Q.Examine the nature of relationship between entrepreneurship and economic development.

Entrepreneurship and economic development are linked in a mutually reinforcing relationship.

Entrepreneurs drive economic development by contributing to GDP, capital formation and employment, creating opportunities for others and improving economic efficiency; and, in turn, a growing economy provides fertile soil in which entrepreneurship flourishes. The relationship therefore runs both ways, as elaborated below.

The relationship between entrepreneurship and economic development can be examined under two heads.

Entrepreneurship drives economic development. Entrepreneurs organise production, without which land, labour and capital would remain idle. In doing so they:

1. Contribute to GDP by generating income through the organisation of production.
2. Bring about capital formation, since the entrepreneurial decision is an investment decision that augments the economy's productive capacity.
3. Generate employment, as every new business employs people of varied skills.
4. Create business opportunities for others through backward linkages (suppliers) and forward linkages (marketers).
5. Improve economic efficiency by reducing waste and bringing about technical progress.
6. Widen the spectrum and scope of economic activities by diversifying the economy and breaking the vicious cycles of underdevelopment.
7. Impact local communities, offering marginalised groups a route out of poverty through small business.
8. Foster a spirit of exploration and daring, challenging tradition and treating change as an opportunity.

Economic development fosters entrepreneurship. The relationship also runs the other way: growing economies provide a fertile environment — with better infrastructure, policy support and institutions — in which entrepreneurship can flourish. Studies by the Global Entrepreneurship Monitor even note a lag of one to two years between entrepreneurial activity and its impact on economic development.

The relationship is therefore one of mutually facilitating reciprocity — each strengthens the other.