This chapter discusses the role of entrepreneurship in creating new jobs and innovating new products. Both of these topics have their origins in research conducted in the late 1970s and the 1980s, when David Birch first claimed that small new firms acted as the engine of job creation in the economy, and David Audretsch and Zoltan Acs argued that small firms played a disproportionate role in the commercialisation of new innovations. Both topics command widespread interest because they suggest that entrepreneurship directly drives venture performance and economic growth.

Much (though not all) of the empirical discussion in this chapter is framed in terms of comparisons between small and large firms. The focus on firm size – which, as noted in chapter 1, does not obviously capture the essence of entrepreneurship – is chiefly a historical legacy. It also reflects data availability. In the discussion that follows, ‘small business’ will merely be assumed to serve as a convenient shorthand for entrepreneurship. However, this focus will be complemented with a discussion about the role of individual entrepreneurs in job creation and innovation.

After setting out in the first section some basic facts about entrepreneurs' decisions to hire external labour, I will present some theory about the labour demand of individual entrepreneurs. This paves the way for an analysis of the empirical factors which determine job creation by entrepreneurs. The second section discusses the role of small firms in creating jobs in the broader economy.