Role of Entrepreneurship in Economic Development

Everything you need know about the role of entrepreneurship in economic development.

The economic development of any economy heavily depends on the accumulation and availability of fundamental resources like land labour, capital and technology.

Technology in particular is contributed by the knowledge of the people in the society. The innovativeness of the entrepreneurs often lead to creation of technology paving the way for defined processes, products services and lifestyles.

Entrepreneurs play a critical role in shaping fortunes of any nation.

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Role of Entrepreneurship in Economic Development

Role of Entrepreneurship in Economic Development – Capital Formation, Improvement of Per Capita Income, Generation of Employment and a Few Others

Manpower or human resource is an important element in the process of economic development of a country. A country may be very rich in natural resources but may be very poor in terms of living standards. This is because people are not exploiting the natural resources for economic development. Take example of India, up to independence, people were not bothered about the natural wealth available and they lived in poor economy.

After independence, because of improper planning, the natural resources have been exported by certain class of people to other countries and imported the product made by the exported material. Thus, Indian economy remained as an underdeveloped economy and the country labeled as underdeveloped country. The main reason for this state of affair is that entrepreneurship is not as widespread in India as it should.

Schumpeter, in his theory of entrepreneurship assigned a critical role to entrepreneurship in economic development. His opinion is that entrepreneurs are the agents who provide economic leadership that disturbs the initial conditions of the economy and causes dynamic changes.

For economic progress of any country, entrepreneurship act as most powerful force and as instrument. Entrepreneurship lies at the center of economic development. It is an integral part of the strategy of industrialization, particularly in the small-scale sector. Without entrepreneurship, the natural resources of the country remain untouched, useless and economy lies at the lowest level.

The entrepreneurship is the cause and the economic development is the effect, as it activates the rate of economic progress. As a matter of fact, higher is the level of entrepreneurship; faster is the level of economic development. An entrepreneur is a creator of wealth and is a key to economic development. If the degree of economic development of a nation is higher it is due to role of entrepreneurship, which further try to develop the economy of that nation. Entrepreneurship is the base of industrialization and determines the growth of the country.

The way in which the entrepreneurs initiate and sustain the process of economic development is:

1. Capital Formations:

Entrepreneurs use the idle capital, investment of public savings etc. to industrial productive activity and produces wealth and accelerate the development of economy of the nation. Hence, they are the creator of wealth.

2. Improvement of per Capita Income:

As the entrepreneurs create wealth by utilizing the idle resources, capital and manpower to produce goods and service which help to increase Net National Product and per capita income in the country, which are the yardstick to measure the economic growth.

3. Generation of Employment:

First thing is as an entrepreneur, he himself settle as the promoter of a unit and at the same time he provides livelihood by offering jobs to the unemployed youth. As he grows, his unit also grows and he needs more people to work, which will create employment opportunities for many people. As per survey, small-scale sector itself provides employment opportunity for more than 60% to the public.

4. Balanced Regional Development:

Entrepreneurs help for regional balanced development by setting up the industrial units in backward areas and in underdeveloped areas and help these areas to develop economically, benefiting the people in that area with an opportunity of employment. State and Central Governments are encouraging the entrepreneurs to start industries in backward areas by giving them various concessions and subsidies.

5. Improvement in Living Standards:

Most of the small scale units manufacture goods and services required by common man, the people in the area will have their minimum needs satisfied and because of these industries other infrastructure are also developed which is the symbol of improvement of living standards. These industrial units provide employment for local people, which naturally improve living standards of the people.

6. Economic Independence:

Industrial units try to manufacture the good, which were hitherto imported and help country to get relieved of imports to a certain extent. In addition, the goods manufactured may be exported to different countries and improve the country’s economic status. In one word, they help in import substitution and export promotion.

7. Backward and Forward Linkages:

In setting up industries, entrepreneurs will create various backward and forward relations. For example, by setting an industry, it helps various satellite units which supply necessary raw products to the set industry and at the same time it helps by supplying the manufactured products for the other industries to use them for economic development. These are known as backward and forward linkages. In simple words, it provides business opportunity to the units which supply material for its process and at the same time supply the products required for other units for their process.

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Role of Entrepreneurship in Economic Development

The economic development of any economy heavily depends on the accumulation and availability of fundamental resources like land labour, capital and technology. Technology in particular is contributed by the knowledge of the people in the society. The innovativeness of the entrepreneurs often lead to creation of technology paving the way for defined processes, products services and lifestyles. Entrepreneurs play a critical role in shaping fortunes of any nation.

In the following segment, we throw light on the role of entrepreneur in economic development of any nation:

1. Promoting Capital Formation:

By mobilizing savings of people and also utilizing owned and borrowed capital, they entrust the desired capital to production of goods and services leading to capital formation.

2. Creation of Large Scale Employment Opportunities:

Evil of unemployment among population is well fought by entrepreneurs by offering direct and indirect employment opportunities to people. This in turn also reduces the pressure on Government to facilitate employment opportunities. Entrepreneur being self-sustained also motivates other people to follow the suit. Keeping this in mind, our Honorable Prime Minister has also announced self-sustenance schemes like Stand up India and Start-up India.

3. Balanced Regional Growth:

Entrepreneurs often set up new enterprises in smaller town away from big cities often due to paucity of space and mounting cost structure. This leads to setting up of business and its allied forward and backward businesses and industries at such places. This in turn leads to growth of facilities like road transport, water electricity, communication channels, provision for health, education, sanitation and entertainment, often leading to development of the backward area. For example development of TATA Nagar by Tata group in Jamshednagar.

4. De-Concentration of Economic Wealth in Few Hands:

Promotion of entrepreneurship would lead to more industrial employment. This would in turn deter accumulation of economic wealth in few hands creating further impetus for promotion of entrepreneurship.

5. Wealth Creation and Distribution:

Creation of employment opportunities through entrepreneurship creates and distributes economic wealth across different section of societies. This in turn leads to greater parity of income among people and creation of multiplier effect also. For e.g. when young software engineer from India, Binny Bansal founded an e-commerce platform, Flipkart in the year 2007, he identified and later filled the huge market potential for e-commerce industry, through his online portal.

6. Contribution to Gross National Product:

By mobilizing resources and seizing the opportunities, entrepreneurs develop, produce and deliver new products, processes and services for masses. Spending by a person becomes income for other and brings money in circulation in the economy, leading to increase in national income as well as per-capita income.

7. Improvised Standards of Living:

Through innovation, new product and services at affordable rates are being offered to customers, making them experiment as well as adopt better ways to work and live. It also bridges the gap between ‘Haves and Haves’ not. For example, advancement in TV technology from a black and white TV to Colour TV to now Smart TV with LED technology and various embedded apps has left viewers wonder as well as relish the marvel of human innovations over a period time.

8. Promotion of Exports and FDI:

Entrepreneurship and in particular cross border entrepreneurship is often found out to be a significant contributor to firms value as well as to nations’ wealth and prosperity. As entrepreneurs successively move from exporting to relocating production to overseas locations, they gain and accumulate experiences, synergies, linkages with international suppliers and also familiarity with the taste and preferences of foreign consumers.

These synergies bring much needed business, capital, technology as well as foreign currency in the country through remittances, royalty and technical fees, further adding to exchequers purse.

For e.g. Aditya Birla Group is the one of India’s most globalized companies with a US $41 billion (Rs.2, 50,000 crore) annual turnover. Over 50 per cent of its revenues flow from its overseas operations spanning 36 countries.

9. Creation of Innovation:

Innovation being one of the most essential trait of entrepreneur propels him to identify the gaps in the market and fill the same by creation of novelty. Most of the world necessities and as well as luxuries have been the brain child of umpteen innovators who have made our work and leisure equally enjoyable and enriching. Innovations like aircraft, mobile phones, internet, laptops, ATMs, online shopping are all ideas that were culminated in to successful business propositions by entrepreneurs, through innovation.

10. Personal Growth:

The constant desire to bring and effect change also makes entrepreneur assume risks and remain directly responsible for the outcomes of the intended venture. This trial and error approach and ‘do not stop till you succeed’ spirit, make entrepreneurs also hone their personality traits like initiative, courage, self-assertion and boosting of confidence.

11. Bringing Social Change:

Entrepreneurs while concentrating on economic profit also remain conscious of pressing social issues while being financially sustainable. Over the years the callous attitude of business towards society, has prompted many startups to solve societal problems. For e.g. companies like Body Shop or Khadi India employ organic methods and environmental friendly technology to manufacture their products, while remaining financially sustainable.

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Role of Entrepreneurship in Economic Development – Providing Job Opportunities, Making the Base of Economic Development and a Few Others

In the words of W. Arthur Lewis (1955), “Economic growth is bound, to slow unless there is an adequate supply of entrepreneurs looking out for new ideas, and willing to take the risk of introducing them.”

Entrepreneurship may be termed as self-employment in which an individual selects various opportunities, such as business, commerce, production, agriculture, trade, profession, direct services. It can also be defined as a process in which the individual starts his/her own legal and profitable economic activities.

Self-employment is an effective tool for fast and speedy development of a nation. The slower growth, high rate of population growth, failure of state-owned enterprises, limited public-sector employment, high rate of unemployment, and the increasing free market call for promoting entrepreneurship in developing economies.

Entrepreneurship helps in the economic development of a country in the following ways:

1. Providing Job Opportunities:

It implies that self-employment directly or indirectly increases employment opportunities. In a country, such as India, the problem of unemployment cannot be solved merely by government and private sector jobs. The youth of developing economies have to depend more on self-employment for their livelihood.

2. Making the Base of Economic Development:

This indicates that self-employment facilitates new business activities. The self- employed units bring forth more job opportunities for public resulting in their increased income. This improves their living standards and social status. On the other hand, increased income leads to savings and this encourages capital formation. Entrepreneurs’ income, savings, and profit again help in establishing new enterprises or expanding the existing ones. Factually, self-employment makes the basis of economic development.

3. Making the Optimal Use of Human and Physical Resources:

It signifies that developing economies are rich in human and physical resources. If these resources are not utilized properly, they would be wasted. Self-employment helps in making the efficient use of resources.

4. Developing Entrepreneurial and Managerial Skills:

It implies that self-employment leads to the development of entrepreneurial and managerial skills in individuals. The individuals with entrepreneurial and managerial skills would be able to establish and manage enterprises and utilize resources effectively. The increasing number of enterprises leads to more and more employment opportunities and production of goods and services. This helps in increasing the gross domestic product of the country.

5. Developing Infrastructural Facilities:

It implies that self-employment leads the development of infrastructure facilities, such as electricity, water, transport, roads, and warehouses. For example, the establishment of Bokaro Steel Plant resulted in the development of infrastructure facilities in the whole Bokaro Steel City, Jharkhand.

Therefore, the government should work on developing infrastructure facilities in rural and industrially backward areas, so that entrepreneurs willingly start their businesses in these areas. The development of infrastructure facilities acts as a major factor in the economic development of a nation.

6 Achieving Plan Targets and Implementing State Policies:

This indicates that the government set certain goals and prepares various policies and programs for rural development, in live years plan. Entrepreneurs help the government in achieving its goals by setting up their industrial ventures in rural areas and employing local people.

7. Increasing the National Revenue:

It implies that the enterprises established under self-employment are important sources of revenue for government. They pay excise duty, sales tax, and income tax, which contribute to national revenue.

8. Checking on Social and Economic Evils:

It signifies that self-employment helps in keeping a tab on various social and economic problems. If the people are involved in their jobs, they may not indulge themselves in various social evil, such as drinking, gambling, thefts, and moral degradation. Apart from this, employment also helps in reducing economic problems, including poverty, formation of industrial slums, and illiteracy. This results in the development of a self-reliant, educated, and cultured society.

9. Nurturing the Untapped Talents:

It indicates that self-employment helps unemployed craftsmen and workers to utilize their skills and talents and make them financially independent.

Thus, self-employment is the tool for economic progress, social transformation, and individuals’ development with which developing economies can proceed to the path of progress and prosperity.

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Role of Entrepreneurship in Economic Development – Capital Formation, Generating Employment Opportunities, Balanced Regional Development and a Few Others 

Entrepreneurs play a vital role in the economic development of a country. The economic resources alone will not produce development.

There should be dynamic entrepreneurs with vision, initiative and drive to make changes in the economic field. It is very often said that “India is a rich country inhabited by the poor”. India is endowed with plenty of natural resources and good climate. In spite of these blessings, our country is only a developing one. The main reason for this under development is the lack of sufficient number of dynamic entrepreneurs. A country can achieve economic development only when it is able to utilize its natural resources effectively.

Joseph & Schumpeter was the first to visualise the entrepreneurs as the key figure in economic development because of their vital role in introducing innovations.

The following points elucidate the pivotal role played by the entrepreneurs in the economic development:

1. Capital Formation– Capital is essential for every business. One single individual will not be able to contribute the entire capital required for a big business concern. So, the entrepreneur mobilises the small and scattered savings from the households and this will lead to capital formation.

2. Generating Employment Opportunities– The most important socio-economic problem faced by the developing countries is unemployment. The entrepreneurs by setting up new business concerns can generate employment opportunities. Most of the entrepreneurial concerns are labour oriented. They provide large scale employment opportunities to the unemployed. Finally, this will lead to improvement in the standard of living of the people.

3. Balanced Regional Development– Setting up of business concerns in the rural or under developed areas will help to achieve a balanced regional development of the nation. Small business concerns can be set up at places where raw materials and labour forces are available.

4. Reduces the Concentration of Economic Power– Entrepreneurship reduces the accumulation of economic power in a few hands. It ensures a wider distribution of economic power among the people.

5. Encourages the Effective Utilisation of Capital and Natural Resources– Entrepreneurs help in the effective utilisation of idle funds in the society. They can also profitably utilise the natural resources at their place of operation. In the absence of entrepreneurs these funds and resources will be kept idle.

6. Promotes Export Trade– Exports are necessary for earning foreign exchange. So the countries follow a policy of export promotion and import substitution. Entrepreneurs setting up their business as EOUs (Export Oriented Units) at EPZs (Export Promotion Zones) will help to increase the level of exports of the nation. The level of exports is one of the vital ingredients of economic development.

7. Promotes the Equitable Distribution of Wealth, National Income and Political Power– Entrepreneurship helps to achieve the socialistic objective of the nation. It helps to reduce disparity in income and wealth of the people. It creates wealth, generates employment and income, and increases the standard of living of the people.

8. Stimulates Economic Development– Entrepreneurship induces backward and forward linkages and thus stimulates the process of economic development of the country.

In short, entrepreneurs are the human agents needed ‘to mobilize capital, to exploit natural resources, to create markets, and to carry on trade’. The economic progress of the USA, Japan and the European countries highlights the significance of entrepreneurship in economic development. The overall role of entrepreneurship in economic development of an economy is put as “an economy is the effect for which entrepreneurship is the cause.”

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Role of an Entrepreneur in Economic Development

Every county tries to achieve maximum economic development. The economic development of the country to a large extent depends upon the human resources. But the human resources alone will not produce economic development there must be dynamic entrepreneur.

A country may rich in natural resources but if it lacks in entrepreneurship it may not be able to utilize the resources and it may lag behind in economic development. This is true in many developing countries. An entrepreneur is the one who looks for opportunities, seizes the opportunities mainly for economic development. Economic development of the country is mainly depend upon an entrepreneur.

In fact entrepreneurship is the dynamic need of a developing nation and sustains the process of economic development in the following ways:

Role # 1. Employment Generation:

Growing unemployment particularly educated unemployment is an acute problem of the nation. When Government creates, say a hundred jobs in various departments, 100 persons get employed and vacancies are filled for thirty years or so, till these people retire and the vacancies re-emerge.

If a hundred people become entrepreneurs they not only create a hundred jobs for themselves but also provide employment to many more. As the time passes these enterprises grow providing direct and indirect employment to many more thus, entrepreneurship is the best way to fight the evil of unemployment.

Role # 2. Increase in National Income:

National income consists of goods and services produced in the country and those imported. The goods and services are produced for consumption within the country as well as to meet the demand of exports. The domestic demand increases with ever increasing population and standard of living. The export demand also increases to meet the need of growing import due to various reasons. Thus entrepreneurship increases the national income.

Role # 3. Capital Formation:

Entrepreneurs mobilize the idle saving of the public through the issues of industrial securities. Investment of public savings in the industry is result of productive utilization of national resources. Rate of capital formation increases which is essential for rapid growth. Thus, an entrepreneur is creator is wealth.

Role # 4. Improvement in Standard of Living:

Entrepreneurs set up industries which remove scarcity of essential commodities and introduce new produces. Production of goods on mass scale and manufacture of handicrafts etc., in the small scale sector help to improve the standard of life of a common man. These offer goods at lower costs and increase variety in consumption.

Role # 5. Innovations in Enterprises:

Business enterprises need to be innovative for their survival and better performance. It is believed that smaller firms have relatively higher necessity and capability to innovative. The smaller firms do not face the constraints imposed by large investment in existing technology and thus they are both free and compelled to innovate.

The national science foundation, an organization in USA found that small companies produce four times more innovations per research dollar than do bigger companies. Entrepreneurship development programmes are aimed at accelerating the pace of small firm’s growth in India. Increased number of small firms is expected to result in more innovations and make the Indian industry compete in international market.

Role # 6. Reducing Social Tension amongst Youth:

Many problems associated with youth social tension are rightly considered to be due to youth hot being engaged in productive work. The country is required to divert the youth with latent entrepreneurial traits from wage career to self-employment career. Such alternate path through entrepreneurship could help the country in defusing social tension amongst youth.

Role # 7. Economic Independence:

Entrepreneurship is essential for national self-reliance; Industrialists help to manufacture indigenous substitutes of hitherto imported products, thereby reducing dependence on the foreign countries.

Businessman also exports goods and services on the large scale and thereby earns the scare foreign exchange for the country. Such import substitutions and export promotion help to ensure the economic independence of the country without which political independence has little meaning.

Role # 8. Dispersal of Economic Power:

The world affairs have been dominated by the power. There have always been two types of power i.e., muscle power and economic power. In the modem age, the muscle power has lost its relevance and the world is ruled by the economic power. Economic power is the natural outcome so industrial and business activities.

Industrial development normally can lead to concentration of economic power in few hands. This concentration of power in few hands has its own evils in the form of monopolies. Developing a large number of entrepreneurs help in dispersing the economic power amongst the population.

This is turn causes of hindrances to the growth of monopolies, which exist partly because of lack of sufficient numbers of entrepreneurs. Setting up of large number of enterprises for the goods help in weakening the harmful effects of monopoly.

When a society produces a small number of entrepreneurs, the enterprises due to lack of competition grow into a few big business houses. This results in concentration of wealth in a few families. This can have serious social and national implication. When the number of enterprises increases, a large amount of national wealth is also shared by a large number of entrepreneurs, thus dispersing wealth.

Role # 9. Balanced Regional Development:

A rapid development of entrepreneurs ensures a balanced regional development. When the new entrepreneurs grow at a faster pace, in view of the increasing competition in and around the cities, they are forced to set up their enterprises in the smaller towns away from big cities. This help in the development of backward regions.

Role # 10. Backward and Forward Linkages:

Setting up of an enterprise has several backward and forward linkages. For example, the establishment of a steel plant generates several ancillary units and expands the demand for iron, coal etc., these are backward linkages.

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Role of Entrepreneurship in Economic Development

We Need Entrepreneurs — How Vital they are to our Economy:

The Great Recession has made it abundantly clear how important are entrepreneurs. We need their creativity to start businesses and create jobs. We do not do enough to cultivate this special breed of vital change agents on which our economic future depends.

Entrepreneurs are the lifeblood of any economy. Policies have to favour risk-taking and have to reward those with the energy and zeal to start businesses. Without entrepreneurs, there are no jobs. The large enterprises of today were all started by single entrepreneurs willing to take risks to claim the rewards from risk-taking.

Americans sometimes take for granted that there is gainful employment, but the Great Recession of 2008 made it abundantly clear that no one can take employment for granted. There are simply not always jobs available. It is imperative to continually increase the supply of jobs for a stable and productive society of working citizens.

Can the government create jobs? Actually no, although the politicians do try to “sell” their legislation by claiming they are creating jobs. In fact, the best the government can do is take money from citizens and pay a government official to do something that the private sector was not willing to pay for. Does this create a job? It does create a government job, but it does not create a ‘net’ number of new jobs.

This is so because when the government takes money from citizens, they have less to spend for their activities. Thus, they will not spend that extra tax money at the hardware store, the movies, a restaurant, fixing a car, etc. Jobs will be lost or not added at the hardware store, a restaurant, the movies, the car repair shop, etc.

An entrepreneur on the other hand creates a new product or service that citizens voluntarily wish to buy. They shift their expenditures to this new product or service and the entrepreneur hires people to satisfy the demand for the new product or service. Everyone is made better off because everyone chooses voluntarily what to buy and sell.

Rather than being forced into giving up a meal at a restaurant in order to hire a new government official, a person wants to give up that meal to buy the new product or service from the entrepreneur. A person who loses their job at the restaurant might work for the entrepreneur in the new business.

If the business is successful, it will add more and more jobs, creating a demand for employees. With greater demand for employees, their wages will rise. Google was just two employees about 15 years ago, now it has many thousands of employees in a new industry that did not exist 15 years ago. It was created by entrepreneurs.

What do we need to do to stimulate entrepreneurial activity to create more jobs? One, allow entrepreneurs to keep more of what they earn — lower tax rates. Create incentives for starting a business. Two, stimulate employment by making employees less expensive. If every business has to pay huge employer taxes (social security, Medicare, unemployment insurance, workers compensation) and be subject to lawsuit for the smallest of infractions, then those are disincentives to hiring workers in the U.S.

Reduce those legal costs to hiring. Third, reduce government mandated paperwork. The government requires a lot of paperwork to run a business. That takes time and detracts from the time for running a business. Starting a business is already more than a full time job; layering on useless paperwork is a big disincentive to the vital economic function of entrepreneur.

We need entrepreneurs to do their magic more now than ever. Let’s give them room and stay out of their way so that they can create great businesses and help us through this economic downturn.

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