Explain the Relationship Between, Entrepreneurship, Innovation and Economic Development

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21 March 2016

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Joseph Schumpeter formally regarded the understanding that entrepreneurs are often innovators, bringing new, improved goods and technologies to markets, creating new niche upcoming solutions and delivering them into new markets. Entrepreneurship focuses on the creativity, moment of inspiration, the why when and how of certain opportunity recognition. According to Schumpeter “the role of entrepreneurship is implicit as an underlying cause of innovation. However, innovation is not solely the domain of entrepreneurs” – The idea of Entrepreneurship somewhat relies on the effective means of innovation. The concept of innovation allows the development of new ideas, inventions and their making come to pass. Economic development undertakes the adoption of new market technologies and industry based economies to see and improvement in economic standards as well as an increase in the net gain of money flow. In regards to the three ideas of entrepreneurship, innovation and economic development I will discuss why I believe they co-exist. Where sustainability fits in is that increasingly our society is becoming more aware of its day-to-day actions with respect to the environment around it.

It is becoming increasingly important topic on businesses agendas as without a scope for future revenue streams, the very nature of what they do will not be feasible. Increasingly these days if a business is to be economically viable then sustainability has to be engrained in its model. Schumpeter progressively demonstrates the fundamental view of behaviour from an entrepreneurial point of view and how it must coincide with that of the innovative. In the book ‘The Entrepreneurial Mind’, Jeffry Timmons defined entrepreneurship as “the ability to create and build something from practically nothing.” This shows that without innovation and ideas entrepreneurship cannot come to pass. Innovation is taking an idea and bringing it to market, however market attractiveness, size and dynamics are all important components and thus theory of entrepreneurial understanding plays a vital role in success The view that (radical) innovation is helpful in the promotion of growth through economic development links to the Schumpeterian understanding of ‘creative destruction’ – presupposed that it is the forceful differential that imposes a separate angle of economical structure, commonly replacing the old and imposing the new. The theory of radical innovation ties in consistently with this theory, however to fully understand the ideology behind innovation we must look at the various types.
The two main types of innovation are incremental and as mentioned radical. Incremental innovation consists whereby the improvement of products, ideas, and strategies are put in place –often seen through the use of extension strategies. Positively speaking, incremental innovation helps to increase efficiency of products or services, by maximising the lifetime within their life cycle (short term innovation) and focusing on exploitation competencies. However in terms of long run economic value for development it may struggle to coincide with increases or dramatic changes in population and improvements of technology as two examples; especially in less economically development countries, thus limiting the innovative nature of an idea or action. On the other hand and more understandably tied in with entrepreneurship, we must look at radical innovation. “Radical innovation creates such a dramatic change in products, processes or services, that they transform existing market or industries, or create new ones.” Radical innovation looks to provide something new, accompanied by a disruptive or discontinuous quality that uproots markets and creates significant change within industries. This ties in coherently with entrepreneurship due to the fact that it is often these creations and innovative ideas that entrepreneurs use to bring good and services to the market place. Innovation encourages the go-forward, propelling economic development.

New creative industries, as well as new firms originate from the entrepreneur causing old companies providing goods and services to react and adapt to market change, in turn leading to a development economically in both the short and long term. The drive to compete and push costs down is what compels market breakthroughs, changing market tastes, fashions and demands which play a role in the success of entrepreneurs. This change is what helps to bring about economic development and through demand and supply problems/wants being solved. It is not only innovation that an entrepreneur provides, yet everyday management and corporate social responsibility that eventually drives success and helps to maintain the sustainable goal. Peter f. Drucker define entrepreneurship as a ‘systematic, professional discipline available to anyone in an organisation’ – Drucker believed that entrepreneurship wasn’t just from an individual, yet it could be introduced systematically by firms and businesses i.e. Corporate Entrepreneurship. Drucker understood that entrepreneurship did not just have to be from initial start-up business but could occur within established organisations as well through management styles and development strategies. In relation to Schumpeter, he regarded development economically as the carrying out of different or new combinations. He developed this concept creating five cases saying that ‘ The introduction of a new good; The introduction of a new method of production; The opening of a new market; The conquest of a new source of supply or raw materials; The carrying out of the new organisation of any industry.’

All of these cases regard the process of economic development and through the structure that Schumpeter has developed we are able to denote the cyclical relationship between entrepreneurship, innovation, and economical development throughout each stage with the ultimate goal of progression in the market place to eventually maintain a sustainable position. I will now explain the importance of innovation with respect to its significance and enhancement of economic development. For the ongoing push to encourage and create economic development, innovation plays a key role as the appearance of new ideas to smaller less mature companies, especially in less economically developed countries. This is due to the fact it helps to promote the gap between a less economic developed countries and more economic developed countries. In their book ‘Entrepreneurship, Innovation, and Economic Development’, Adam Szirmai and Wim Nadue view innovation as ‘intimately tied in with changes in structure of the economy, technological increases in production and eventually more added value for global gain’ Common components such as product and process advancements through technology, as well as lowering cost barriers, innovations have become an important asset to firm success and competitiveness. Innovation through technological change proves to be embodied within machinery, equipment, and more specialised work forces. Other advances in research and development, and improved efficiency working environments have also helped to improve total economical productivity, ultimately leading to increases in development.

Increases and development in the above not only improves the quantity of output within an economy, it also helps to advance the quality, delivery, and nature of a good or service. The continued increase of economic development creates higher output abilities for business that is ultimately fed back into the economy starting from the bottom and working its way to the top. An example of how entrepreneurship, innovation and economic development are linked can be shown from the internet site/service, Amazon created by the American Entrepreneur Jeff Bezos – offering an internet based approach, allowing customers to purchase books online. The radically innovative idea led to many traditional bookshops being put out of business, and its ability to hold a larger amount of books to a high street store, decreasing book store sales by 40%. Jeff Bezos saw the growing use and development of the internet, and decided to use this as a platform to launch his risky yet transformational idea of Amazon. The fact that Bezos saw this gap in the market and took the risk to launch his innovation makes him and the business entrepreneurial. The core competencies of Amazon allowed it to contribute it to economic development. One reason is due to the fact that it allows business and consumers to save time by being able to look and purchase for products on Amazon quickly and efficiently without having to go to stores or spend time search for them. It also contributes to economic efficiency due to the fact it allows companies to find goods at the most competitive prices and hence drives out firms that are uncompetitive. Going back to my emphasis on the increasing importance of sustainability, the ‘World Commission on Environment and Development’ say that ‘Sustainable Development meets the needs of present without compromising the ability of future generations to meet their own needs’ – A vital consideration in this link is the goal or guide at which business as well as whole industry produce a good or service to a sustainable degree.

Sustainability in this sense ties in with two concepts; meeting the needs of the poorer countries economically, and secondly the thought of limitation created by new technology and social footprint within the environment and its ability in the future. The obvious link between the former subject topics of this essay relate significantly to the topic of sustainability in the sense that each rely on future generation for further development, and also must maintain sustainability one way or another. Within his book ‘Beyond growth: Economics of Sustainable Development’ – Herman E. Daly saw sustainable development as ‘development without growth, that is without throughput growth beyond the regeneration and absorption capacities of the environment’ (pg13, 1997) – this view of sustainability sees economic development in a different category to that of growth. Therefore, the initial entrepreneurial idea that may have been developed through either incremental or radical innovation will need to maintain being sustainable in order to create development economically in both the short, but more-so the long run.

In conclusion it seems evident that without the inherent relationship that exists between the three main ideas of entrepreneurship, innovation and economic development none of them would completely flourish. The involvement of sustainability also plays a key role in this tightly knit relationship – the direct influence that sustainability has it extremely important as business in today’s world have a focus point on developing economically whilst being sustainable for themselves, and investors. I feel that in the future especially in the near future firms that do not involve themselves sustainably will find it difficult to compete within the market not having prejudged future needs and wants from consumers. This will evidentially create a firm to be less competitive in the long-run. Schumpeter stated ‘A firm can never be perfect in any sense, yet it in time approaches a relative perfection having regard to the surrounding world and social conditions’ – The ability of entrepreneurs and business’ to understand that sustainability is vital at an early stage will enable them to source information and models to follow. I feel that even though the symbiotic relationship between entrepreneurship, innovation, and economic development must tie in subsequently with sustainability it is a process that can be adapted throughout the innovation stage, and well as during economic development, and that entrepreneurs must not take away wholly from the prospect of growth and profit in such a way that may eventually negatively impact an idea, or a firm in the long-run. This fundamental relationship demonstrates the need of positive conductivity between each other, and I think that unless this is not achieved then economic development and market retention will not be held. Thus evidently I feel the focal communication between each stage must remain if an ultimate goal is to be reached economically and in terms of sustainability.

Adam Szirmai and Wim Nadue (2011). Entrepreneurship, Innovation, and Economic Development. USA: Oxford University Press. p8. Advameg, Inc. (N/A). ENTREPRENEURSHIP. Available:
http://www.referenceforbusiness.com/small/Di-Eq/Entrepreneurship.html#b. Last accessed 18/11/2012. Gina Colarello O’Connor (2000). Radical Innovation: How Mature Companies Can Outsmart Upstarts. Boston, Mass: Harvard Business School Press. p5. Herman E. Daly (1997). Beyond growth: Economics of Sustainable Development. N/A: Beacon Press; New edition. p13. Jeffry Timmons (1989). The Entrepreneurial Mind. Andover, Mass: Brick House Pub. Co., p1. Joseph Schumpeter (1989). The Theory Of Economic Development. Harvard University: New Brunswick and London. p67. Joseph Schumpeter (1989). The Theory Of Economic Development. Harvard University: New Brunswick and London. p79. Poh Kam Wong, Yuen Ping Ho, Erkko Autio. (2005). Entrepreneurship, Innovation and Economic Growth. Evidence from GEM data. 24 (3), p339. UN. (1987). World Commission on Environment and Development. Report of the World Commission on Environment and Development. 96th (42/187), 43.

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