A writer at the Economist raised the interesting point in a February 2014 article about who do we mean when we use the word entrepreneur. Is it the recent immigrant, who starts a self-sustaining, low-tech business, such as a dry-cleaners or a restaurant, and works mostly or completely by his or herself? Is it the young graduate of a top business school, ready to put his best and most brilliant ideas to the test in some high-tech industry? Is it the young singer who unwittingly puts together a song that captures culture in a way that could not have been predicted?
Each of these could reasonably be construed as entrepreneurs, and each (or the type they represent) is necessary to a fully functional and healthy economy. Each of these entrepreneurs contributes to healthy economic growth differently, based on some fundamental characteristic. The Economist article provides a good entry point for understanding this characteristic difference and the effect it has on growth.
The Economist’s A.W. makes a thought-provoking distinction between two types of entrepreneurs. The first type, called replicative entrepreneurs, is the stereotypical self-employed, self-sustaining businesses, usually run by individuals that do not have grand plans for expansion and growth. The second type, the innovative entrepreneur, represents those engaged in Schumpeterian creative destruction. They are Clay Christensen’s innovative disruptors, and the leaps that they make can alter whole industries and result in wildly more productive (and profitable) activity.
The differences between what these two groups do in terms of the overall economic picture is important to understand. The replicative entrepreneur many times owes his or her livelihood to the success of his or her business. There is often times no grand plan to become the next Amazon or Google. These sorts of firms are important in that they provide economic stability and an outlet for individuals whose skills may not find a useful match to prospective employers. In contrast, innovative entrepreneurs drive economic growth by clearing new paths for other entrepreneurs to follow in their footsteps.
From a policy perspective, cities and regions that wish remain competitive in a globalizing economy need to take advantage of their own, home-grown innovators. The growth of innovative (and especially young) firms creates the most new jobs in an economy. If cities want to unleash their potential growth, it is essential that they nurture these types of firms. Doing so starts not with the right kind of tax incentives, but rather the right kind of environment. Such an approach is consistent with endogenous growth theory, which states the main avenue of growth for an economy is through innovation, education, and the formation and nurturing of human capital. If a community can provide individuals with the ability to develop their latent talent and combine that with an education that challenges individuals to succeed and incites an entrepreneurial spirit, then more individuals will have the potential to form those ventures that lead to dynamic, economy-wide growth.
Beyond education, there needs to be an environment that allows individuals to engage in the creative destruction that Schumpeter hails as the driving force of entrepreneurship. Without it, there is no room for dynamism and the opportunities for growth are constricted. While the opportunities for explosive growth are not as present with the replicative entrepreneurs, their value to an economy lies in the support they bring. This support comes in the form of their participation in industries such as service and retail, industries that do not attract entrepreneurs with dreams of expansive growth but provide a growing population and productive workforce with an efficient means to acquire necessary goods and services.
As the overall economy continues its meek recovery from recession, a focus on areas where there is potential to catch up to previous projections of productivity is natural. It is important to understand the economy-wide impact of both the ordinary replicative entrepreneurs that provide a livelihood for themselves and the extraordinary innovative entrepreneurs that drive growth and provide high wage jobs for others. It’s not about encouraging one group of individuals or industry over others, or some sort of pick the winners scenario, but creating an environment that allows for the organic development of all kinds of entrepreneurs, and permits individuals to match their skills and talent in a way that provides the most overall value. A better allocation of workers to jobs according to skill level and fewer burdensome policies will kick start the engine of economic growth that entrepreneurs represent in a way which overcomes some of the structural hurdles hindering the economic recovery.
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Chris Jackson is a research assistant in Research and Policy for the Ewing Marion Kauffman Foundation, assisting in the understanding of what policies and environments best promote entrepreneurship and education in the pursuit of economic growth.