State finance

The role of startup companies in economic development and job creation

Nowadays, it is not difficult to realize a real emergence of entrepreneurial spirit and more startup activities than ever before. More and more people are looking for starting their own business rather than working for someone else to satisfy their own need and desire. The only two views of startups that seem to be universal across Europe are their value for economic development and their ability to produce creative ideas, goods, and services. As a crucial driver of economic development, innovation and startups help propel a country's economy forward. Entrepreneurs are scaling businesses to sizeable sales with smaller teams and less cash than they were only a few years ago, thanks to the lean startup process and technological advancements. The pace of innovation is quickening, and young entrepreneurs are poised to take the reins and discover the next big things.
Every entrepreneur has a different story about reasons that he or she decided to take the entrepreneurial leap. Although there are numerous different reasons for startups to be established, the new venture motivations can be mainly defined as wo factors, which are pull and push factors. Positive factors that ‘pull’ individuals toward entrepreneurship are described as pull factors. Pull factors may rise from the desire to be self-reliance, the need for achievement and recognition, the impulse for personal development or aspiration for creativity and artistry. If you ever wanted to have your own freedom to unleash your hidden potential, set your own priorities, or be controlled by no one else, then you might already set your sight at starting up a new company for yourself to become your own boss. The more self-reliance and aspired you are, the more suitable you will be for these types of career. However, if you ever have thought of growing your own company, advancing to a higher level, yearning for more achievement and recognition, then you better find a co-founder or a team to work with. One person cannot handle everything on their own, the amount of work when working alone can be extremely stressful and overwhelming, but with team, it can be shared among the members and therefore, you can have anything done for less time and reviewed and criticized for better quality. That is the reason why TEAM stands for Together Everyone Achieve More.
Although there are many reasons to start their own business, you should first of all determine your true motivation, true ability, and personal commitment to pursue your dream. Because although there are outstanding successes of startups such as Instagram, Dropbox, or Pinterest which have changed the world, it is more likely that a startup would fail. If you ever have any ideas for startup, it is better not just some ideas that suddenly come across your mind. When thinking that your product or service you are planning to work on is in the circumstance in which the market does not yet realize that it cannot live without your product or service, you might choose wrong ideas to start your own business. It is about looking for problems you already have rather than thinking of new one.
There are two types of startups. We will focus on one. “Subsistence” startups are those that are not planning to be a big company. Their goal is to have a level of financial independence while enjoying what they do. Since 2013, the number of startups has decreased to the same level as it was in 1980, when the population was smaller. Fewer people are pursuing subsistence startups in recent years.
The “Transformational” startups are those that have a substantial economic impact. These are the most economically significant startups, with plans to expand globally or internationally. Transformation startups have been launched at a faster pace in recent years⁶, but there is still a long way to go.. These “high” growth firms make up just 15% of all companies. But they contribute an estimate of 50% of total jobs created. These young companies comparably invest more in research and development (R&D) than older ones.
Startups may be small. But they create ripples in the economy that change people’s way of living.
Here are the ways startups disrupt the economy and forces it to evolve, taking technology one or several steps higher:
1) Advance Technology Older companies or incumbents are more likely to invest in R&D on existing technologies and incremental innovation. Startups, on the other hand, are more concerned with emerging innovations and cutting-edge creativity. Startups are more flexible and able to transform a concept into a product and change it in response to customer demand because they are not bound by a multilayered corporate bureaucracy. Its high stakes drive its workers to go above and beyond to succeed. Startups are frequently acquired by large corporations such as Google and Microsoft, which use their size and distribution channels to improve innovation and increase sales.
2) Open New Markets. Startups create new markets or completely transform old markets by introducing products that change the world. Giants today like Apple, Facebook and Google were once small but ambitious startups. New technologies often create new opportunities that startups take advantage of. Startups then create a massive value over mature businesses, inspiring competition and disrupting the economy to evolve. However, not all startups succeed. The reason behind this is the increased power of established incumbents.⁷ Though incumbents have been toppled before, the American industry has grown more concentrated over the last 30 years.
3) Boost Production of Goods and Services. According to Bryan Ritchie and Nick Swisher of IDEA Center, startups disproportionately have higher technology.⁸ This drives up production of goods and services. In a 2017 report by the Center for Economic Studies at the US Census Bureau, they have found that firms that have a high growth output are disproportionately young and “makes disproportionate contributions to output and productivity growth.” In another paper published on 2011 by Small Business Administration, startups were discovered to generate more revenue with the same number of capital inputs than older companies.

4) Increase Employment. Startups create jobs. These “high-growth” firms are companies that add jobs at a rate of 25 plus percent. Wadhwa states,⁹ “Without startups, there would be no net job growth in the US economy. From 1977 to 2005, existing companies were net job destroyers, losing 1 million net jobs per year. New businesses in their first year added an average of 3 million jobs annually.” In a 2017 report by the Progressive Policy Institute, the private sector job growth is significantly higher where the startup activity is high. In contrast, regions with few startup activity experience less than half the job growth.

5) Direct Local Impacts. Startups also have a direct change on the cities where they are located such as how Microsoft has transformed Redmond and Google has changed Mountain View California. They bring in wealth and a large inflow of graduates and experienced professionals from other locations who are looking for job opportunities. Startups are engines of growth. To avoid economic stagnation, methods must be sought to foster competition and assist transformational entrepreneurs. While it is important to get support in a federal level, the effort must be focused in a local level. Cities need to foster programs that encourage entrepreneurship. It is absolutely critical for growth at a local and national level and legislative and political motives can no longer take entrepreneurs into account as an after-thought.

Innovation is the driving force of the economy at all levels and in all forms of organizations in a knowledge-based society. Due to the high risk of launching new goods and services, technologies are typically commercialized by isolated structured formations such as startups. A startup, according to Eric Ries, the founder of the Lean Startup movement, is a newly founded business whose aim is to create new, typically creative products or services in uncertain circumstances.¹⁰ 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. 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.
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 young generation.¹¹
Bringing new competitive dynamics into the economic system – startup companies are the most dynamic economic organizations 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.
Startups create 3 million jobs per year. In a set of data stretching all the way back to 1977, startups created an average of 3 million jobs per year (By startup, we mean any firm that is less than a year old). Since all startups are basically age zero, they don’t undergo any gross job destruction. What’s even more interesting is that the BSD uncovered a common assumption about established firms, which is that they will have a positive net job gain. That’s not the case.
On the contrary, established firms suffered from net job losses during several economic recessions. Startups had consistent job growth levels and created more jobs than they lose. More often than not, these old ideas get replaced because they just aren’t as productive as the new and improved ones. And with nearly 600,000 business births every year, the result is an extremely productive economy. But how do startups effectively create new markets or replace incumbents in an existing one? It all comes down to the product. A recent study found that the “lack of a market need for their product” was the main cause of over 40% of startup failure.
European startups are creating a large number of jobs. More established ecosystems such as the UK (startups hired 12.8 people on average), Germany (9.0) or France (9.8) are planning to hire even more, while more emerging ecosystems such as Slovakia (9.5), the Czech Republic (8.1) or Poland (7.8) are catching up in developing their startup ecosystems.¹² To seek diversity and to embrace an intercultural working environment from the start, is a characteristic for startups and not so common for SMEs or established companies. An analysis of leadership and organizational culture also uncovers differences. Startups usually practice an open leadership approach (69.1%) and reduce the level of hierarchies, often assigning the leadership to whoever has the greatest expertise or the best idea.

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