Relationship between Entrepreneurship, Innovation and Economic Development - Essay Example

? Entrepreneurship, Innovation and Economic Development Introduction The degree of technological change has been progressively growing over the last 100 years. Consequently, the capacity of nations to develop and thrive economically is associated with their efficiency in controlling the forces of technological change. Today, since all regions aim to be the ‘next Silicon Valley’ and tend to support innovative firms, it has become a topic of interest to understand the knowledge economy in which the achievement of firms depend on how well they can manage innovation and technological changes. As technological change permeates our lives, it is essential for each individual to understand the forces underlying and unleashed by technological change in order to become better decision makers, managers, policy analysts, and researchers. Relationship between Entrepreneurship, Innovation and Economic Development As Braunerhjelm points out, economists have undoubtedly made considerable advances during the last decades in understanding the relationship between entrepreneurship, innovation, and growth, and have brought in more profound insights on how entrepreneurship, innovation, and growth are interrelated. According to him, the relationship between entrepreneurship, innovation, and economic development can be identified from its most immediate foundation in simple perception, common sense, and a clear economic observation that performance to convert proposals into economic opportunities lies at the very core of entrepreneurship (2). Entrepreneurship can be stated as the foundation of innovation and revolution, and as such stimulates the development in efficiency and profitable competitiveness. Knowledge and flexibility are the two significant factors that are closely linked with entrepreneurship and have been noticed for their importance as measures for achieving competitiveness in this rapidly developing globalised economy. In the same way, development and growth of upcoming entrepreneurship brings chances for a country’s development within an intensified global competition due to the phenomena like globalisation and liberalisation, and modern technological innovations. According to Pirich et al, most economic, psychological and sociological research focus on the fact that entrepreneurship is a process, and not just a stagnant phenomenon and it is more than just a mechanical economic factor. Moreover, entrepreneurship is associated with choice-related issues and has a wide range of functional roles which involves coordination, innovation, uncertainty bearing, decision making resource allocation, capital supply, and ownership (14). Schumpeter holds the view that innovative entrepreneurs are the vehicles that can move the economy into development from a stagnant equilibrium, depending on the blending abilities of entrepreneurial individuals. In his opinion, “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, when he settles down to running it as other people run their business” (Schumpeter, 78). Likewise, there has been a great deal of attention focused on studying various models of innovation throughout the recent decades to identify the significance of innovation with various institutions. The Economist (1999) (as cited in Pirich, et al) reports that innovation has turned out to be the industrial religion of the late 20th century, where business considers it to be the key to increase profits and market share and Governments generally select it while trying to fix the economy; moreover, the rhetoric of innovation has substituted the post-war language of welfare economics (15). The entrepreneur takes the place of the most essential agent in almost all of the production, distribution, and growth theories. Entrepreneurship is the driving force of economic growth and this concept suits best with the long waves theory of Joseph Schumpeter. According to Schumpeter, “everyone is an entrepreneur when he actually carries out new combinations” (cited in UNCTAD, 4). Searching for and adopting new combinations of factors of production is regarded as a process of entrepreneurial discovery that will constitute the driving factor of economic development. In Schumpeter’s point of view, “new combinations” will find out better ways to manage the existing demand or exploit new products through existing technologies and creative destruction of products. Therefore an innovative entrepreneur can ensure the economic growth of the firm by taking the market share or by increasing the overall demand for the product. Toyota Motors is an example for economic growth through its policy of Top-line growth through innovation. As Little points out, Toyota realized that in spite of its reputation and fame for efficiency, it needed a new innovative platform strategy. Consequently, Toyota’s focus on innovation resulted in a profit increase by 39% since 2000 following the higher production efficiency of their platform strategy (Little, 36-38). Wennekers and Thurik (1999) (as cited in UNCTAD, 6-7) explain the relationship of entrepreneurship and innovation to economic growth through a conceptual framework model as having three levels of analysis: the individual level, the firm level, and the macro level. This model states that the entrepreneurship originates from the individuals level of action where the person’s activities are depended on motives, attitudes, skills, and psychological influences. And so the entrepreneurial objectives are influenced by cultural and social factors, the market environment and the macroeconomic situations. On the other hand, at the firm level, the entrepreneur obtains knowledge of innovations, through which the individual’s entrepreneurial qualities and objectives are, through actions, illustrated to the market. And finally, at the macro level, novel innovations and creative ideas are formed into action while meeting competing experiments from industries, national economy, and the international global market activities. Therefore, an entrepreneur’s innovative activities increase and develop the productive potential of the global economy by encouraging greater productivity and opening new niches and markets. And, as Davidsson (2003) illustrates, various concepts of entrepreneurship from all perspectives conclude that “entrepreneurship consists of the competitive behaviours that drive the market process,” depicting market place as an instance of entrepreneurship, which is manifested not only be the entrance of new firms into the market but also through the innovative and imitative activities of the existing firms into new markets (cited in Wong, Ho, and Autio, 336-337). Linking innovations to growth, he adds that technological innovation is in fact, a kind of entrepreneurship, as introducing innovations create change and competition in the market. For example, Lal and Clement points out that in India, the recent market reforms have led to higher economic growth, which means that fostering entrepreneurial activity would definitely result in economic growth of the market and in turn the overall development of the country (81). In the opinion of Sundbo, there are three basic theories which are competing paradigms in innovation research in current market economy; the entrepreneur paradigm, the technology-economic paradigm, and the strategic paradigm (16). In order to explain the innovation process associated with the entrepreneurs, he used the concept of entrepreneurship paradigm at the levels of individual organisations that has already acquired an encouraging market place with the development of a specific innovation. Such relationship between entrepreneurship and innovation takes place without any organised previous approach to innovation process. Rather, it involves with the introduction, through a market-generated attempt, of a new product or service into the market in order to sustain or increase the volume of business activities, or to exploit new business opportunities. The central agent of this paradigm is entrepreneur, the inventor in the innovation process through his self-determined activities. Here the process of innovation itself helps to gain a higher position in the market and create additional profits, though through an unsystematic innovation strategy. Role of Creativity and Problem Solving Creativity and problem solving has a great role to play in the relationship of entrepreneurship, innovation, and economic growth. The creativity enhances an entrepreneur to have access to opportunities and social capital for the business. Creativity and problem solving act as the central point in bringing out a product or service with maximum efficiency, and thereby bringing a marginal profitability to the business. It is evident that individual’s abilities and managerial skills are the most essential characteristics for an entrepreneur. An individual with his creativity finds out the cognitive processes through which he is able to discover and exploit the opportunities and resources and takes the decision to bring a new firm into existence. Risks and uncertainty are always associated with modern business, but the ability to risk acceptance and problem solving distinguishes an entrepreneur from other individuals, and so is their forbearance. Therefore, as Lee et al (as cited in Braunerhjelm, 14) commented, individual characteristics such as, creativity, tolerance, and the ability to problem solving have the significant power to influence entrepreneurship and thereby economic growth of the business. Through an economic perspective, Oyvin Kyvik brings out the multifaceted relations and comments that the perspectives of entrepreneurship as a trend in social, business and economics are diverged, and varies from the processes individuals undergo from becoming “motivated to discover” an innovation and transform it into something of value to themselves and to society (1). Conclusion In total, a firm with an innovative entrepreneur will result in deliberate and dynamic economic growth. A market’s capacity to expand its wealth and welfare over time is significantly based on its prospective to develop, exploit, and disseminate opportunities. The most pronounced role in this evolution is played by entrepreneurs with enhanced technical progress and innovative mentality. There is a general concept about the economic disciplines that micro-level processes play a vital role in the diffusion opportunities. However, the exploitation and dissemination of opportunities is influenced by the economic variables of entrepreneurship, innovation, and thereby resulting in economic growth of the market. Works Cited Braunerhjelm, Pontus. Entrepreneurship, innovation and Economic Growth. Royal institute of technology, (2010). 1-48. Web 21 Nov 2011http://papers.cesis.se/CESISWP224.pdf “Entrepreneurship and Economic Development”: The Empretec Showcase. United Nations Conference on Trade and Development, (2005): 1-14. Web 21 Nov 2011 http://www.unctad.org/en/docs/webiteteb20043_en.pdf Joseph Alois Schumpeter. The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle. Transaction Publishers, 1934. Print. Kyvik, Oyvin. Relationships between Entrepreneurship and Economics. ICBS World Congress, (2009): 1-4. Print. Little, Arthur D. Innovation Excellence 2005: How companies use innovation to improve profitability and growth. Global innovation Excellence PressDinner, (February 2005): 1-42. Lal, Anil K and Clement, Ronald W. Economic development in India: The role of individual enterprise. Asia-Pacific Development Journal, (2005). 81-97. Web 21 Nov 2011http://www.unescap.org/pdd/publications/apdj_12_2/lal.pdf Pirich, Amir., Knuckey, Stephen and Campbell, John. An interface between entrepreneurship & Innovation. Aalborg Unieristy, (2001): 1-45. Web 21 Nov 2011http://www.druid.dk/conferences/nw/paper1/pirich.pdf Sundbo, Jon. The theory of innovation: entrepreneurs, technology and strategy. Edward Elgar Publishing, 1988. Print. Wong, Poh Kam Ping Ho, Yuen and Autio, Erkko. Entrepreneurship, Innovation and Ecnomic Grwoth: Evidence from GEM data. Springer, (2005): 335-346. Web 21 Nov 2011 http://business2.fiu.edu/1660397/www/Ent%20and%20Eco%20Development/Wong_Ho_Autio(2005).pdf Read More