Entrepreneurs, those innovators with an innate desire to better the world, seize opportunities, and explore new horizons, often end up creating a new market or expanding an existing one. This has a ripple effect that invites consumers to spend on recently-launched products or services, which inevitably increases the gross domestic product (GDP) of a country.
A country’s GDP measures the economic growth of a nation by calculating the number of goods and services produced within a country during a given time period. Usually, but not always, a greater GDP means a higher standard of living in the respective country. Entrepreneurs play a pivotal role when it comes to growing a country’s GDP.
During economic hardships, entrepreneurs are more prone to solve consumer’s pain points, resulting in the continuation of the circular flow of income in a country. In the economy, the circular flow of income demonstrates how money moves through society, which also impacts the GDP.
In this article, we’ll highlight the importance of entrepreneurship and its relationship with a nation’s economy.
The Economical Impact of Small and Large-Scale Entrepreneurship
Many would argue that large companies such as Microsoft, Amazon, and Facebook are the primary contributors to the success of a nation’s economy. However, studies show the main contributors to the GDP in certain economics are actually small and medium enterprises (SMEs).
According to the U.S. Small Business Administration (SBA), these are businesses that are independently owned and operated, typically comprising fewer than 500 employees with little influence on their respective industries.
In 2019, the SBA reported small businesses to have generated 44% of all business activity and created two-thirds of net new jobs in the United States, which stimulates economic growth. The report also measured the US’ GDP at $5.9 trillion in the most recent data available. Since 99.7% of businesses in the United States are SMEs, it becomes evident that small businesses are the backbone of the economy.
On the contrary, the advantage large-scale enterprises have over SMEs lies in the fact that they typically provide higher wages to their workers. This results in consumers maintaining higher spending habits which directly impacts the GDP. Considering that only 16,055 companies fit the definition of large businesses in the United States, their GDP continues to grow at a steady rate of 2.5% every year.
Typically, large corporations have vast budgets which part of it gets spent on research and development (R&D). During the R&D phase, companies partner with universities, institutes, and other corporations to gather new business ideas and turn them into profitable business opportunities. In fact, research has shown that R&D increases total factor productivity, a factor that impacts the GDP, by increasing output per worker.
Both small and large enterprises have shown the importance of entrepreneurship to the economy in their own respective way. When working together, they create a greater impact on the economy by selling each other’s goods and services to advance their own supply chain.
What Role do Entrepreneurs Play in the Economy?
To bring forth a successful economy, entrepreneurs’ role of inciting innovation and enhancing total factor productivity (TFP), a measure of how much output can be produced in the economy, plays a pivotal role.
Innovation opens the door to new markets, products, and technologies. Thus, helping generate new wealth and increase a nation’s income. Innovation complements TFP by implementing technological advances to create a more efficient production process. This cycle helps achieve continuous improvement, which further helps the economy.
From the book written by economists Robert E. Litan and Carl J. Schramm titled, Better Capitalism: Renewing the Entrepreneurial Strength of the American Economy, “… entrepreneurs throughout modern economic history, have been disproportionately responsible for truly radical innovations – the airplane, the railroad, the automobile, electric service, the telegraph and telephone, the computer, air conditioning, and so on — that not only fundamentally transformed consumers’ lives, but also became platforms for many other industries that, in combination, have fundamentally changed entire economics.”
Entrepreneurship, Social Change, and the Economy
Entrepreneurship influences social change which, in turn, can shape the economy. Social change represents how cultural norms, human interactions, and behavior patterns change over time. They’re some of the most profound changes in society because it transforms the way consumers think, act, and buy.
Our most recent social change was the immense amount of employees adapting to work remotely. According to the International Workplace Group, 74% of respondents called remote workplaces the “new normal.” And 80% said they would turn down an employment offer that didn’t offer flexible working.
How did entrepreneurs contribute to this social change?
Not only did entrepreneurs create new markets and employment opportunities, but they were also able to influence society to get involved in the gig economy. The gig economy is where workers can work independently, such as a freelancer, which offers high flexibility. From their marketing campaigns, companies like Uber, Airbnb, and Fiverr hooked consumers on the benefits of having a side gig. Today, 36% of U.S. workers report having a gig in some capacity — an increase from 15.8% in 2015.
The bottom line is that the importance of entrepreneurship can determine the outcomes of the economy and create an impact on society. To learn more about related economic and business matters like this, be sure to subscribe to our newsletter. Have any questions, comments, or ideas? Contact us today.