What Is a Private Enterprise?
Private Enterprise Meaning
The term “private enterprise” is typically in reference to either a privately owned and operated entity, or an economic system.
When referred to as an entity, a private enterprise is a business that is not controlled or owned by the government.
Everything, including the means of production, is owned by an individual or group of individuals.
When referred to as an economic system, private enterprise is a capitalist, market-based economy, rather than a command economy.
Private enterprise is a contrast to publicly-owned entities which are owned and operated by a government or one of its agencies.
An economic system premised on public enterprise is one in which social, collective principles are used to design economic systems.
An example is socialism in which society is organized to promote collective good rather than individual aspirations.
Private Enterprise as a Private Owned Entity
The term “private enterprise” stands in contrast with a “private company,” which is a company not traded on any public stock exchanges and is privately held.
A privately-owned entity started by an entrepreneur contributes to the overall economic well-being of an economic system by generating revenue and profits, employing workers, and providing products and services to a group of people.
Even though it is privately-owned, a private enterprise exists to serve the public. As such, the operations of such an enterprise generally involve several stakeholders. Some of them are as follows:
- Customers: Customers determine the success of a private enterprise. They contribute to information about a product’s price through demand. Their needs are also barometers for a private enterprise’s product and service mix because the firm exists to meet their demands.
- Employees: Private enterprises provide employees with wages and salaries that helps them buy other products and services. In turn, this helps an economy expand. Their productivity and creativity determines the success of a venture. To that end, private enterprises invest in employees to ensure that they are happy at their jobs.
- Government: Private enterprises are the lifeblood of economic systems like capitalism in which governments play a restricted role in the economy. However, governments are also important determinants of success for private enterprise. They regulate competition in a sector and generally get a share of a private enterprise’s overall profits as tax.
- Investors: Investors are responsible for providing initial capital to entrepreneurs interested in starting a private enterprise. The term encompasses a broad definition and can include stock market traders to venture capitalists and banking institutions. In some cases, the government itself can take on the role of an investor and provide capital to kick start a new industry in the form of a loan.
Private Enterprise as an Economic System
Perhaps the most important common example of an economic system characterized by private enterprise is capitalism.
Like other market economies, in theory, an economic system with private enterprise allows the demand of consumers to operate as the “invisible hand” dictating the prices at which a product or service is sold; however, government intervention is still allowed in a private enterprise economy, even though the businesses are privately held.
A private enterprise economic system is a type of free enterprise system whose goal is to allow for “perfect competition.”
In theory, removing all government intervention should allow for economies to create perfect competition. In reality, this is not the case.
Monopolies often form and larger, more established enterprises will often squash new entrants to a market.
Some government regulation is therefore necessary to allow an economy to operate as efficiently as possible.
The United States is thought of as an example of a private enterprise and market economy, but in reality, it is a mixed economy with elements of both a market and command economy.
Mild government regulation is necessary to protect public interest and promote the flourishing of private businesses.
There are projects in a private enterprise economic system that benefit from government intervention.
For example, the government forms partnerships with private enterprises for infrastructure projects.
These projects are known as public-private partnerships.
Capital and expertise for such projects is provided by private enterprise and the government regulates and manages them. Toll roads and highways are an example of public-private partnership.
They may be built and operated by private enterprises for a certain period of time but are transferred after their lease is up and managed by the government.
Or, the capital for such projects may be provided by private enterprise while federal or state authorities are responsible for its execution.
In return for their capital infusion, private enterprises are entitled to a share of the income from toll roads.
Alternately infrastructure bonds may be sold in private markets to fund such projects.
Future of Private Enterprise
As it was conceptualized originally, the role of private enterprise was limited to creating capital and generating returns for shareholders and entrepreneurs.
But that role has changed in the modern world. A new global economic order is emerging.
Increased liberalization, the knitting together of economies through trade, and technological advancements have led to the emergence of private enterprises known as Multinational Corporations (MNCs).
The operations and profits of MNCs span multiple countries and jurisdictions and, in some cases, their revenues and profits are greater than even some of the countries that they operate in.
Because of their sheer reach and influence, such private enterprises have an outsized impact on society and are subject to intensive pressure and demands from governments. Therefore, private enterprise now has a public component to it.
This component can take the form of Corporate Social Responsibility (CSR) or simply a commitment towards social good and diversity.
Some corporations might also take up an environmental objective, such as reduction of carbon dioxide in the atmosphere, as their stated goal.
For more information
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About the Author
True Tamplin, BSc, CEPF®
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.