Role of Entrepreneurship in Economic Development

Role of Entrepreneurship in Economic Development

This article explains the role of entrepreneurship in economic development.

Table Of Contents

What is Entrepreneurship?

Entrepreneurship is the process of identifying a business opportunity and assuming the risk of creating and running a business in order to exploit that opportunity. There are two types of entrepreneurs, the innovative one who brings new products and services and the replicative one who enters existing markets with unique selling propositions. Some people become entrepreneurs out of necessity when there are no other options for work whilst others solely seek to exploit opportunities in the market.

Role of Entrepreneurship in Economic Development

In many countries, entrepreneurs are regarded as the fresh blood that keeps societies healthy and flourishing, and their entrepreneurship role in economic development cannot be overemphasised. Economic development is concerned with improving the standards of human lives through raising their capabilities, self-esteem, freedom and choice; entrepreneurs do just that. Through new products, creating jobs, and social change, entrepreneurship raises the quality of life for many.

New Products and technologies

The first role of entrepreneurship in economic development is introducing innovative technologies, new products or services and opening up new markets. In India for example, only a few IT firms founded the Indian IT industry back in the 1990’s. Overtime the IT industry and related companies grew. The radical innovations that arise from entrepreneurship result in economic growth. Unlike existing firms who are less likely to innovate due to organisational inertia, new firms look out for opportunities and better ways to operate. Existing firms miss out on opportunities to adopt new ideas sometimes intentionally and this stagnates an economy. People like Jack Ma (Alibaba), Steve Jobs (Apple) and Bill Gates (Microsoft) are examples of entrepreneurs who have contributed to economic growth and development through their ventures.

Increasing competition

Increasing competition is another role of entrepreneurship in economic development. Entrepreneurship may threaten existing firms, but it is necessary for a country to remain competitive. New businesses that are set up by entrepreneurs increase competition for existing businesses. This results in reduced prices and a variety of quality products and services for consumers. A survival of the fittest environment is created as a result of competition between new and old firms. Consequently, old firms are forced to adjust their products and processes in order to retain their market share. If the old firms do not improve on productivity they will not survive in the competitive environment. In the end, scarce resources are put to their optimum use whilst consumers benefit from superior products and services.

Creating employment

In addition to increasing competition and introducing innovative technologies, the 3rd role of entrepreneurship is creating employment. Entrepreneurs create jobs for the unemployed especially in underdeveloped countries where unemployment is a chronic issue. The businesses set up by entrepreneurs create jobs directly and indirectly for people or other businesses that may benefit. This way a country’s economy is stimulated. Through the reduction in unemployment, the average income level of a country can increase, in turn, the living standards of many people can be improved in both the short-run and long-run.

Creating structural change

The 4th role of entrepreneurship in economic development is accelerating structural change by replacing crippled firms with new ones. Old firms struggle to adjust to new market conditions. They fail to make necessary internal changes and lack the ability for creative destruction. Entrepreneurship creates new markets and industries that become engines for economic growth and development.  Online markets such as Amazon, eBay and Alibaba are examples of structural change in the retail industry that came about from entrepreneurship.

Social Change

In addition to the above, another role of entrepreneurship in economic development is social change. Entrepreneurs, with their new products and innovative processes encourage people to move away from old fashioned ways of living. Entrepreneurs improve people’s quality of life through their offerings. The introduction of cars completely changed the way we travel, instead of using time-consuming methods cars brought about convenience. The use of mobile phones has transformed work and play all over the world. Overall, the innovative products that come with entrepreneurs improve the daily lives of many thereby promoting economic freedom. Instead of focusing on time consuming inefficient ways of living entrepreneurs, with their products, allow people to focus on other issues that are worthwhile. Entrepreneurs also contribute to society through their donations to charity, schools and hospitals. Most successful entrepreneurs have set up charity organisations that are meant to assist the needy and improve the lives of communities. Examples include the Gates foundation and the Jack Ma Foundation among others.

Reduce Income Inequality

The reduction in income inequality is another role of entrepreneurship in economic development. Industrialisation often leads to the concentration of economic power in the hands of a few. Entrepreneurs on the other hand, compete with monopolies to obtain a share of the economic wealth. This in turn redistributes wealth from the hands of a few individuals to a larger group of entrepreneurs and the people they employ. More people are able to participate in economic activities and are taken out of poverty due to the job opportunities created by entrepreneurs.


Sadly only a few people are willing to become entrepreneurs and for those that do many of their businesses fail, but the role of entrepreneurship in economic development is crucial. Entrepreneurs contributed to the development of countries like the Japan, the United States of America and Germany. They continue to create employment, not only for themselves but for other people that are directly and indirectly impacted by them. Entrepreneurship is a necessary input for economic development.  A country’s economic performance can be positively influenced by entrepreneurs since the activities of entrepreneurship have a ripple effect in an economy. However, entrepreneurship can cause job losses in the short to medium term as old businesses are replaced by innovative processes and technology. Overtime, research shows that new jobs are created, and the level of employment increases. In addition, the role of entrepreneurship in economic development differs from country to country. Entrepreneurs contribute more towards development in countries where the material resources, industrial climate and political conditions are favourable.

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