Academic journal article Academy of Entrepreneurship Journal

The Economic Impact of Entrepreneurship: Setting Realistic Expectations

Academic journal article Academy of Entrepreneurship Journal

The Economic Impact of Entrepreneurship: Setting Realistic Expectations

Article excerpt

INTRODUCTION

There is growing agreement that entrepreneurship is a critical component of economic growth (Ahlstrom, 2010; Baumol & Strom, 2007; Holcombe, 2003; World Economic Forum, 2014). The Small Business Administration reports that entrepreneurial startups and small businesses (fewer than 500 employees) make up 99.7% of employer firms, 63% of net new private jobs, 48.5% of private sector employment, 42% of private sector payroll, 46% of private sector output, 37% of high-tech employment, 98% of firms exporting goods, and 33% of exporting value (Small Business Administration, 2014). These impressive statistics entice community leaders and economic developers, especially in rural areas, to view entrepreneurial and small business activity as key to economic growth. Many communities focus a significant amount of resources on encouraging entrepreneurial activity (Markley, Macke, & Luther, 2005). Overall entrepreneurial activity coupled with business growth is seen as being essential to economic growth. Often, however, the positive economic impact of entrepreneurship and small business is exaggerated because of faulty expectations based on hype rather than a critical analysis of current data and trends.

Scott Shane in his book The Illusions of Entrepreneurship (2008) provides a cautionary note about the positive economic impact of entrepreneurship. He concludes that a careful analysis of the data challenges some of the widely-held positive assumptions about the inflated economic impact of entrepreneurship, especially if the growth dynamics of the startups are considered as the firms age. In addition, he suggests that policy makers should have realistic expectations before committing community resources to encourage startups (Shane, 2009). The data may indicate the economic impact of most startups is not sufficient to justify the resource commitment.

It has been several years and a recession since Dr. Shane came to his conclusions. What do the numbers indicate now? Realistic expectations are especially important to guide economic development as the nation's economy rebounds from recession. This paper addresses faulty expectations by evaluating current data and trends to establish a realistic assessment of the impact of entrepreneurship and small business activity for two major economic development components: job creation and business ownership income.

To understand the value of an evaluation of the current numbers is to realize the importance of economic growth and development. Economic growth and development are critical components of overall community development by providing financial resources to develop community assets (Flora & Flora, 2013). Though there is no agreed-upon definition of economic development, there is agreement on the general notion that a primary goal of economic growth and development is to increase per capita incomes of local residents (Perryman, 2006). Two primary sources of income are jobs and business ownership. The number and quality of jobs and the level of business income are directly tied to overall entrepreneurial startup and business growth activities. Therefore, this study begins with an investigation of the current level of entrepreneurial and business growth activity followed by a focus on job creation and business ownership income.

When conducting a research project such as this, it is necessary to start with a cautionary reminder. The data presented in the paper are from a variety of sources. As a result, some of the data collection periods, assumptions, and definitions may not align perfectly. In fact, data may differ from source to source. Therefore, regardless of the source, the numbers should not be taken as absolute but only as good estimations of reality. Every attempt will be made to make the data as consistent as possible and any major variations will be noted.

WHAT STORY DO THE NUMBERS TELL?

A widely accepted measure of startup activity is the Kauffman Index of Entrepreneurial Activity which is supported by the Kauffman Foundation and is compiled by Robert Fairlie, an economics professor for the University of California at Santa Cruz (Fairlie, 2014). …

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