Entreprenuership

The Economic Role of the Entrepreneur

Daniel F. Spulber

Northwestern University June 2008 Abstract Entrepreneurs play a central role in the economy by establishing firms, which in turn create markets and organizations. The paper presents a dynamic theory of the entrepreneur. An individual engages in entrepreneurial activities before the firm is established and then becomes an owner after the firm is established. I refer to the change is the individual’s role from entrepreneur to owner as the foundational shift. Before the foundational shift occurs, the objectives of the startup enterprise cannot be separated from those of the entrepreneur. After the firm is established, by definition, its objectives are separate from those of its owners. The foundational shift is important because it helps to explain the interconnections between the financial, labor and technology decisions of the startup enterprise and the consumption, human capital, and innovation decisions of the individual entrepreneur. The entrepreneur faces three types of competition. In type-I competition, the entrepreneur competes with other entrepreneurs to establish the most efficient new firm. In type-II competition, the entrepreneur competes with direct exchange between consumers; the newly-established firm must create efficiencies of exchange that consumers cannot achieve on their own. In type-III competition, the entrepreneur competes with existing; the newly established firm must offer innovations and efficiencies that cannot be achieved by adjusting or expanding incumbent firms.

________________________________ * Elinor Hobbs Distinguished Professor of International Business, Management & Strategy, Kellogg School of Management, Northwestern University, 2001 Sheridan Road, Evanston, IL, 60208. E-mail: jems@kellogg.northwestern.edu I gratefully acknowledge the support of a research grant from the Ewing Marion Kauffman Foundation.

Introduction Entrepreneurs are major contributors to economic...