3.2 The impacts of entrepreneurial activity
Entrepreneurial activity can have decisive effects on us as individuals. It can also make a real difference to the communities we live in, to the performance of national and regional economies, and the state of the natural environment. In this task we examine these impacts of entrepreneurship, which can be both positive and negative.
Is entrepreneurship always ‘a good thing’? Research suggests that increased levels of entrepreneurial activity can help to generate positive economic outcomes, including more employment opportunities, less unemployment, lower prices, more rapid technological innovation, and increased rates of economic growth. However, entrepreneurial activity can also act in dysfunctional ways that inflict serious economic damage. The global financial crisis of 2007–10 was a particularly dramatic example, with devastating effects on individuals, businesses, and communities around the world. In a widely cited article, the US economist and entrepreneurship researcher, William Baumol distinguished between economically ‘productive’, ‘unproductive’, and ‘destructive’ forms of entrepreneurship (Baumol, 1990). He sees productive entrepreneurship as having a beneficial impact (e.g. increasing incomes and employment and meeting people’s needs). By contrast, unproductive entrepreneurship (e.g. ‘rent-seeking’ activities, such as tax avoidance) has negative effects, while destructive entrepreneurship (e.g. organised crime) can undermine an entire economy. Baumol’s historical study explores how entrepreneurial resources have been reallocated between these three roles over the centuries.
Watch these two videos, which examine contrasting impacts of different kinds of entrepreneurial activity in Mexico and Peru. Each video lasts about seven minutes.
- Having watched the videos, categorise the examples featured using Baumol’s (1990) categories of economically ‘productive’, ‘unproductive’ or ‘destructive’ entrepreneurship, then add one or two additional examples from your own experience. Include a brief explanation as to why you have placed each example in the chosen category.
|Type of entrepreneurship||Practical example||Brief explanation|
This task referred to the work of a US economist and entrepreneurship researcher, William Baumol, who distinguished between economically ‘productive’, ‘unproductive’, and ‘destructive’ forms of entrepreneurship (Baumol, 1990). He suggested that productive entrepreneurship has beneficial impacts. By contrast, unproductive entrepreneurship has negative effects, while destructive entrepreneurship can undermine an entire economy.
The fish farming venture illustrates how entrepreneurial activity can be economically productive, generating higher incomes and providing new employment opportunities for women in this remote Peruvian community. The venture was initially supported by micro-finance provided by a regional women’s development organisation,. The work of this organisation could also be described as productive (social) entrepreneurship. The video shows how it has successfully adopted an innovative approach to financing very small enterprises pioneered in Bangladesh by Muhammad Yunus and the Grameen Bank. By contrast, the Mexican example illustrates how opportunity-seeking entrepreneurial activity can be economically unproductive, or even destructive. In this case, unregulated commodities market speculation has inflated the price of the corn used to make tortillas, which are a key part of the national diet. While speculation is nothing new, technological and financial market innovations have enabled it to exert much more powerful effects on world markets. By creating high and unstable prices, this kind of speculation can undermine the confidence of investors and damage the economic livelihoods of individuals, families and small businesses.
During this task, you may have identified examples that could be placed in more than one of the boxes. For example, entrepreneurial activity that has increased mobility (e.g. low-cost airlines flying to islands in the Indian Ocean), could be seen as economically productive in the short term, helping to promote tourism and other forms of economic development. However, this kind of activity may prove to be economically destructive over the longer term due to its environmental impacts (i.e. increasing carbon emissions, contributing to global warming and rising sea levels).
This task has raised several important issues around the impact of entrepreneurial activity, and of particular kinds of innovation.