Startups play a crucial role in driving innovation, economic growth and job creation for countries around the world. Here is an in-depth look at why startups matter so much and how they contribute to the overall development of nations:
The Innovation Engine
Startups are the primary drivers of innovation in an economy. Unlike large established companies that often focus on incrementally improving existing products and services, startups are willing to take risks and disrupt industries with new technologies or business models. The innovation coming from startups helps address unmet consumer needs, increase efficiencies and productivity, and keep countries competitive in the global marketplace.
Some of the most iconic innovations in recent decades like the personal computer, internet search, social media, ride sharing, and e-commerce platforms emerged from ambitious startups. Without startups, large incumbent companies and even entire industries can stagnate due to lack of innovation. Startups inject fresh thinking and force change upon ossified sectors.
New Job Creation
Startups are an important engine for job creation. While large corporations account for a significant share of employment, their job growth tends to be slower. Startups on the other hand generate new employment at a rapid clip, especially high growth startups.
According to the Kauffman Foundation, young startup firms accounted for basically all net new job creation in the United States during the past couple of decades. Fast expanding startups have been found to create 10-20 times as many jobs as non-high growth firms. Besides directly hiring people, startups also create indirect employment through suppliers, partners and contractors.
The high pace of job creation from startups helps counterbalance jobs lost due to automation, offshoring or downsizing at mature companies. It provides employment opportunities across skill levels and keeps the labor force dynamic.
Economic Growth
By spurring innovation and job creation, startups significantly contribute to the economic growth of countries. Startup activity is correlated with higher productivity growth rates. Cities and regions with thriving startup ecosystems tend to exhibit higher economic momentum.
Venture capital backed startups in the United States have been estimated to account for over 20% of GDP and jobs created. Startup formation rates directly impact overall economic growth rates. Policies and regulations that lower barriers for starting new businesses and ease the process of experimentation can magnify the economic benefits.
Some argue that too much fixation on startups and small businesses as job creators can be misguided. But economists mostly agree that young, high-growth firms play an outsized role in driving prosperity, especially in knowledge and tech-driven industries.
Revitalizing Local Economies
Startups are reinvigorating local economies by bringing growth and renewal to cities that were losing steam. In the U.S., old manufacturing hubs like Pittsburgh, Detroit and Cleveland have found new life by attracting startup activity around local universities. Startup hubs have emerged far from traditional tech centers like Silicon Valley and New York.
Global cities like London, Singapore and Berlin have facilitated startup growth to diversify from reliance on real estate and finance sectors. China has made incubating domestic startups in segments from AI to green energy a key national priority to sustain economic growth. The spillover effects from startup vitality include a vibrant local culture, increased property values, talent attraction and more.
Access to Capital
A strong presence of risk-taking early-stage investors like angel investors, venture capital firms and private equity funds is essential for supporting startups through stages of the business lifecycle. Geographic areas with abundant availability of early stage capital see more startups thriving past the formative stages to become mature companies.
Governments around the world are establishing public programs to expand availability of capital in order to boost startup activity and growth. Policies like tax exemptions on angel investment, matching public funds with private capital, and other incentives help propel startup investment. Access to capital is often a major bottleneck for startups and restricting it inhibits their growth potential.
Contribution to Exports
For countries facing negative trade balances and current account deficits, startups in export-oriented industries can help enhance access to foreign markets and boost exports. Software/tech startups, for instance, can penetrate global markets without much upfront capital investment. Rapid growth startups have shown greater propensity to derive a significant portion of their revenue from exports.
Startups help gain footholds in fast-growing sectors before other nations dominate them. Indian startups have contributed to India becoming the world’s largest sourcing destination for software services talent. With supportive public policies, startups can be seeded in strategic export-oriented areas to expand the exporting capacity of an economy.
Absorbing Workforce Growth
Countries with rapidly growing working age populations need to create abundant employment opportunities to productively channelize their human capital and reap demographic dividends. Startups help absorb the growth of the workforce by providing avenues for employment and on-the-job skill development.
They prevent rising unemployment and underemployment among youth especially in nations undergoing rapid urbanization and transition from agrarian to industrial economies. The job creation capacity of startups is thus critical for emerging economies to fully utilize their workforce strengths.
Alleviating ‘Brain Drain’
Ambitious startups in cutting-edge industries attract top young talent and skilled professionals. High-growth startups and unicorns give opportunities to work on challenging problems, earn disproportionately high rewards and gain international exposure. Startup hubs act as magnets for those seeking the excitement of working with the newest innovations.
The shortage of attractive employment options often drives top talent abroad causing ‘brain drain’. A vibrant local startup ecosystem ties down human capital. Countries like Israel and South Korea have managed to reverse brain drain by building thriving cultures of technology entrepreneurship and startup job opportunities.
Platform for Solutions
Startups provide a platform for innovators and entrepreneurs to create solutions for pressing societal challenges. Needs like education, healthcare, financial access and national security often require innovative thinking with technology at the core. Startups can build agile and scalable solutions without bureaucratic constraints of governments.
Promoting social entrepreneurship expands the landscape of startups tackling problems with positive externalities. Focusing innovation policies on startup activity around the United Nation’s Sustainable Development Goals is one way to align startup ecosystems with social good. The entrepreneurial talent and creativity unlocked in the startup sector is a major asset for creating public value.
In summary, countries around the world are closely linking growth strategies with startup policies as they recognize the outsized contributions of young, innovative firms. With the right nurturing environment, startups can flourish and drive sustainable job creation, exports, investments, productivity gains and overall prosperity for nations. The agility and regenerative capacities of startups make them indispensable for growth in the 21st century.
