Pushed or pulled into entrepreneurship – does it matter?

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One’s propensity to become an entrepreneur, or to even consider such venture, is in most cases driven by the need for income. Fewer are the cases that an individual becomes an entrepreneur due to identifying new or underserved markets. However, scholarly research argues that the latter type of entrepreneurialism is better for society because it tends to create additional wealth while the former is more likely to redistribute existing wealth, and in extreme cases it can even destroy a portion of it (Baumol, 1996).

The literature has named these two types of entrepreneurial motivations as push and pull. Individuals are pushed into entrepreneurship due to a need for income or are pulled into it because they spotted a market or niche that has yet to be explored. These dissimilar drivers became widely known as necessity and opportunity based entrepreneurship, respectively.

Now, if during normal economic times the number of necessity-based typically surpasses the amount of opportunity-based entrepreneurs, in times of economic hardship the divide gets even wider. Notwithstanding, entrepreneurship appears to act as an automatic stabilizer when the economy tanks – it certainly contributes to buffer unemployment spells. For example, according to the Global Entrepreneurship Monitor (GEM), individual entrepreneurship rates (not to confuse with new business creation, which includes the registration of subsidiaries by existing companies) in the US rose from 8% in 2009 to 14% by 2014.  Concurrently, the unemployment rate declined from 9% to 6%.

Regardless of motivation, entrepreneurship rates increase when a recession hits the economy. Similarly, it also increases with the worsening of economic inequality (Xavier-Oliveira et al., 2015). Hence, hardship seems to be the most potent driver of entrepreneurial entry. This is not to say that hardship is good. In an ideal world, novel inventions or business models should be the reason for new ventures.

In 2015, according to GEM, the most entrepreneurial country in the world (measured as percentage of total working age population) was Senegal, followed by Ecuador, Botswana, Lebanon, and Burkina Faso. The United States ranked 27th, the United Kingdom 48th, and Germany 57th. Clearly, the most entrepreneurial citizens of the world do not live in rich nations but in countries where economic hardship is more prevalent. Breaking down total entrepreneurial activity into necessity and opportunity-based motivations, the top 3 in each rank is taken by, on one hand, Macedonia, Guatemala, and Panama, and on the other hand by Malaysia, Luxembourg, and Switzerland (the latter are all economies heavily dependent on the financial sector). Such evidence further reinforces the need to understand the motivations behind national entrepreneurship rates and that one-policy-fits-all are rarely viable.

Decision makers need to reconcile their entrepreneurship-related policies with the domestic stage of socioeconomic development. Given where the local economy is currently at, is it more important to create new entrepreneurs no matter what or should the policies be focused on a particular type of entrepreneurship? This issue is particularly relevant for developed nations, as these economies need to keep innovating in order to preserve world leadership.