Well, despite being less exciting than the part of productivity driven by breakthrough technological innovations, reallocative efficiency is important enough to drive macroeconomic performance. In fact, a group of leading economists have identified the slowdown in reallocative efficiency in the American economy during the last two decades as the central culprit for the decline in productivity growth that has occurred over this period.
And the decline in the firm start-up rate — our proxy for entrepreneurship — is the single biggest factor contributing to that decline. The second and more significant force driving productivity growth is innovation — the advance of new technologies, the creation of something new or improved, or doing something in a superior way. Innovation enhances the productive capacity of an economy while holding inputs capital and labor constant.
Growth in productivity raises the material well-being for a society, improves standards of living, and is the primary source of long-term economic prosperity. If innovation drives productivity, what drives innovation? Put simply, new ideas and knowledge, or more precisely, commercially useful ideas and knowledge. Schumpeter also wrote about the central role of entrepreneurs in driving this change:. And these types of innovations depend heavily on the contributions of entrepreneurs.
A large and growing body of evidence supports this understanding. Entrepreneurs play a disproportionate role in commercialization of new products, and essentially all of the most transformative innovations have been brought to the fore by entrepreneurs. During the industrial era, economies of scale prevailed — bigger was better, and the largest businesses employed most people. That began to change with the decline of manufacturing and a shift towards knowledge-intensive activities — smaller, more nimble firms started factoring more prominently in the American economy during the s.
By the s, the notion that small businesses were the engine of job creation had been set in stone — it was politically popular, consistent with the American cultural vision, and was empirically verifiable. The data, and narrative, were clear — small businesses accounted for the majority of employment and new job creation. Even though overall employment may decline, new firms can foster productivity [6]. This happens for two reasons.
First, new firms increase competition in the market and thus diminish the market power of incumbent firms, forcing them to become more efficient or go out of business. Second, only firms with a competitive advantage or firms that are more efficient than incumbents will enter the market.
The subsequent selection process forces less efficient firms both entrants and incumbents to drop out of the market. These effects were found for a sample of 23 OECD countries [6] , and in single country studies for Germany, the Netherlands, and Sweden.
In the initial years following entry, the productivity effect can sometimes be negative, probably a result of adjustments to routines and strategies in response to the new entrants. The overall positive relationship is particularly strong for entrepreneurs with high-growth ambitions and a high degree of innovation; the effect on productivity is weaker for entrepreneurs with low-growth ambitions. This pattern indicates that entrepreneurs generally increase the productive use of scarce resources in an economy, with the strongest impact coming from innovative entrepreneurs.
Existing firms often struggle to adjust to new market conditions and permanent changes, getting locked into their old positions. The entry of new businesses and the exit of worn-out firms can help to free firms from a locked-in position. Moreover, entrepreneurs may create entirely new markets and industries that become the engines of future growth processes.
Entrepreneurs share certain traits, such as creativity and a high tolerance for the uncertainty that comes with developing new products. Four personality characteristics are particularly important for becoming an entrepreneur: willingness to bear risks, openness to experience, belief in their ability to control their own future internal locus of control , and extraversion [8].
Entrepreneurs are significantly more likely to have these traits for the following reasons:. The success of each investment, particularly in innovative activities, is unpredictable. Every entrepreneurial decision is risky, and success is never assured. In contrast to ordinary managers, entrepreneurs often put their own funds on the line and risk losing money if the investment fails.
They have to be willing to bear risks. People who are open to experience—who seek new experiences and are eager to explore novel ideas—are creative, innovative, and curious. These attributes are vital for starting a new venture. Locus of control measures generalized expectations about internal and external control.
People with an external locus of control believe that their future is determined randomly or by the external environment, not by their own actions. People with an internal locus of control believe that they shape their future outcomes through their own actions. Entrepreneurs need to have an internal locus of control to propel them.
All of these traits—being assertive, seeking leadership, and developing networks—are important if an individual aims to become an entrepreneur. Empirical research reveals that the most important personality characteristics influencing entrepreneurial success are lower levels of agreeableness, higher levels of need for achievement, higher levels of internal locus of control, and medium levels of risk acceptance:.
Agreeableness refers to having a forgiving and trusting nature and being altruistic and flexible. Lower scores on agreeableness might help entrepreneurs survive by enabling them to bargain more for their own interest with their partners.
For entrepreneurs, a need for achievement is expressed in the search for new and better solutions and the ability to deliver these solutions through their own performance. The same holds for having higher levels of internal locus of control. Entrepreneurs with a medium range of risk tolerance have the lowest exit probabilities.
The relationship between risk tolerance and the probability of entrepreneurial success is not linear but an inverse U-shape [8]. Too low a risk tolerance leads to low-risk projects with low expected returns, which makes entrepreneurship an unattractive option to dependent employment, and excessive risk tolerance leads to projects that are very high risk with high failure rates.
Recent studies in Germany and in the UK have shown higher survival rates for new ventures in innovative industries [9]. There are several reasons why new businesses fail and close see Failure versus closure. Not everyone who tries to start a business has the right character traits to become a successful entrepreneur.
Other impediments to success are restricted access to capital, lack of customers, and discouraging regulatory hurdles, including unfriendly entry regulations and difficult and time-consuming requirements for registering property and obtaining or extending licenses or permits.
Self-employment is not synonymous with entrepreneurship. The level of entrepreneurial activity offers information about the dynamics of an economy, while the level of self-employment is not necessarily correlated with economic development. In fact, most economies with high levels of self-employment are less developed.
Less developed economies have fewer large firms which deliver economies of scale and scope and a greater number of small firms and self-employed individuals delivering fewer economies of scale and scope. Thus, a high level of self-employment does not necessarily correspond with a high level of entrepreneurial activity.
Regulatory obstacles to setting up a business, such as the need to buy permits or licenses and other entry barriers, may discourage entrepreneurship. Overregulation of commerce prevents entrepreneurship from flourishing because it increases the costs of starting a business and decreases flexibility and the ability to react quickly to opportunities as they arise, thus reducing experimentation.
Similarly, frequently changing, complex, unclear, or opaque regulations make it difficult to understand the legal environment for entrepreneurial activity. Sometimes, overregulation can even make entrepreneurship impossible by restricting or prohibiting entry into certain sectors of the economy through strict control of licenses. Permits and licenses can act as noncompetition agreements. Overregulated markets can turn potentially productive entrepreneurs toward unproductive non-wealth-creating activity.
And because there are many potential markets for high-tech innovations all over the world, innovative businesses deterred by overregulation in one market can go elsewhere. A high level of corruption can be a side effect of overregulation, with direct negative impacts on innovative activities [10].
Success in entrepreneurship and innovation—which are about new products or services—is uncertain. Thus if intellectual property rights are not adequately enforced, this adds to the uncertainty, which can build up to prohibitively high levels that discourage any potential innovators.
Skip to main content. Apply Program Guide. Investopedia describes four ways entrepreneurs benefit society: Economic growth : The success of the products and services created and sold by entrepreneurs cascades to other businesses and markets. Wealth generation : Entrepreneurs frequently target new markets and tap audiences outside the focus of established firms.
This creates new sources of revenue and profits. Social change : The innovative goods and services entrepreneurs offer reduce dependence on outdated processes and technologies. One example is the way smartphones have affected how businesses communicate with customers, employees, and partners. Community development : Entrepreneurs foster a sense of community among people with common goals and interests, whether in a single neighborhood or across continents.
Types of Entrepreneurship Most people think of an entrepreneur as someone with dreams of becoming a titan of industry. Small-Business Entrepreneurs The U. Investor Entrepreneurs The roles of investors and entrepreneurs are typically seen as complementary but distinct: Entrepreneurs seek investors to bankroll their new companies. Technology Entrepreneurs As new technologies permeate industries of all types, it could be said that all entrepreneurs are technology entrepreneurs in some regard.
Online Entrepreneurs Internet-based businesses offer many advantages to entrepreneurs, including low startup costs and the ability to establish an online presence quickly to take advantage of the fast pace of changing markets.
Entrepreneurship Styles Just as no two companies are identical, each entrepreneurial endeavor is as unique as the person behind it. These are among the most common entrepreneurship styles: Innovators have the potential to transform entire industries with novel ideas. Inventor Thomas Edison was the prototype for the modern innovative entrepreneur.
They also know how to develop and market their innovative products. Managers are often considered the antithesis of entrepreneurs, but management skills are paramount in bringing a great idea to fruition as a commercial product or service.
Manager entrepreneurs understand the importance of choosing and nurturing a good team of workers, and ensuring that they have the tools and resources to succeed. Opportunists identify an important business or technical problem, devise a winning solution to the problem, and plot a course to bring that solution to market in the form of a commercial product.
Opportunity entrepreneurs tend to have a business background rather than a technical one, so they may focus too much on short-term goals and lose sight of the larger picture. Revolutionaries are in many ways the antithesis of manager and opportunity entrepreneurs because they typically have technical backgrounds and may show disdain for established business practices.
While revolutionary entrepreneurs such as Apple founder Steve Jobs leave a legacy that is both broad and deep, they often need the help of nontechnical business people to realize their world-changing vision.
John D. Walt Disney is famous as a pioneering animator and entertainment mogul, but his greatest innovation may have been in recognizing the potential of merchandising his creations in the form of toys, clothing, and other items.
The Disney Company remains one of the largest and most successful entertainment enterprises in the world. Jeff Bezos founded Amazon out of a garage in Seattle in the s. Less than 25 years later, the company is one of the most valuable in the world, and Bezos is a billionaire many times over. Since his school days, Bezos has had a vision that extends beyond our planet, but he also has a practical side that realized the potential of the internet long before the rest of the world did. As Amazon achieved record-breaking growth early this century, Bezos simultaneously invested in a variety of endeavors outside online retail, including the commercial space project Blue Origin.
Entrepreneurs Arise from Diverse Backgrounds Any field can serve as a springboard for a successful new business enterprise. In addition to an abiding passion to see their innovations realized, entrepreneurs share certain characteristics: They are independent thinkers. They are optimistic and confident about their chances for success. They are creative problem solvers.
They are tenacious, visionary, and focused. They are more likely to act than to wait, and they attack challenges rather than avoid them. Entrepreneurship Skills Growing a business requires a diverse set of skills, but the one trait that ties them all together is leadership. These are the capabilities that entrepreneurs need to make their businesses thrive: Leadership : Entrepreneurs demonstrate their zeal for the enterprise in all of their interactions with investors, employees, and outside parties.
They are confident in themselves and in the business, and they are decisive yet adaptable.
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