What’s it: Entrepreneurship means the individuals’ capacity and willingness to start, design, launch, and run a new business. In economics, it is one of the factors of production other than land, capital, and labor, which represents the inputs used to produce goods and services. The reward for entrepreneurship is profit.
Entrepreneurship is inherent in an entrepreneur. They develop, organize and manage businesses to profit and are willing to take all the risks.
Entrepreneurs seize business opportunities by innovating, creating new products, processes, and sometimes new organizations. They commercialize their ideas and inventions and then organize the necessary resources to make them happen. What they do involves risk, and they dare to take it in the hope of making a profit.
If successful, entrepreneurship does not only create value for the entrepreneur himself (profit). But, it also creates value for society at large, both through job creation and income generation. In addition, the products they offer also provide solutions to meet our various needs and desires, making our lives easier and more comfortable, leading to a higher standard of living.
Furthermore, entrepreneurship drives competition in the marketplace, forcing us to be more efficient and continuously innovate. Therefore, it is essential to encourage us to use resources at their highest use.
Entrepreneurship meaning in economics
In economics, entrepreneurship is one of the three factors of production – sometimes we call them economic resources – besides land, labor, and capital. All three are inputs to produce goods and services. Without one of them, there is neither business nor goods and services.
Labor and entrepreneurship come from individual contributions. Both represent human resources.
However, both have different roles in the production. Labor represents the individuals’ physical and mental effort, but does not take business risks. It comes from workers’ contributions. They don’t pool other resources to start a business. Instead, they only carry out what is assigned by the employer (entrepreneur).
On the other hand, entrepreneurs take risks by starting new businesses. They bring together three other factors to realize ideas and produce goods and services. They organize the business, including allocating resources, establishing organizational structures, and managing business functions. It’s not easy. Often, their business fails and loses. If successful, they hope to earn a profit in return.
The importance of entrepreneurship
There are several reasons why entrepreneurship is important.
Create value. Entrepreneurs run businesses to make a profit by selling goods and services. Their businesses create value by processing low-value inputs into higher-value outputs. Then, they sell the output at a price higher than the price they pay the input supplier. For example, a company processes cheap rubber latex into tires and sells them at high prices. Maximizing the difference between input and output values is their way to get the highest profit.
Change agent. Entrepreneurs are constantly finding new ways to do things. They provide solutions through the goods and services they produce. Their discoveries often render existing methods and systems obsolete.
- For example, e-commerce services change us about how we should sell and buy goods. For example, retailers do not have to rent space to display the goods they sell before e-commerce emerged. Likewise, buyers don’t have to visit physical locations just to select and compare prices and then buy goods.
Stimulate more value creation. Entrepreneurship creates more cake for everyone. As I have already mentioned, entrepreneurs create value by producing higher-value outputs than the inputs used. But, it doesn’t stop there. Their output can also stimulate other new businesses to emerge.
- Take car manufacturers as an example. When they set up a factory in a location, it will also stimulate other businesses to appear there, such as retail and lodging. And, it also stimulates supporting businesses to grow, such as spare parts, tires, and other components. For this reason, governments in some countries require local content for car components to stimulate supporting businesses to thrive.
- Another example is the computer. It not only makes our daily administrative work easier. But, it has also created various business opportunities such as computer training and software development. It also gave rise to more sophisticated production methods such as computer-aided manufacturing, allowing faster and quality production. And, ultimately, more value creation results in a higher standard of living for us.
More jobs and income. Entrepreneurs build new businesses and recruit workers to start them. First, it creates jobs and income. Then, their presence creates a ripple effect as a new business can stimulate other new businesses to emerge, generating more jobs and income in the economy.
Entrepreneur’s motives for starting a business
Profit is the main motive for starting a business. If the business is successful, the entrepreneur earns more money. For a sole proprietorship, the money they get is the same as the business profit because the owner and the business entity are not separate entities like a limited liability company.
The profit motive is indeed the main incentive to start a business. But, some people might start a business for the following reasons:
Survive. People need income to meet their daily needs. Adversity, for example, due to unemployment, is a strong drive to survive. When unemployed, individuals may prefer to start their own business rather than find a new job. They see it as the best opportunity to earn an income. They struggle hard because their lives depend on the success of the business they start.
Commercialize a hobby or skill. Business ideas can come from what we are passionate about or our expertise. For example, suppose you are a cat lover. In that case, you can start a business by creating a website as a forum for other cat lovers to interact and share tips. There, you can earn income from selling or recommending products (affiliate programs) or placing advertisements.
Bad experience. Entrepreneurs see problems as opportunities for commercialization. Bad experiences – those they or others have experienced – can encourage them to start a business. They are trying to find a solution to the problem. So, the same bad experience will not happen again.
- They then launched a new business. For example, many people may pay a high price for a product because of limited information. They find difficulties in comparing product prices from various brands and find the best price.
- But, you, for example, might see it as a new business opportunity. Then, you build a product comparison website where they can do it more easily, quickly, and anywhere.
Stimulating entrepreneurship is a way to build the economy. Many resource-poor countries such as Japan and South Korea invest in this aspect to make their economies more developed. As a result, many well-known companies emerged from both countries, such as Toyota, Honda, Itochu, SoftBank Group, Samsung Electronics, Hyundai Motor, SK Holdings, and POSCO.
Some possible solutions to stimulate entrepreneurship include:
- Build supporting infrastructures such as roads and railroads. Non-physical infrastructure such as education and training centers are equally vital.
- Reducing the cost of doing business by tackling bureaucratic problems. Simplifying regulations and permits for starting a new business is an example.
- Offer incentives. For example, the government offers subsidies or grants for various viable business ideas to be commercialized. Another incentive is through taxes.
- Provides easy access to seed funding. Many entrepreneurs find it difficult to obtain sufficient start-up capital. Banks are usually reluctant to lend to new businesses due to the high business failure rate. Thus, providing soft loans by government and public institutions is one possible solution to stimulate entrepreneurship.
- Establish an entrepreneurship education program or by offering business development classes in college. It becomes a way to foster interest in starting a new business.