Financial Development and Economic Growth

Last Updated: 25 Jun 2021
Essay type: Process
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An introduction to business and entrepreneurship

“Business refers to any activity that seeks to provide goods and services to others while operating at a profit[1].” The growth of an economy is dependent on the growth of business activities within the community. A thriving business environment forms the base of a thriving economy. In order to be successful, entrepreneurs need to tap potential or existing consumer needs and allocate resources to meet these requirements. “Entrepreneurs provide products and services which support the core businesses and employees and families.[2]”

Businesses add value to the economy and society in terms of generating employment, creating infrastructure for further growth, and creating wealth that is instrumental in supporting consumerism and increasing demand for products and services. The growth of business ventures has come a long way from the times when barter system was the accepted mode of trade to an era of multinational growth and investment that defies geographic boundaries. In recent times entrepreneurs are re-engineering their business strategies to accommodate advancing technology and rapid innovation in the field of information technology and e-commerce. Technology has equipped the workforce with speed and accuracy that has enhanced overall productivity and efficiency.

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Changing Business Environment

Business is a dynamic process governed by the economic, political and social environment in which it operates. Due to rapid changes in the operating environment entrepreneurs need to dynamic in their approach to devising and implementing strategies for growth and development. Businesses create opportunities within the community to grow and prosper. It enhances the living standards of the global community providing people to become wealthy.

Growing complexities within the business environment has created greater need for knowledge and understanding of the operating environment that affects the profitability and growth of the organization.

Evolving business climate includes vast transformations in the perception of organizational leadership, managerial functions, and human resource strategy. Corporate management faces more challenges in the form of changing corporate relations and increasing global influences that have set a new pattern in managing people and businesses. The traditional autocratic leadership style in management has given to a more humane and softer leadership approach that “empowers self managed teams to manage themselves”.[3] This provides the employees with the authority and responsibility to respond to customer requests. An essential pre-requisite for such leadership practices is ongoing training and development workshops for the employees that assist them in analyzing situations and resolving problems at the operational front.

The Dynamics of Business Markets

Economic systems adopted by a country determine the market characteristics for the goods and services sold within the country. This also has considerable impact on decisions “about what to produce and in what quantities” and in determining product pricing. In cases of free market economy the higher the price, the more goods and services suppliers are willing to produce. Price is the mechanism that allows free markets to work.”[4]

A socialist economy emphasizes social equality and workers receive free education and health care benefits. This type of economic system reduces profitability of the business owners resulting in reduced economic growth rate and higher unemployment rates. A capitalist economy, on the other hand, decides what needs to be produced, in what quantities, how much wages each worker should be paid and pricing of the goods and services offered in the market.

Most economists agree that a mixed economic system that adopts the advantages of capitalist and socialist markets is ideal for the overall growth and development of the country’s economy. Businesses should not overlook their moral and social obligations to the community in which they operate and serve. Government policies and regulations should be directed towards social benefits that prevent misuse of power and wealth, promotes effective resource allocation, and is instrumental in reducing the rich-poor divide. The government exercises its control through the management of money supply and regulating interest rates. The Federal Reserve Bank of United States controls the supply of money in the economy that in turn tends to influence the borrowing and investment patterns.

Globalization of economies and liberalization of markets have rendered the global markets highly susceptible to global events. Markets have become more volatile as a result of global impacts and this has created the need for changing strategies in business operations and tactful government intervention to insulate the country’s economy from harmful economic effects. Monetary and fiscal policies are highly instrumental in regulating the country’s economy and creating market stability.

Risk perception and management in businesses

Business growth revolves around four essential components that include risk, profit, competition and customer satisfaction. Entrepreneurs assume risk while allocating time, money and other resources to shape up business ideas and cultivate profits. “Risk is the chance an entrepreneur takes of losing time and money on a business that may not prove profitable.”[5] Taking risks is an integral part of business activity. Virtually all business ventures faces risk. Experts and analysts believe that greater the risk involved the higher the chances of becoming successful.

Business faces two types of risk – speculative risk and pure risk. Speculative risk is involved in business decisions that might result in loss. This kind of risk generally has three potential outcomes – a loss, no loss and a gain. Purchasing a share of common stock, acquiring a new business venture or gambling are examples of speculative risk.[6]

Pure risk on the other hand has only two potential outcomes – either there is no financial loss or a financial loss takes place due to certain unprecedented events. The risk of a key employee falling sick, or accidents, natural disasters are events that pose uncertainty to the management. Most of the speculative risks are uninsurable because entrepreneurs willingly undertake such risks in search of profit.

The success of a business venture is to a great extent credited to an effective risk management strategy. Risk management strategies involve avoiding risks, reducing risks, providing resources to assume that risk or transferring risks to other parties. The business environment today provides a wide variety of tools and techniques to mitigate risks involved in businesses.[7]


A critical aspect of business management today lies in evolving well defined strategies to meet global challenges posed in the form of new opportunities and emerging markets. The developing economies today have emerged as potential contenders for consumer markets and most multinational companies are venturing to extend its operations to these regions in search of higher profits. Advancing technology and lowered cost of telecommunications has opened new channels of business operations and this is visible in the increasing demand for outsourcing of business processing, knowledge processing and legal processing to developing economies. Countries like China and India have displayed tremendous capacity to generate skills at competitive market rates and as such have become favored destinations for outsourcing activities.

The Internet revolution and emerging e-commerce activities are yet another aspect that has thrown new light on business strategy development. Growing number of Internet users worldwide has extended the reach of entrepreneurs finding new ways to reach their potential global clients. The amount of information available to the consumers through the Internet has created a new group of highly educated and well informed client base who have extensive access to competitive market information such as product prices, range of services available, features and scope of application. This makes marketing of goods and services even more challenging for the entrepreneurs.


  1. Levine, Rose. 1996. Financial sector policies. Chapter 8 from “Financial development and economic growth: theory and experiences from developing countries” by Niels Hermes and Robert Lensink. Published by Routledge.
  2. Economic Forum. 2008. Free markets and government intervention. Accessed on 18th November 2008 from
  3. Chapter 1- Managing within the dynamic business environment – taking risks and making profits.
  4. Chapter 2 – How economic affects business – the creation and distribution of wealth.
  5. Chapter 7 – Management, leadership, and employee empowerment.
  6. Rosenbloom, Jerry S. 2005. The handbook of employee benefits: design, funding and administration. Published by Mc-Graw Hill Professional
  7. Chapter 1 – Managing within the dynamic business environment
  8. Introducing Business video – 1997 Dallas Telecourses
  9. Chapter 7 – Management, leadership and employee empowerment
  10. Chapter 2 – How economics affects business: the creation and distribution of wealth
  11. Chapter 1 – Managing within the dynamic business environment
  12. Rosenbloom – The handbook of employee benefits; Pg 41
  13. Managing Risk – Its strictly business - Dallas Telecourses 1997

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Financial Development and Economic Growth. (2018, Jul 31). Retrieved from

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