The Importance of Startups in Economic Development

22 Nov The Importance of Startups in Economic Development

What is startup entrepreneurship?

In a knowledge-based society, innovation is the driving force of the economy on all levels and in all types of organisations. Due to high risks present when introducing new products and services, innovations are usually commercialized via isolated formal formations such as startup companies.

Eric Ries, the creator of the Lean Startup movement, defines a startup as company is a newly formed company, the purpose of which is to develop new, usually innovative products or services in uncertain circumstances. If it satisfies a new need, present in a broader area or even globally, it also has great growth potential. Startup entrepreneurship is crucial because of innovations, new jobs and bringing competitive dynamics into the business environment. A feature of these companies is that they first test different possible business models in order to find the right one. But for this, they need a suitably developed support startup ecosystem.

The Global Entrepreneurship Monitor (GEM) research data show that worldwide, an entrepreneur with high potential creates on average as much as 3 times more jobs than an entrepreneur with average potential and as much as 15 times more jobs than an entrepreneur with low potential. Thus there is only 4 % of entrepreneurs who can be placed in the group of dynamic companies that have the potential to grow on global markets (on average they reach at least 20 % annual income growth) and they truly contribute to the economic development of the society, as they create as much as 38 % of all jobs. In the society, there is only 6 % of entrepreneurs with average potential, amongst which we also count those who achieve between 5 % and 20 % average annual income growth, and they create 28 % of all jobs. But the great majority of entrepreneurs have low potential (90 % of all) – on average they achieve only up to 5 % average annual income growth and together create 34 % of jobs.

Therefore growth is mostly generated by highly ambitious entrepreneurs who find and realize promising business opportunities. Their companies grow quickly and so increase the employment rate. A research by the Global Entrepreneurship Monitor South Africa (2012) states that one third of dynamics of countries’ economic growth can be attributed to the dynamics of startup entrepreneurship. They also contribute to the promotion of the research and innovation system and introduce values of proactivity into the society.

Entrepreneurial talents with high potential are very scarce and represent the most precious human resource of every nation, which is why they should be fully supported. The economic policy in general and the policy for promoting entrepreneurship have to understand that not all business activities are the same, much less that the motives for being an entrepreneur are the same for everyone. Facilitating settings for ambitious innovative entrepreneurship is fundamentally different to facilitating settings for self-employed necessity entrepreneurship.

Startup companies are thus those that have ambition and potential to become gazelles that can, with quick growth, create a large number of new jobs. This is often, but not always, the case for companies from high-tech industries.

The majority of developed countries in a knowledge-based society encourage startup entrepreneurship from the aspect of investment into the future as well as from the aspect of actively designing long-term economic policy. Why?

Five key reasons for encouraging startup entrepreneurship:

• Innovations – They are the main driving force behind economic development and the increase of productiveness in a knowledge-based society. Startup companies are the most suitable form of implementing inventions and consequently the best mechanism for commercializing technological and other novelties. Startup companies contribute to a quick development of new technologies and the location where they operate. Large companies often buy startup companies because of technology (fundamental ingredient) that they then integrate into their business and thus keep their competitive advantage. At the same time, they provide knowledge as well as spin-off and spin-out companies to the startup environment, which wouldn’t be possible without a well- functioning startup ecosystem.
• New jobs and economic growth – In the long term, startup companies create a large portion of new jobs and contribute to the country’s economic growth. Considering that startup companies are based on innovations, the potential of startup companies represents the healthy core of the economy. If the country wishes to encourage new employments in the long term, it is necessary for it to invest into the segment of companies that create the most jobs in the long run (in 10 years and more). Startup companies are the ideal form and opportunity for employing and activating the Y generation.
• Bringing new competitive dynamics into the economic system – Startup companies are the most dynamic economic organisations on the market, since they provide additional dynamics and competitiveness to the economic system. This means that the economy stays healthy, vital and diligent, while individual companies find it harder to fall asleep on their laurels.
• Promoting the research-innovation system – High-tech as well as knowledge-based service startup companies are very closely connected to knowledge institutions. An appropriate entrepreneurship ecosystem thus promotes the research & development as well as research & innovation approach of knowledge institutions, companies and connecting institutions as well as contributes to the applicative orientation of research work at universities and research institutions. Meanwhile it also works as a role model and encourages students and researchers to implement their ideas via a startup company.
• Bringing the values of proactivity into the society – Startup entrepreneurship changes the values of the society and brings a new mind-set, in line with the society based on knowledge and creativeness. The population is starting to increasingly realize that they have a responsibility for their work and career development.