The Role of Entrepreneurship in Job Creation and Economic Growth

In the United States, small businesses are often called the backbone of the economy. Policies that encourage the growth of small businesses and the role of entrepreneurship in the market are considered to be healthy for the economy at large. What is the link between entrepreneurship and job creation?

For a capitalist economy to thrive, there must be competition, growth, and innovation. Successful entrepreneurs tend to be naturally competitive, think outside of the box, and see through many of the easy answers to see how an industry could benefit from a fresh take. When the SBA said in 2012, for example, that small businesses had created 64% of the new jobs in the previous decade, this is how they got it done.

New businesses challenge the existing market
When a new business enters the local or global market, they begin to shake things up. Very few businesses open and try to be an exact replica of another company. Even if they have a similar mission statement and unique value propositions, they target a new niche or are expressing their brand differently.

New businesses may start by bringing an existing product to a new group of customers, but at some point, they will begin to draw customers away from other businesses if they are going to succeed. Older companies are forced to make changes or lose market share. Competition is generally agreed to be necessary for a healthy capitalist economy.

Market disruption can cause new job fields to open
In the field of manufacturing, much has been made about how robotics has disrupted and continues to disrupt traditional manufacturing jobs. As these line jobs have been reduced, however, other fields have opened up to respond to alerts, program systems, and repair and maintain systems as they are used.

Netflix, for example, disrupted the video rental industry to the point that the neighborhood video store is basically a thing of the past. In its place, people stream movies and television to their TVs through a subscription service, occasionally get DVDs in the mail, or pick up a movie from a kiosk at the grocery store.

While jobs did move from one area to another, and it is possible that the industry as a whole saw a net decrease in positions, there was also a substantial shift from one area to another. New warehouses opened up in new locations to allow for processing of DVDs, and all those grocery store kiosks require maintenance and upkeep.

Small businesses are more flexible
Small businesses operate with fewer employees, less overhead, and less infrastructure than large companies. In typical market conditions, this can be a disadvantage. A small business might lack the clout to organize a discount on a particular supply, or be unable to attract the very best talent because they can't offer the same kind of compensation package as a very large company.

But small businesses are much more flexible and nimble in terms of adjusting to changing market conditions than big businesses. Small businesses might operate on a time scale of weeks or months, whereas big businesses need to talk years in advance in order to get things done.

When they see an opportunity, a small business is able to quickly react to take advantage of it. By the time a big business has enough meetings and approvals to act, the chance may very well have passed.

Competition pushes companies to streamline
While small businesses are more nimble overall, big businesses that survive disruption generally push to become more streamlined, to maintain their power while reducing their bulk. Streamlining big businesses can drive innovation just as much as nimble small businesses can.

When big businesses streamline in order to respond to small businesses, they end up pushing other big businesses to move in a different direction as well.

When experts look at small businesses on the whole, they say that small businesses create jobs in an S wave. A large number of people are hired at the beginning of a business, then there is a period of flat growth as competition right-sizes or closes, and then an increase as the smaller business grows.

As a small business becomes big, it faces additional challenges from other small, startup companies that are able to innovate more quickly and disrupt more intensely. This can be seen with Apple; while Apple remains a lifestyle brand that many people happily pay a premium for, they have not been considered the top of the tech field for some time.