The entrepreneur as a driver of productivity growth
Economic growth is a dynamic process of creation and destruction; the creation of new firms, new investments and new methods of production drive growth and destroy the old, less productive firms and methods of the past. The individuals that ultimately drive this process are the entrepreneurs. Whilst it is important to have a skilled labour force, efficient capital markets and a sound innovation system, without the entrepreneur to bring these factors together, to utilise and deploy them efficiently and to seek out new ways of conducting business and undertaking new investments, the economic churn that drives productivity growth would not take place. Entrepreneurs create new businesses and new investments. These investments create new jobs, intensify competition and can increase productivity by introducing new technologies or working practices.
The entrepreneur is the innovator who implements change…
Joseph Schumpeter highlights the relationship between the entrepreneur and the innovator. “The entrepreneur is the innovator who implements change within markets through the carrying out of new combinations. The introduction of a new good, the introduction of a new method of production, the opening of a new market, the conquest of a new source of supply of new materials or parts or the carrying out of the new organization of any industry” (Schumpeter, 1934). The definition of an entrepreneur adopted in this paper is anyone who identifies a market opportunity and moves to take advantage of it, whether they are starting up a new firm or innovating and creating new products in a large established firm.
There are two ways in which the average productivity of firms in the economy can increase. Productivity levels of individual firms grow as they improve their production methods, for example by introducing more capital, skilled labour or new innovative ideas. However, even if individual firms’ productivity levels do not increase, the process of economic churn pushes up the average level of productivity in the economy: poorer-performing firms experience decreasing market share or exit the market and more productive firms increase their market share or enter the market. A report for the OECD suggests that up to 50 per cent of a country’s growth is derived solely from this firm-level churn, wherein the process of entry, exit and changing market shares improves economic growth (Ahn, 2001). Entrepreneurial actions, to start up a new business or to improve an existing one, lie at the heart of both of these productivity enhancing mechanisms.
