employment growth over the past few decades. New businesses are especially important for youth employment. However, these businesses tend to borrow a lot, and the credit constraints they face limit their ability to create jobs. Historically, much of the discussion regarding the economic importance of entrepreneurship has focused on small businesses. Empirical evidence increasingly suggests that, among small businesses, those that are young create the most jobs.MoreLess
Immigrants and entrepreneurship Updated
Business ownership is higher among immigrants, but promoting self-employment is unlikely to improve outcomes for the less skilledImmigrants are widely perceived to be highly entrepreneurial, contributing to economic growth and innovation, and self-employment is often viewed as a means of enhancing labor market integration and success among immigrants. Accordingly, many countries have established special visas and entry requirements to attract immigrant entrepreneurs. Research supports some of these stances, but expectations may be too high. There is no strong evidence that self-employment is an effective tool of upward economic mobility among low-skilled immigrants. More broadly prioritizing high-skilled immigrants may prove to be more successful than focusing on entrepreneurship.MoreLess
Digital payments can increase firms’ profits by allowing more efficient and cost-effective financial transactionsLeora Klapper, November 2017Digital payment systems can conveniently and affordably connect entrepreneurs with banks, employees, suppliers, and new markets for their goods and services. These systems can accelerate business registration and payments for business licenses and permits by reducing travel time and expenses. Digital financial services can also improve access to savings accounts and loans. Electronic wage payments to workers can increase security and reduce the time and cost of paying employees. Yet, there are challenges as many entrepreneurs and employees lack bank accounts, digital devices, and reliable technology infrastructure.MoreLess
Effective measurement can help policymakers harness a wide variety of gains from entrepreneurshipSameeksha Desai, January 2017Policymakers rely on entrepreneurs to create jobs, provide incomes, innovate, pay taxes to support public revenues, create competition in industries, and much more. Due to its highly heterogeneous nature, the choice of entrepreneurship measures is critically important, impacting the diagnosis, analysis, projection, and understanding of potential and existing policy. Some key aspects to measure include the how (self-employment, new firm formation), why (necessity, opportunity), and what (growth). As such, gaining better insight into the challenges of measuring entrepreneurship is a necessary and productive investment for policymakers.MoreLess
Government should create an enabling environment—for entrepreneurs and investors—rather than try to pick “winners”Ramana Nanda, April 2016Entrepreneurship is essential to job creation and to productivity growth and therefore is an important matter for government policy. However, policymakers face a difficult challenge because successful growth for a few firms—which cannot easily be identified in advance—is accompanied by widespread failure for most other new firms. Predicting which firms will fail and which will succeed is nearly impossible. Instead of futilely trying to pick winners, governments can play a useful role in facilitating the growth of the most promising firms by setting the conditions for efficient trial-and-error experimentation across firms.MoreLess