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Link Between Entrepreneurship and Economic Development

Paper Type: Free Essay Subject: Business
Wordcount: 2376 words Published: 18th Jun 2018

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In the influential article by Solow (1956), a structure was given for the readers to have a clear view of the linkage between economic growth and the basic important factors of production. He suggested ways in which maximum economic growth is easily achievable through his dynamic state of the art framework. Solow’s model named as the growth accounting framework, includes two factors; physical capital and labor precisely, whereas technological change being the implicit factor.

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One of the basic purposes is to tell the reader about the entrepreneurial trends going on in the world. Entrepreneurship is a central focus in the growth policy which is well matched in the Solow’s model and it is also linked to the economic growth at the same time. It is linked to the economic growth in the sense that it is facilitating the current organizations through spillover of knowledge and in turn increasing the economic growth.

According to Acs (2004) and Audretsch (2006) the term knowledge filter for the commercialization of the firm in terms of R&D, human capital, university research etc may not be the only sources of economic growth. It has been noticed that the investment in new knowledge has been substantial resulting in growth and decrease in unemployment, but it blocks commercialization of new knowledge investments in turn reducing innovative activity and ultimately declining growth. The growing of entrepreneurship policy to promote economic growth is an attempt to create entrepreneurship capital, or the ability of an economy to generate the start-up of new firms.

Porter (1990) said that Entrepreneurship is ‘at the heart of national advantage’. The role of entrepreneurship motivates economic growth through innovation and sustaining of competition among competitors.

Entrepreneurship is an important part of industrial growth and the backbone of any country for its economic development. The spirit of entrepreneurship brings about enthusiasm, persistence and the ability to seek entrepreneurial opportunities that lead to success. A country’s ability to generate a steady stream of business opportunities can only come about when its people take to entrepreneurial activities. Entrepreneurs are essentially the engines of growth for a country.

Entrepreneurship and entrepreneurs are vital drivers of economic growth, employment, innovation and productivity and it has been long understood by analysts and economic theoreticians. Entrepreneurship is the driving force behind the growth in the modern economy.

Taking into consideration the topic I have chosen the following dimensions:

  • Entrepreneurship
  • Commercialization
  • Investment
  • Capital
  • New firms

Now I will thoroughly discuss each dimension separately


According to the Small Business service 2002, the term ‘entrepreneurship’ is derived from the word ‘entrepreneur’, and it is commonly referred to as the activity that individuals connect in that is often characterized by a unique reflection, innovative approaches and risk taking in order to create a new business or grow an existing business. It can be defined as a managerial performance that time after time develop opportunities to bring results beyond the individual’s own capabilities, which involves creativity and innovation says Thompson (1999) and it is also a focus on change and opportunity as well as organization-wide management says Wickham (2001).

Entrepreneurship is an attitude that covers an individual’s motivation and capability, independently or within the context of an organization and to spot an opportunity and to pursue it in order to create wealth or economic success. It is advance thinking outside the box leading to new ideas, new products or services. Better production methodologies and efficient ways of doing things also helps in economic growth according to Khan (2008).

Cantillon, (1700s), used the term ‘entrepreneur’ to refer to a person who took an active risk-bearing role in pursuing opportunity. It is not a 21st century phenomenon as Coulter (2003) says. Deakins and Freel (2003) in their research found out that entrepreneurship acts as a catalyst in bringing about an economic change and helps in economic development.

Entrepreneurship is the apparent aptitude and enthusiasm of persons, on their individual base, in groups, inside and outside existing organizations to make out and generate new economic opportunities (new products, new production methods, new organizational schemes and new product-market combinations), and to introduce their ideas in the market, in the face of uncertainty and other obstacles, by making decisions on location, form and the use of resources and institutions says Wennekers and Thurik (1999).

Schumpeter in his theory of Economic Development emphasizes the role of the entrepreneur as basic cause of economic development. He describes how the innovating entrepreneur challenges existing firms; by introducing new inventions that make current technologies and products obsolete. This process of creative destruction is the main characteristic of what has been called the Schumpeter Mark I regime. This process of creative accumulation is the main characteristic of the Schumpeter Mark II regime.


Commercialization is a process that helps firms achieves a good name in the market economy. New technologies are introduced in the market and they further help in attaining much public attention. Commercialization has been occurring throughout the world and proves helpful in getting much surface attention. The basic component of commercialization of innovation includes patent protection and capital investments. According to the WIPO2007; National Governor’s Association 2008, both the patent requests along with the easy governmental policies for promotion of capital investments in concept to the new commercial applications are rising.

Economic development is possible through successful commercialization. It is a cycle as commercialization increases the economic value by creating high skilled people which in turn is the basis of highly waged jobs and both these lead towards the stability of the economy. New technology in commercialization is playing its vital role as this knowledge when applied appropriately and in the right direction helps in the growth of the economy.

A five stage model of commercialization process according to Jolly (1997) has been outlined in order to attain market entry of new procedures, goods and techniques. These stages are as follows:

Imaging stage

This is the first stage in which the researcher finds the basic research which relates to a new concept. Technology exploration is the main purpose of this stage.

Incubating stage

In the incubating stage, the already existing techniques and technologies are examined, the ones that are being generically used and tested.

Demonstrating stage

Prototypes are created in this stage of the new concept.

Promoting stage

This stage is the beginning of the entry and expansion of the prototypes being created in the demonstrating stage.

Sustaining stage

The last stage according to Jolly tells us that whether the prototype is able to sustain the in the long run or not (David A. Boulay; Charles T. Worley; Meagan Barnes , 2008)


Investment and entrepreneurship are interrelated with each other. Entrepreneurship is not possible without investment. Investment is required for production of new products and services. It is also required for enhancing knowledge and technology which helps in innovation.

In intrapreneurship: conceptualizing entrepreneurial employee behavior by Jeroen de Jong Sander Wennekers in (2008), the major inconsistent elements of entrepreneurship are the investment of personal financial means and the related financial risk taking, a higher degree of self-sufficiency, and legal and fiscal aspects of establishing a new independent business.

New ventures started by entrepreneurs are often risky and they require heavy investment. It is a risk that entrepreneurs take; in order to bring out a new innovation in the form of a new product or new service or even a new methodology of production, into existence. The transformation of knowledge into a new product is risky and if the idea clicks the investment is turned into profit which helps in economic development.

According to Baumol (2002a, 2002b) the entrepreneurial function of risk taking in the innovation process from the role of larger current corporations that are engaged into routine processes of large scale innovation.

In “the impact of entrepreneurship on economic growth” by M.A. Carreea b.c and A.R. Thurika, a large amount of companies guide to high interest in huge amount of investment and research and development programs leading to high growth where as less amount of investments in research and development lead to slow growth.


Capital is the financial asset that is used for investment in the entrepreneurial activity to start a new venture of innovate the existing one. However, entrepreneurial and risk taking behavior certainly makes apparent itself in the creation of new ventures. Higher the entrepreneurship intensity is, the higher the level of the hidden variable “entrepreneurship capital” becomes. Entrepreneurship capital means the ability for economic agents to generate new firms. Entrepreneurship has typically been referred to as an action, process, or activity whereas entrepreneurship capital is the ability of the people to generate new firms and help in the economic prosperity of the world. According to G. Hofstede (2002), entrepreneurship capital can also be a part of stock capital as it reflects other numerous factors such as legal, institutional and social factors. A recent study shows that entrepreneurship capital is somewhat a missing link in describing the variations in economic performance says Acs and Audretsch (2003)

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From the economic perspective, Hebert and Link (1989) distinguish between the supply of financial capital, innovation, allocation of resources among substitute uses and decision-making. Such perspectives generate a high propensity for economic agents to start new firms can be characterized as being rich in entrepreneurship capital. Entrepreneurship capital exerts a positive impact on economic output for a number of reasons. The first being mechanism for knowledge spillovers. Romer (1986), Lucas (1988 and 1992) Grossman and Helpman (1991) recognized that knowledge spillovers are an important mechanism underlying growing expansion.

A second way that entrepreneurship capital put forth a positive impact on economic out-put is through the increased competition by high number of enterprises. Jacobs (1969) and Porter (1990) argue that competition is more conducive to knowledge externalities than is local monopoly.

A third way that entrepreneurship capital generates economic output is by providing variety among the firms. Not only does entrepreneurship capital generate a greater number of enterprises, but it also increases the multiplicity of enterprises in the location. A key assumption made by Hannan and Freeman (1989) in the population ecology literature is that each new organization represents a unique approach.

Entrepreneurship Capital and Economic Growth by Audretsch and Keilbach tells that entrepreneurship capital contributes to output and growth by serving as a means for knowledge spillovers, increasing competition, and by instilling diversity leading to economic growth.

New Firms:

Schumpeter (1942) gave his work in a very influential manner and since then entrepreneurship has been the hot topic in economic growth and development. With the advent of entrepreneurship, new firms and new employment opportunities are created which brings with it productive innovation says Baumol (2002). It is important to understand factors that promote new firms to economic development. High level of new firms is created with entrepreneurial activities which significantly promotes economic vitality and shows that the economy is dynamic rather than being static. Different factors affect the creation of new firms such as unemployment, population growth, industrial structure, and human capital, the availability of financing and entrepreneurial individuality. Building on the contributions of urbanism Jane Jacobs, Lee, Florida and Gates (2002) showed that social diversity and human capital have constructive relationships with regional innovation production measured by per capita patent production. According to Rynolds, (1994) factors like unemployment, population, industrial scattering and financial availability are important in terms of new firm formation. Armingten and Acs (2002) found that industrial intensity, income growth, population growth and human capital were closely related to new firm formation. Kirchhoff (2002) found academic research and development expenditure to be associated with rates of new firm structure across regions.

Studies noted the significance of the function of association in entrepreneurship. Saxenian (1999) found that extensive networks of Chinese and Indian workers help people start new firms with the help of contacts and financial support in Silicon Valley. STUART and SORENSON (2003) argue that businesses cluster because geographical closeness enables them to use ‘social ties necessary to gather together essential resources’.


Entrepreneurship is a vast topic which covers the major aspects of economic growth. Entrepreneurship is possible with the help of new innovative ideas that gives birth to new firms. For making the innovation real, investment is required in capital and assets. All these dimensions lead towards economic growth of the world.



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