Entrepreneurship’s importance to an economy and the society in which it resides was expertly articulated in 1934 by Joseph Schumpeter, an Austrian economist who did the majority of his work at Harvard University. In his book The Theory of Economic Development, Schumpeter argued that entrepreneurs develop new products and technologies that over time make current products and technologies obsolete. Schumpeter called this process creative destruc- tion. Because new products and technologies are typically better than those they replace and the availability of improved products and technologies in- creases consumer demand, creative destruction stimulates economic activity. The new products and technologies may also increase the productivity of all elements of a society.54
The creative destruction process is initiated most effectively by start-up ventures that improve on what is currently available. Small firms that prac- tice this art are often called “innovators” or “agents of change.” The process of creative destruction is not limited to new products and technologies; it can in- clude new pricing strategies (e.g., Netflix in DVDs), new distribution channels (such as e-books for books), or new retail formats (such as IKEA in furniture and Whole Foods Market in groceries).
Now let’s look more closely at entrepreneurship’s importance.
1. Economic impact of Entrepreneurial Firms
For two reasons, entrepreneurial behavior has a strong impact on an economy’s strength and stability.
Innovation is the process of creating something new, which is central to the entrepreneurial process.55 According to the Small Business Administration (SBA) Office of Advocacy, small innovative firms are 16 times more productive than large innovative firms in terms of patents per employee. Small firms tend to be particularly innovative in certain industries, as measured by patent activity. For example, small firms account for more than 32 percent of patents in both smart grids and solar energy and 15 percent of patents in bat- teries and fuel cells.56
Job Creation According to the SBA, small businesses create a substantial number of net new jobs in the United States. Firms with 500 or fewer employ- ees create 65 percent of new jobs on an annual basis, while firms with 50 or fewer employees create 32 percent of new jobs. The only downside of small business jobs is that employee pay tends to be less than is the case in larger companies. According to the SBA, weekly wages averaged $679 at businesses with 5 to 9 employees, $815 at businesses with 50 to 99 employees, and $1,000 for firms with over 250 employees.57 Still, small businesses are held in high regard in terms of job creation.
2. Entrepreneurial Firms’ impact on Society
Entrepreneurial firms’ innovations have a dramatic impact on a society. Think of all the new products and services that make our lives easier, enhance our productivity at work, improve our health, and entertain us. For example, Amgen, an entrepreneurial firm that helped pioneer the biotechnology industry, has produced a number of drugs that have dramatically improved people’s lives. An example is NEUPOGEN, a drug that decreases the incidence of infection in cancer patients who are undergoing chemotherapy treatment. In addition to improved health care, consider smartphones, social networks, Internet shop- ping, overnight package delivery, and digital photography. All these products are new to this generation, yet it’s hard to imagine our world without them.
However, innovations do create moral and ethical issues with which societies are forced to grapple. For example, bar-code scanner technology and the Internet have made it easier for companies to track the purchasing behavior of their cus- tomers, a fact that raises privacy concerns. Similarly, bioengineering has made it easier to extend the shelf life of many food products, but some researchers and consumers question the long-term health implications of bioengineered foods.
3. Entrepreneurial Firms’ impact on larger Firms
In addition to the impact that entrepreneurial firms have on economies and societies, they also positively impact the effectiveness of larger firms. For exam- ple, some entrepreneurial firms are original equipment manufacturers, producing parts that go into products that larger firms manufacture and sell. Thus, many exciting new products, such as smartphones, digital cameras, and improved pre- scription drugs, are not solely the result of the efforts of larger companies with strong brand names, such as Samsung, Apple, and Johnson & Johnson. They were produced with the cutting-edge component parts or research-and-develop- ment efforts provided by entrepreneurial firms.
The evidence shows that many entrepreneurial firms have built their entire business models around producing products and services that increase the efficiency or effectiveness of larger firms. For example, an increasing number of U.S. firms are competing in foreign markets. These initiatives often require firms to employ translators to help them communicate with their foreign coun- terparts. SpeakLike, a 2008 start-up, has created an online service that pro- vides real-time translation services for two or more people who speak different languages. This cost of this service is considerably below what it costs to employ human translators. A large percentage of SpeakLike’s customers are large firms. Similarly, Box is an entreprenurial start-up that allows clients to store data files in the cloud. The majority of Fortune 500 companies are now Box subscribers.
Source: Barringer Bruce R, Ireland R Duane (2015), Entrepreneurship: successfully launching new ventures, Pearson; 5th edition.