Functions of Entrepreneurs in Relation to Economic Development

Entrepreneurs organise the production process; in the absence of this function, land, labour and capital would all remain idle. Even where entrepreneurs do not themselves invent or discover the products, their role in the commercial exploitation of advances in science and technology is what makes the other resources productive. Their functions in relation to economic development are as follows.

1. Contribution to GDP. Income is generated in the process of production, so entrepreneurs generate income by organising production in agriculture, manufacturing or services. The income generated is distributed among the factors of production — rent to land, wages and salaries to labour, interest to capital — with the residual accruing to the entrepreneur as profit.
2. Capital formation. The entrepreneurial decision is, in effect, an investment decision that augments the productive capacity of the economy. By investing their own savings and informally mobilising the savings of friends and relatives, entrepreneurs add to capital formation, supplementing the funds available from banks, financial institutions and the capital markets.
3. Generation of employment. Every new business is a source of employment for people of different abilities, skills and qualifications. Entrepreneurship becomes a source of livelihood for those who have neither capital to earn interest on nor land to earn rent from.
4. Generation of business opportunities for others. Every new business creates opportunities both for the suppliers of its inputs (backward linkages) and for the marketers of its output (forward linkages). A pen manufacturer, for instance, creates opportunities for refill and ink manufacturers as well as for wholesalers, retailers, transporters and advertisers — a chain reaction that spurs the level of economic activity.
5. Improvement in economic efficiency. Entrepreneurs raise efficiency (greater output from the same input) by improving processes, reducing waste and increasing yield, and by bringing about technical progress that alters the labour-capital ratio.
6. Increasing the spectrum and scope of economic activities. Development means not just 'more' and 'better' of the existing, but the diversification of economic activities across geographic, sectoral and technological lines. Entrepreneurs break the vicious cycles of underdevelopment on both the demand and the supply side — for example, by orienting domestic production towards exports and by mobilising local and overseas resources to augment productive capacity.
7. Impact on local communities. In its natural habitat — small business — entrepreneurship is a great leveller. With no entry barriers in terms of educational qualifications, it is an attractive option for marginalised groups such as women and members of the Scheduled Castes, Scheduled Tribes and Other Backward Classes. Agro-based rural industries and craft-based cottage industries can turn local communities into socio-economic success stories, and local governments help by developing entrepreneurship clusters. …