A General Theory of Entrepreneurship - Example

Growth businesses are different Name Institution Course Tutor Date Introduction Currently, experts in economic development are relying on putting up businesses from the ground and encouraging the growth of enterprises in existence. The drive behind this approach is not only to support but also to develop entrepreneurs as well as small businesses. Secondly, it is aimed at recruiting highly skilled and educated human resources, and expanding and improving infrastructure, all meant to increase economic growth (Edmiston, 2007). In relation to these efforts, observers believe that new enterprises grow and help in creating job opportunities as well as social and economic benefits to citizens and country in general. However, not all new businesses grow to this level as most of them collapse before realizing these goals. In any case, only few new businesses grow and generate employment as well as other benefits like social and economic benefits. This essay critically discusses the validity of this statement with reference to different academic research material. New businesses grow and create jobs and other benefits Apparently, new businesses especially small and medium-sized enterprises (SMEs) play an important role in economic development in many countries. According to Pull (2003) SMEs contribute to over 95% of enterprises and about 70% of jobs in most countries. The effect of business establishments on job creation is assessed based on changes in net employment at any time. For instance, since mid 1980s up to early 1990s, small business establishments alone in all countries exhibited faster net employment growth compared to existing larger enterprises (Edmiston, 2007). It is estimated that new small business establishments account for between 40% and 80% of general manufacturing employment in most economies. The U.S Census Bureau indicates that most of the net new jobs are created by firms with not less twenty employees (Edmiston, 2007). According to statistics, from 1990 to 2003, small and mid-sized firms contributed to more than 79% and 13% respectively of the net new jobs despite the fact that they employed fewer jobs in 2003. In addition, large firms with more than five hundred employees accounted for over 7% of net new jobs (Edmiston, 2007). This is evident that new businesses play a significant role in creation of employment. Sometimes it is difficult to reconcile net new job figures at a first glance considering the fact that, during a particular period, the share of total employment for small enterprises essentially fell. However, this does not mean that their contribution to net new jobs and other related benefits can be disregarded (Mitra, 2003). In stead, this can be well understood by considering the concept of migration of enterprises across size and classes on a yearly basis. In every year, it is obvious that some small businesses will expand beyond their normal capacity and join larger size classes (Edmiston, 2007). This kind of migration reduces the share of businesses in smaller class size. In addition, new small enterprises are developed and this increases the amount of jobs in the class of small enterprises (Mitra, 2003). Most of business establishments also represent the self-employed. Some of the people who are self-employed in these new business enterprises have other jobs also. However, for many, get their income from self-employment. Undoubtedly, many entrepreneurs commence their businesses as self-employed individuals and obtain new employees as their trade grows (Headd, 2000). Thus, when new businesses are started, the expectation is that more people will be employed. Even if the group of people who are self-employed work without a payroll, the fact is that such employment is their source of income, which is a benefit to them. According to Edmiston (2007) in 2004, over 19.5 million people fall under self-employment or did business without a payroll. This figure matched up to a compound yearly growth rate of close to 3.4% over the same period. According to Zoltan (2007) to determine whether starting new businesses is good for economic growth and development depends on the interpretation of the term entrepreneurship and the perception about the link between entrepreneurship and economic development. In most cases Entrepreneurship related to self employment in a very small scale industry or agriculture may not promote economic development since it is difficult to link the activity to development. In deed, self employment starts to reduce when economies become further developed (Zoltan, 2007). Nevertheless, it is clear that the ration of opportunity to necessity entrepreneurship is a significant indicator to economic growth and development. Therefore, as more individuals become actively engaged in opportunity entrepreneurship and as most individuals abandon necessity entrepreneurship at any time the more the economy will develop (Shane, 2003). Although traditional analyses concentrate more on large corporations and their impact economic development, they tend to disregard the innovations as well as competition the small new businesses present to the economy in general (Acs, Audretsch, Braunerhjelm & Carlsson, 2004). The ability of large corporations to influence national economic growth depends on overall business conditions existing in specific country. In addition, large corporations play a significant role to economic growth and development mainly through the increment of new business establishments, which lead to creation of job opportunities (Acs & Armington, 2004). According to Zoltan (2007) new technologies are normally introduced in new establishments which help to increase productivity in the country. The new plants that bring social and economic benefits to the economy can either be built by domestic companies or by multinational corporations. Often, the decision for potential entrepreneurs to start new business is determined by more features that exist within the business environment. These characteristics are known as Entrepreneurial Framework Conditions and they exist is every country (Parker, 2004). These conditions include the skills and motivations of starting a business and the capacity of the country to encourage entrepreneurship. In deed, the conditions have effect on the entrepreneurial process economics. Zoltan (2007) argues that when these conditions are well combined result to offshoot businesses, which then enhance competition and innovation in the marketplace. Ultimately, these result to national economic growth in terms of job creation and other economic and social benefits. All new businesses do not grow and create employment and benefits However, while it is assumed that starting new businesses to take advantage of business opportunity lead to economic growth and development in the country it is possible that not all of them bring about economic benefits. Most of new businesses do not survive in the long run due to various factors (Edmiston, 2007). Therefore, we may not expect that any new business will create economic and other benefits to individuals in a country. As Fisk (2008) indicates, new businesses need to adopt a more creative approach, sustain innovation and exploit new markets for them to realize future cash flows and to be able to survive even in the future. There is a big difference in profitability, survival as well as growth of SMEs due to problems of financing. These firms are normally faced with higher interest rates and credit rationing because of insufficient collateral (Fisk, 2008). Thus, issues of financing are much different between new and existing enterprises, also between firms that grow slowly and those that experience rapid growth (Enkel & Goel, 2012). This implies that new businesses may actually fail to produce relevant social and economic benefits due to the challenges of growth. The organizational structure for new businesses determines the success and the benefits the businesses avail to individuals and economy as well. In most cases, some new ventures lack clear roles and responsibilities, and mechanisms for decision making within organizational structure which hinder then from functioning effectively (Enkel & Goel, 2012). This definitely deters such new establishments from achieving economic benefits. Alternatively, venturing activities for new businesses are sometimes poorly coordinated and makes it impossible to adhere to the right procedures of conducting business. Therefore, entrepreneurs encounter inherent risk which affects their success and in most cases starting from scratch results to high level of uncertainty (Vintergaard, 2005). Innovation is the hallmark for a successful business (Edmiston, 2007). New businesses that survive are those that continue to innovate and develop not only new products but also processes to meet current trends in the market (Edmiston, 2007). Large existing firms are better placed to make innovations because of their capital base and if they operate in a market that is concentrated compared to new businesses. This means that the success of new establishments is not guaranteed. Although some businesses are innovative, lack of innovativeness for some SMEs limits their growth potential (Chowdhury & Overby 2000). New businesses, especially SMEs encounter regulatory burdens since they are not well equipped to handle problems that arise from regulations. In some instances, such firms are forced to access information about regulations at high cost. In addition, compliance procedures related to new technologies and Research and Development (R&D) are costly and even lengthy (Wang & Poutziouris, 2010). Other barriers to the growth of SMEs include indirect labour costs, limited markets, and inability to recruit qualified and skilled employees. Therefore, it may be difficult to predict the continued existence of most new SMEs with absolute certainty. Personal view According to my own understanding, creating new businesses is good as it leads to economic growth and development, especially in terms of new employment opportunities to people. Despite the fact only a few new establishments grow to maturity and create most of economic and social benefits, they should always be encouraged. A part from just creating new jobs, new business establishments also account for value added although this varies among industries. Generally, SMEs contribute between 25% and 35% of the direct exports across the world (Edmiston, 2007). Although most exports are concentrated around only a few larger SMEs, the growth of exports is beginning to take place even in smaller SMEs. Therefore, ideally, we would expect to see new businesses grow and create many social and economic benefits to individuals and their country as well (Deakins & Freel, 2003). The share of employment of new SMEs is normally more than the share they have in value added, meaning that the measure of labour productivity is lower in smaller enterprises compared to larger ones. However, it may not be right to conclude that small enterprises obviously less than existing large enterprises to productivity growth to the economy. Realistically, changes in the overall productivity occur as a result of individual enterprises increasing the levels of their productivity and due to them expanding and replacing low-productivity firms. In addition, new businesses take the place of the exits due their high level of productivity (Edmiston & Turnbull, 2007). Therefore, I can argue that since SMEs comprise of many new businesses and replace exits they play an important role in the competitive process that leads to overall productivity growth. Although, in reality only a few businesses grow and contribute to economic and other benefits, it is appropriate to ask ourselves why most business don’t survive and how they can be supported to grow (Wang & Poutziouris, 2010). Most businesses collapse due reasons identified above but these can be improved to encourage growth of new SMESs. Through best practice policies like improving financing, technology, the business environment, management capabilities and access to markets many new businesses will grow and create many jobs and other social and economic benefits (Wang & Poutziouris, 2010). Therefore, we can not rule out the contribution of new businesses to economic growth and development. Conclusion Conclusively, creation of new businesses in a good because of the benefits associated with them. Apart from just leading to creation of new job opportunities, new business establishments also lead to increase in overall productivity growth and exports. However, due to availability of risks, especially inherent risks in new establishments, not all businesses grow and create jobs and other benefits. This is a reality which all entrepreneurs have to come to terms with when starting up businesses. Therefore, this does not mean that entrepreneurship should be discouraged at all. Even those businesses that survive experience similar challenges but through best practice policies management capabilities, innovation, R&D and access to markets they are able to grow. As long as new businesses are supported to grow they will always benefit people and the economy as well. References Acs, Z 2007 “How is entrepreneurship good for economic growth?,” Innovations, 1(1): pp. 1-21. Acs, Z, Audretsch D, Braunerhjelm P & Carlsson B 2004 “The Missing Link: The Knowledge Filter and Entrepreneurship in Endogenous Growth,” Discussion Paper, Center for Economic Policy Research, London, UK. Acs, Z.J & Armington C 2004 “Employment Growth and Entrepreneurial Activity in Cities,” Regional Studies, 38(8): pp.911-927. Chowdhury, S & Overby, J 2000 “The Competitive disadvantages of small businesses of twenty first century. Deakins, D & Freel, M 2003 “Entrepreneurship and Small Firms,” McGraw-Hill, London. Edmiston, K 2007 “The role of small and large businesses in economic development,” Available at SSRN 993821. Edmiston, K.D & Turnbull, G.K 2007 “Local Competition for Economic Development,” Journal of Urban Economics, forthcoming. Enkel, E, & Goel, S 2012 “Smoothing the corporate venturing path: rules still count,” Journal of Business Strategy, 33(3): pp.30-39. Fisk, P 2008 “Seeing things differently: New perspective for business to drive more radial innovation and growth. Headd, B 2003 “The Characteristics of Small-Business Employees,” Monthly Labor Review, 123(4): pp. 13-18. Miltra, A 2003 “Establishment Size, Employment, and the Gender Wage Gap,” Journal of Socio-Economics, 32(3): pp. 317-330. Parker, S 2004 “The Economics of Entrepreneurship and Self-employment,” Cambridge, MA: Cambridge University Press. Pull, K 2003 “Firm Size, Wages, and Production Technology,” Small Business Economics, 21(3): pp. 285-288. Shane, S 2003 “A General Theory of Entrepreneurship: The Individual-Opportunity Nexus,” Cheltenham: Edward Elgar. Vintergaard, C 2005 “Opportunities in corporate venturing - actors creating passageways,” International Journal on Innovation Management, 9(2): pp.215-240. Wang, Y, & Poutziouris, P 2010 “Entrepreneurial risk taking: empirical evidence from UK family firms,” International Journal of Entrepreneurial Behaviour & Research, 16(5): pp.370-388. Read More