The Importance of Entrepreneurship

Entrepreneurship is currently a very popular topic among students of management and economics. It was not always so. Before 1960, most economists had understood its importance they tended to under rate it. To begin with, the attention they devoted to big companies obscured the fact that most new jobs are created by newer, smaller firms. Moreover, the function of the entrepreneur organizing new productive resources to expand supply seemed unimportant to the dominant school of economies, which was chiefly interested in managing consumer demand by including consumers to buy more products. A classic example of managing consumer demand was the American auto industry practice of model changes from year to year.

In the 1970s the mood changed again when economies concerned primarily with consumer demand failed to prevent the constant inflation of that decade. Economists began to worry about the fact that productivity was increasing much less rapidly than it had earlier. This made them more interested in the supply of goods and services – the entrepreneur’s sphere and less interested in managing demand. The Japanese (Nissan) and German (Volkswagen) challenges to the American auto industry’s Big Three (Chrysler, Ford, and General Motors) doomed the management of consumer demand as a manager’s by word.

Slower growth in general made those sectors of the economy that were still rapidly growing stand out: medical services, electronics, robotics, genetic engineering and a few others. These are all high tech industries in which many companies are small start ups founded by people who wanted to change the business world – entrepreneurs. What George Gilder calls the heroic creativity of entrepreneurs came to see essential to our economic well-being especially in a global economy.

Entrepreneurship has at least four social benefits. It fosters economic growth, it increases productivity; it creates new technologies, products, and services; and it changes and rejuvenates market competition.

Economic Growth: One reason economists started paying more attention to small new firms is that they seem to provide most of the new jobs in our economy. In an important US industry electronics a trade association study showed that companies that have survived for 5 to 10 years hire more than 50 times as many people as do companies that have been around for more than 20 years.

In the United States more than four fifths of al new employment openings come from small businesses. Of these openings, upwards of 30 percent are provided by companies that are less than 5 years old. Not all small businesses are job creators. The job creators are the relatively few younger ones that start up and expand rapidly in their youth, outgrowing the small designation in the process. It was also found in the service sector of the economy rather than in the manufacturing sector.

Productivity—the ability to produce more goods and services with less labor and other inputs increased much less rapidly in the United States during the 1970s than it had in the 1950s and 1960s. Many economists concluded and still believe that this is the most fundamental problem of our economy. One reason for the greater interest in entrepreneurship has been the growing recognition of its role in raising productivity. A major impetus in the focus on productivity is international competition. In order for the United States to maintain a high standard of living we must be productive. In 1990, according to the Organization for Economic Cooperation and Development, the average US worker produced $45,100 of goods and services while the German worker averaged $37,580 and the Japanese worker $34,500 However, productivity gains in Germany, Japan and other countries place pressure on America to continue to strive for increased productivity in the race for global business.

Higher productivity is chiefly a matter of improving production techniques and this task, according to John Kendrick is the entrepreneurial function par excellence. Two keys to higher productivity are research and development (R&D) and investment in new plant and machinery. There is a close link between R&D and investment programs, with a higher entrepreneurial input into both.