Wednesday, October 19, 2011

Does Entrepreneuship Stimulate Economic Growth ?

Most people I speak to, seem to think that it is obvious that entrepreneurship is one key to economic growth. This is a very modern view-point in that the entrepreneur was never really considered in neo-classical economic theory.  I don't however believe that the answer to this question is as obvious as most people may think.

Economic growth is measured by a nations Gross domestic Product (GDP) which as the name suggests measures the economic output of the nation. So there must be some production or output for this domestic product to grow, this implies that the workers of the nation are adding value to some resource which previously had a lesser value (if any). This might be digging a huge whole and extracting diamonds, which are then polished and sold, or it might be using intellect and some intellectual property which is then sold around the world. Either way, no matter how you look at it, something has to be created or some value added.

If a nation has a large percentage of entrepreneurs who are not especially productive or successful, there will not be much economic growth. In fact they may be using important human and other resources in a very unproductive manner and ultimately do more harm than good. For one thing, unsuccessful entrepreneurs place a burden on the administration system (processing bankruptcy for example) they also eat up valuable opportunity cost (they could have been doing something productive in the meantime). Furthermore in nations where entrepreneurs are not especially innovative, i.e they simply replicate what already exists, they simply saturate the market with more of the same - which is not sustainable in the long run.

For entrepreneurs to contribute to sustained economic growth, they need to be more successful than not and produce a some kind of "net productivity". The role of good government is thus not only to stimulate entrepreneurs, but also to help them be successful. So some co-ordination and collaboration is essential for this to happen.