Importance of Entrepreneurship
What is Entrepreneurship
Entrepreneurship is the act by an individual to start and develop their own business. This involves the willingness to take risks and pursue ideas in the hope of profit. For example, the founders of Microsoft, Bill Gates and Paul Allen, are entrepreneurs as they both invested time and money into starting and developing Microsoft.
We can also look at entrepreneurship as the action an entrepreneur takes. So an entrepreneur may have an idea or innovation, but entrepreneurship is the willingness to forward that idea into action. Therefore, we see the entrepreneur as an innovator, a source of employment, and a creator of new products and services.
- Entrepreneurship is where an individual turns an idea into a business.
- Entrepreneurs create value by taking an idea and turning it into a good that people want.
- The importance of entrepreneurship can be seen through the competition new businesses provide. In turn, this forces competitors to innovate and increase their efficiency so it can produce at the lowest cost.
Why Entrepreneurship is Important
When thinking of entrepreneurship and innovators, people like Steve Jobs, Elon Musk, and Thomas Edison may come to mind. Each of them contributing to society each in their own individaul way. They’ve changed the way we live. Yet there are thousands of other entrepreneurs who have all contributed to improving our standard of living.
Steve Jobs, for example, created the revolutionary iPhone, with other big brands such as Samsung and Sony following suit. In turn, this has completely changed the lives of millions, if not billions of people. We can easily obtain directions, browse the internet, and watch sport all on a small device that can be stored in our pocket.
Big named entrepreneurs such as Steve Jobs have revolutionized the economy on a massive scale. However, the everyday entrepreneur also contributes to the economy. It might be the local barbers or restaurant, they contribute in their own small way which adds up to make a significant part of the economy.
1. Stimulates Demand in Wider Economy
So how does entrepreneurship contribute to economic growth? First of all, it stimulates economic activity in other markets. For instance, when an entrepreneur starts their own business, they may take a loan out. They may then invest this into office equipment, computers, desks, and the like. This then stimulates those relevant markets by which the entrepreneur invests in.
For example, an entrepreneur may start their own online florist. They may have to purchase flowers from a local supplier, as well as pay a hosting provider for their website. So even in this basic example, the entrepreneur is creating demand from a local supplier as well as a hosting provider.
2. Stimulates Employment
As an entrepreneur starts their business, they may need to hire someone. For instance, a local restaurant owner would need to hire some waiters/waitresses to look after the tables.
Now, those employees are receiving an income they would otherwise not have. They have a greater level of income, which will be spent elsewhere in the economy. This then stimulates demand for others goods which can subsequently increase employment in that market as well.
For example, a waitress may use the money to go and get her nails done at a local beauticians. This sends a signal to the market that there is extra demand. The beauticians may then have to start hiring to meet higher levels of demand. So there is a domino effect that can occur from that first entrepreneur. Through their entrepreneurship, the money they spend on employees can filter through the economy.
3. Increases Productivity
Entrepreneurship has the potential to increase productivity in four key ways. First of all, entrepreneurs can place pressure on existing firms in the market, which can force them to increase productivity and efficiency. Faced with the threat of competition, existing firms will need to be able to offer customers a better value proposition. Usually, this will mean becoming more efficient and lowering prices.
Second of all, they can introduce new knowledge and ways of working into the market which can ripple throughout various markets. For instance, Henry Fords assembly line invention not only transformed the efficiency of manufacturing motor vehicles, but also of food and beverages.
Third of all, we have what is known as ‘creative destruction’. Entrepreneurs with new companies may have a more productive way of working. In turn, this destroys the incumbent firm as they are unable to compete. So in the short-term there may be some productivity losses, but which are supplemented in the long-term by the more efficient companies.
Finally, entrepreneurship can create completely new industries. This is partially advantageous during an economic recession as it creates employment, growth, and new options for the customer. By introducing something revolutionary that all consumers want, they can create a surge in demand to help bring life back into the wider economy.
4. The Ripple Effect
We have already discussed the impact on economic growth, employment, and productivity, yet there is an underlying ‘ripple effect’ that entrepreneurship creates. This ripple effect occurs when the original entrepreneur creates a platform for other entrepreneurs to follow.
For example, Steve Jobs’ original innovation of the iPhone created the ‘App store’. Entrepreneurs took advantage of this platform to create apps such as Angry Birds and WhatsApp, whilst others such as Facebook and Instagram have proven popular on mobile devices.
However, this can also occur from unsuccessful entrepreneurs. For instance, the business may fail, but the equipment, building, and labourers may already be in place. In turn, this sets the foundation for other entrepreneurs to pick up where the failed one left off.
At the same time, it can be useful to new entrepreneurs to see where the previous one went wrong and therefore avoid the same mistakes. For instance, a retailer may have targeted the high-end market, but failed because it wasn’t suitable for the area. It is this testing of the waters that makes entrepreneurship a tough task as many have to fail before some succeed.
5. Social Change
Entrepreneurship can create substantial social changes by introducing new goods and services to the market. On an individual basis, new businesses only change our lives marginally. However, on the whole, they can change the fabric of society.
Looking at Netflix, it has created a completely new market for ‘stay-at-home’ entertainment. This new market has had a negative impact on cinemas as people are able to stay at home and watch complete series and films. At the same time, this has also led to an increase in demand for takeaway foods and the innovation of companies such as ‘Deliveroo’ and ‘Uber Eats’.
We can also look to smaller firms that have started to change society. There are a number of online learning platforms such as ‘Tinybop’ which has developed applications to help students learn from home. Other platforms include the likes of some bigger firms such as Udemy that offer courses for almost anything.
Such firms have already started to change the way we learn and provide a change from a traditional classroom setting. It is because of such entrepreneurship that society has changed how it eats, entertains, and learns.
Is Entrepreneurship Good or Bad?
Entrepreneurship depends on the average entrepreneur creating a good or service that the public wants. Some fail and some succeed, although the majority will fail. For instance, 90 percent of new startups will fail within three years.
Even though the majority fail, they can create the framework for others to succeed. The original idea can be built upon and developed into something better. For example, MySpace used to be the biggest social networking site in the US between 2005 and 2008, yet it has since faded into obscurity. Even though it still exists, it is only a fraction of the size it was previously.
Its failings were identified and solved by Facebook which created a more user friendly platform. So although original entrepreneurs may fail, it is so that another can take over and succeed; providing a better service to the consumer.
With that said, entrepreneurship does cause significant levels of chaos. Business will fold, and even though new businesses will come in and benefit, there is disruption in terms of the jobs lost.
Furthermore, there is also the case of entrepreneurs not offering a service that is not morally or ethically acceptable. For example, certain health and safety standards may be forgone in order to cut competition. Yet these same businesses will eventually be driven out by those who offer the best value for money. Nevertheless, this is still a concern in the short-term.
Overall, entrepreneurship is arguably a good thing. After all, without such, we wouldn’t have goods and services such as Netflix, Amazon, Google, or McDonald’s. It starts with an idea in the head of an individual or group of individuals. It’s only once this idea is followed through that makes an entrepreneur. So whilst it produces some problems such as the chaos and potential job losses, it produces efficiencies and companies that millions use each and every day.
FAQs on Entrepreneurship
Entrepreneurship is important as it creates new businesses. People with an idea put it into action and create a new business. In turn, that new business puts pressure on existing firms and its competitors to ‘up their game’ in order to compete and attract customers. This forces businesses to increase their efficiency so customers can get a lower price, but also its innovation.
An entrepreneur is someone who takes an idea and starts a business, thereby creating value.
The bad part of entrepreneurship is that most business will fail. However, it is because they fail that others are able to learn and succeed from those failures.
Paul Boyce is an economics editor with over 10 years experience in the industry. Currently working as a consultant within the financial services sector, Paul is the CEO and chief editor of BoyceWire. He has written publications for FEE, the Mises Institute, and many others.