Entrepreneurship is important for many reasons, not all of them quantifiable. New enterprises can supply a growing economy with new wealth and new jobs; they can create better jobs or bring whole new industries to emerging markets. They can open up new cultural possibilities in countries where risk aversion previously hampered entrepreneurial achievement. And a growing body of literature finds that entrepreneurship can have major, large-scale economic impact.
In a recent paper, Dr. Wong Poh Kam of the National University of Singapore examines the impact of entrepreneurship on productivity growth. The paper investigates the different paths by which entrepreneurship can create impact, beginning by breaking up entrepreneurial ventures along three key distinctions and noting that much common entrepreneurship research tends to focus on only certain segments of the entrepreneur population.
Dr. Wong chooses to take a more holistic view, arguing that entrepreneurship in general can improve productivity and inspecting five main ways in which entrepreneurship impacts productivity—both positive and negative. First, by introducing new knowledge and technology, entrepreneurs cause improvements in productivity as those technologies diffuse across the economy. Second, entrepreneurs are the primary source of what Joseph Schumpeter called “creative destruction”— by displacing incumbents, they reallocate economic resources in a more efficient (read: productive) way. Dr. Wong notes that, though this path leads undoubtedly to long-term productivity growth, it is likely to result in short-run productivity drawdowns.
Third, entrepreneurs create whole new industries. Instead of simply meeting existing demand more efficiently, they create new markets and consumption activities, driving growth. However, when firms try and fail at this cousre of action, they will negatively impact productivity through their failure. Fourth, when they don’t simply displace incumbents, they create pressure on existing firms to become productive, creating competitive pressure where non previously existed.
Lastly, Dr. Wong notes that both subsistence entrepreneurs and high-risk entrepreneurs introducing new technologies to market can negatively impact productivity. Subsistence entrepreneurs who are unable to find productive work are protected from “exit” (as well as more calamitous personal outcomes) by government programs, which nevertheless keep them in unproductive work that slows productivity growth. Additionally, the failure of high-risk market entrants results in value destruction, with similar unpleasant results.
Read the study here.