Although the notion that entrepreneurship benefits society has attained broad currency in Latin America and elsewhere, confusion reigns: Latin America’s leaders variously promote entrepreneurship as “self-employment”, and regularly talk of “start-ups”, “disruptive business”, “small businesses” and “micro-enterprises”. No wonder a recent World Bank article on Latin America bemoans that “entrepreneurs’ lack of innovation curbs creation of quality jobs”. Even respected institutions like the World Bank confuse small business, innovation and growth.
In reality, some of these “entrepreneurships” contradict each other: research shows big firms, not small ones, are more innovative. Media hype notwithstanding, “disruptive start-ups” as a coherent concept just doesn’t produce the goods. A 2015 World Economic Forum report shows that highly competitive countries have less start-up activity, not more. Latin American countries in particular shine in new business creation, but lack luster when it comes to competitiveness.
It’s not start-ups that matter – it’s growth
For entrepreneurial activity to translate into economic growth, we need to focus less on the “start” and “small” side of things and more on how those companies of all ages, sizes and sectors scale. Why? Because research (see here, here and here) clearly shows that it is relatively high-growth firms – what we call “scale ups” – that are the real generators of jobs, taxes and wealth. Contrary to the myth, small businesses and start-ups only generate these benefits if they then go on to grow. And historical perspectives on the growth of entrepreneurship from Israel to Bangalore to Silicon Valley shows that the critical path to prosperity paradoxically goes from scale up to start-up, not the other way around.
Policy-makers should therefore stop calling for the creation of new businesses and prioritize helping firms of all ages, sectors and sizes to grow. There’s ample evidence that when they do so, it helps more than just the businesses in question – it also spreads prosperity deep into the community.