What are the economic benefits of entrepreneurship?
The problem with making entrepreneurship the centerpiece of a community or region’s economic development scheme, it is said, is that it just doesn’t matter that much to the economy. It’s certainly valid to want to make investments where they have the greatest opportunity of generating high returns. But is it true that entrepreneurship is of only minor importance to the economy? In a word, no.
The Global Entrepreneurship Monitor (GEM) Project is a comparative international study assessing entrepreneurship’s importance to economies worldwide. They conclude that:
* the correlation between the level of entrepreneurial activity and economic growth is greater than 70 percent;
* all nations with high levels of entrepreneurial activity have above-average rates of economic growth; and
* economies with higher rates of entrepreneurial activity are stronger and more competitive. (GEM 2000 Executive Summary as cited in "The Case for Entrepreneurship," June 2003)
What about the U.S. economy? The 2003 GEM report shows the United States to have the seventh highest rate of entrepreneurial activity out of the 31 countries surveyed and the highest rate among the G7 countries (GEM 2003 Executive Summary as cited in Dabson’s "New Jobs, New Strategies: Recruitment, Regionalism and Rural Development," April 2005). According to Chad Moutray, Chief Economist, U.S. Small Business Administration:
* 60 to 80% of net new jobs are created by small firms;
* the bulk of these small firms are under two years old; and
* small firms are driving innovation with more important patents than large company patents.
According to the Small Business Administration’s Office of Advocacy (or David Birch, "Job Creation in America: How Our Smallest Companies Put the Most People to Work," Fortune, 2002), 44 percent of new jobs in the United States are created by startup companies, 55 percent by the growth of existing firms, and only 1 percent by relocation. These startup firms create about 70 percent of new economic growth (February 2004).
Contrary to popular misconception, most new businesses don’t fail. According to the U.S. Small Business Administration (2002), 66 percent of new businesses survive for two years or more. Many are sold to other firms or morph into different enterprises as they outgrow their original structure and seize new market opportunities. It’s been estimated that by the year 2025 one-half of the North American workforce will be self-employed (Wall Street Journal, 9/12/2000).
Researchers offer insights into entrepreneurship in terms of both breadth and depth (Sarah Low, Kansas City Federal Reserve Bank, Mainstreet Economist, September 2004). Breadth is the level of entrepreneurial activity, whereas depth measures the value created by entrepreneurs. We’ve provided some sense of the breadth of activity, but what about the depth? David Birch coined the term "gazelles" to describe those relatively few entrepreneurial companies that have extraordinary growth over a sustained period. Also known as entrepreneurial growth companies or EGCs, these firms have a remarkable impact on our economic growth. According to the National Commission on Entrepreneurship, EGCs account for:
* two-thirds of all job creation;
* two-thirds of business growth; and
* more than one-half of all business innovation.
(NCOE’s "High Growth Companies: Mapping America’s Entrepreneurial Landscape," 2001, as cited in "The Case for Entrepreneurship," June 2003)
Locally owned and managed businesses have a unique place in a community’s economy. They are less likely to relocate as the business grows and changes. Revenues are more likely to be reinvested locally. Employment opportunities for young people add a level of dynamism that can help sustain a community. The sense of community tends to be stronger, enhancing charitable causes and civic investments. They provide a level of stability and community spirit that becomes infused in other public organizations and businesses and leads to a stronger quality of life.