The Relationship Between Entrepreneurship, Innovation and Economic Development
Discuss the relationship between entrepreneurship, innovation and economic development. What role do creativity and problem solving play in this relationship? Refer to both theory and examples from the business world to support your discussion. Date of submission: 26 November 2010 Name: Chen Wanxin School: the University of Nottingham, Ningbo, China Module convenor’s name: Maris Farquharson Module title: Entrepreneurship and Business Module code: P11440 (2010) Length: 1885 words
Entrepreneurship, which was a notion put forward approximately three centuries ago and soon becomes a contentious topic, contributes positively to economic development mainly through innovation. Whilst creativity and problem solving are required at all points in this relationship, for the reasons that creativity is the origin of innovation and effective problem solving is an indispensable skill required at every link in this process. The essay will firstly give definitions to the notion “entrepreneurship” relating to some theories and then throw light upon the term “innovation”.
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The third part will clarify how entrepreneurship contributes positively to economic development through innovation. After that, moreover, the essay will figure out the link between creativity and innovation as well as the role problem solving play in this whole relationship. Entrepreneurship, mainly based on four historical theories, has become increasingly thorough all the way from the early 1700s to the 21st century. The first use of the term entrepreneurship on record was by Richard Cantillon (168? 1734) in his book Essai Sur La Nature de Commerce en General. In Cantillon’s theory, the notion entrepreneur refers to those individuals who buy staffs at a low price and expect to sell them at a higher price under the condition of uncertainty (Lumsdaine and Binks, 2007). While after that, the economist well known as a populariser of Adams Smith’ work, Jean Baptiste Say (1767-1832), attributed Britain’s industrial success to the “wonderful practical skills of her entrepreneurs” (Lumsdaine and Binks, 2007).
Entrepreneurship here is no longer simply about the producing process or the product market; it is also concerned with the ability to deal with financial and raw material markets as well as the awareness of relevant legislations when they apply to their business activities. However, one important factor is still missing in Say’s theory—entrepreneurial creativity. Beyond these quests for entrepreneurship, a prominent economist and political scientist—Joseph Alios Schumpeter (1883-1950), highlighted the entrepreneur’s role as the catalyst for economic development through innovation.
Here is one of his famous statements, ‘whatever the type, everyone is an entrepreneur only when he actually carries out new combinations, and loses that character as soon as he has built up his business. ’ (Schumpeter, 1934) It is not hard to find out that Schumpeter’s theory is highly rigorous about the element of difference, uniqueness, innovation and change that is missing from those previous perceptions of entrepreneurship. Schumpeter also accounted for what it means by “new combinations”—‘They have employed existing means of production differently, more appropriately, more adventurously.
They have ‘carried out new combinations’. They are entrepreneurs. ’ (Schumpeter, 1934) His entrepreneurs might even be salaried employees so long as they are engaged in carrying out new combinations; nonetheless, individuals are acting as Schumpeterian entrepreneurs only when they are innovating: ‘it is just as rare for anyone always to remain an entrepreneur throughout the decades of his active life as it is for a businessman never to have a moment in which he is an entrepreneur, to however modest a degree. (Schumpeter, 1934) In short, entrepreneurship in Schumpeter’s theory is about breaking down the stalemate of resistance and enabling the wave of innovation to occur, it is a process of “creative destruction” that ‘captures the notion of dynamic progress and development as opposed to moribund stagnation’ (Lumsdaine and Binks, 2007). From the writer’s point of view, the former two theories are relatively intellectually imperfect due to their limit of time horizon, while Schumpeter’s theory is far more sophisticated as well as complete, in spite of its restriction to some extent.
The term innovation is much more frequently used in people’s daily life. Despite that, it is necessary here to clarify what innovation exactly is in the economic context. Lumsdine and Binks (2007) regarded innovation as ‘a valuable skill in demand by employers who recognize the ability to innovate as a key for remaining competitive in the global marketplace’. While innovation was conceptualized as the key to economic development in any enterprises or even countries, by Hisrich, Peters and Shepherd (2010).
They also categorized innovation into three types shown as follows: Moreover, Johnson (2007) pointed out that innovation could be both introduction of a novel production method or product as well as the development of a new geographical market for an existing product. While Bessant and Tidd (2007: 29) summarized innovation as: ‘the process of translating ideas into useful-and used-new products, processes and services’. Their idea supports the Development of Trade and Industry (DTI) definition that, ‘innovation is the successful exploitation of new ideas’.
When discussing the term innovation, it is inescapable to refer to both incremental innovation and radical innovation. The former is about small changes which are generally based on established knowledge and existing capabilities, in order to refine and modify existing product or production method; while the latter is about introduction of hitherto unknown ideas and novel products to exploit uncharted opportunities when old knowledge and capacities are obsolescent (Andriopoulos and Dawson, 2009).
In brief, innovation is the vehicle by which old and obsolete product or method of production is replaced by new ones. Hence, after clarifying two of the key concepts as above, what to discuss next is how entrepreneurship contributes positively through innovation chiefly. It is first necessary to refer to three roles that entrepreneurship play in economic development, namely the catalytic role, the allocating role, and the refining role (Lumsdaine and Binks, 2007). The theory of catalytic entrepreneurship was put forward by Joseph Schumpeter in his book The Theory of Economic Development.
In the theory, Schumpeter depicted an economy as a collection of enterprises and business which of each represents a certain combination of production factors in the form of people, machines, land, premises, finance, and so forth. To some extent, every business relied on the buoyant performance of all the others. As a consequence of this interdependence via customer demand, changes in the level of economic activity would only occur when a new combination-as mentioned in the second paragraph-of production elements was introduced.
Whereas the Austrian economists sees the economy as dynamic and ever changing, and thus come up with theory of the allocating role that entrepreneurship play in the economy. In this ‘elusive equilibrium’ theory, when there is an increase in demand for a particular product or service in the market, the first people to discern and respond to that will be able to charge higher prices under the circumstances of unchanged costs. Without those entrepreneurs’ alertness and responsiveness, market will inevitably suffer from imbalances and, ultimately leading to the poor performance of economy.
The theory of the refining role of entrepreneurship was firstly presented by Harvey Leibenstein (1922-1994). It is expounded that entrepreneurial activities could diminish the amount of slack in the market when catalytic and allocating entrepreneurship bring about changing competitive pressures in the economy. While from where the writer stands, Schumpeter’s catalytic theory is most closely connected with economic development although each of the other two theories holds water.
To explain this, let us look at what McDaniel (2002) say: for almost 300 years, entrepreneurship has been recognized as a part of the economy. The enhanced ability of the entrepreneurs to build up new combinations has converted society from one of a subsistence lifestyle to one of unheard-of ease of living and luxury, just about one generation ago. While innovation as the successful result of entrepreneurial efforts, are the lifeblood of this ease. There is an abundance of evidence in the business world to look at.
Nonetheless, this paragraph will only refer to two main examples, one is the legend of the Microsoft Corporation (Andriopoulos and Dawson, 2009), and the other is the case study of Charles Schwab’s success as an incumbent (Dannels, 2005). It is of great renown that Bill Gates left Harvard for his own business with the vision that the computer will be a practical tool in every office desktop and in every home. He founded the Microsoft Company with Paul Allen in 1975 and promoted the company to a monopolistic position in software industry within just a few decades.
It should be observed that Gates’ entrepreneurial characteristics such as creativity, enthusiasm, ingenuity and long-term vision have resulted in an innovation in computing industry, and consequently, have had a great positive impact on the economic growth. Whilst Dannles (2005) conducted many case studies about successful incumbents in his journal, and one of these is the Charles Schwab as an established financial industry incumbent. In the somehow early period of the company, it took an entrepreneurial action as disrupting Merrill Lynch’s full-service brokerage by offering discount brokerage.
Hence, Charles Schwab is currently the leading online brokerage with respect to Internet trading revenues and consumers on the Internet have benefited a lot from this innovation, which also implies a development in the economy. All the theories and examples demonstrated above evince one conclusion, that entrepreneurs principally plays a catalytic role in the economy, which means that entrepreneurship contribute positively to economic development mainly through innovation.
The final subject to discuss is the role that creativity and problem solving play in this relationship among entrepreneurship, innovation and economic development. Firstly, it is notably that creativity is the origin of innovation. Without creativity, entrepreneurs would not be capable of carrying out new combinations that lead to innovation in a society. As Lumstaine and Binks (2007) indicated, creativity is required at the early stages of product development, also known as the invention phases, whereas innovation occurs much later as well as disseminated and accepted much more widely.
It might be more easily to see through three examples–the creativity of Wright Brothers’ first successful airplane was the origin of the innovation of Boeing’s 747 jumbo jet flying non-stop across the Pacific; the creativity of Chester Carlson’s invention of the Xerox process was the origin of the innovation of Battelle’s development to produce a practical copier; and the creativity of Art Fly’s invention of the Post-it note was the origin of the innovation of 3M’s turning the invention into a line of successful business products.
Beyond creativity’s role upon innovation, effective problem solving plays the role as an indispensable skill required by every link in the relationship among entrepreneurship, innovation and economic development. Lumsdaine and Binks (2007) defined effective problem solving as the skill of ‘producing and implementing ecological, technical solutions for economic and social problems, thus creating economic improvement for individuals and communities’.
There are plenty of problem solving methods such like the Pugh Method, Decision Tree Method and Paired Comparison Method (Kirkham, Mosey and Binks, 2009) that could be applied to the entrepreneurial process from creativity to innovation, and finally to economic development. Fortunately enough, the writer had the opportunity to put all these problem solving method into practice during the third and forth Entrepreneurship tutorial sessions with her fraternal group members and had an even deeper understanding of entrepreneurship and innovation.
In a word, either creativity or problem solving skills plays an indispensable role in the relationship between entrepreneurship, innovation and economic development. To draw a conclusion at the very end, entrepreneurship, which is regarded as the catalyst in Joseph Schumpeter’s theory, contributes positively to economic development by means of innovation. Whilst creativity is the origin of innovation and effective problem solving is a required skill by every step within the process, so that creativity and problem solving play an indispensable role in this relationship. word count: 1,885) References: Andriopoulos, C. and Dawson, P. (2009) Managing Change, Creativity and Innovation by SAGE Publications Ltd. Bessant, J. and Tidd, J. (2007) Innovation and Entrepreneurship by Chichester: John Wiley Danneels, E. (2004) The Journal of Product Innovation Management by Product Development and Management Association Hisrich, R. D. , Peters, M. P. and Sherpherd, D. S. (2010) Entrepreneurship by McGraw-Hill International Edition
Johnson, P. (2007) The Economics of Small Firms Simultaneous published in the USA and Canada, by Routledge Kirkham, P. , Mosey, S. and Binks, M. (2009) Ingenuity in Practice: A Guide for Clear Thinking by the University of Nottingham Institute for Enterprise and Innovation Lumsdaine, E. and Binks, M. (2007) Entrepreneurship: from Creativity to Innovation by Trafford Publishing, Offices in Canada, USA, Ireland and UK McDaniel, B. A. 2002) Entrepreneurship and Innovation: An Economic Approach by M. E. Sharpe, Armonk, New York and London, England [On line] Available at: Ebrary<http://site. ebrary. com/lib/unnc/docDetail. action? docID=10178085> [10 November 2010] Schumpeter, J. A. (1934) The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle First published as a Galaxy Book, 1961, New York: Oxford University Press