Entrepreneurship and innovation

Several academics have made an effort to define entrepreneurship. For example, Frank Knight defined an entrepreneur as a bearer of uncertainty, Kirzner as a creator or arbitrager of balance, Jean-Baptiste Say as a coordinator, and Schumpeter as an inventor. The execution of new or significantly improved products, services, processes, or new business practices is the most typical definition of innovation.

Innovation therefore entails a transformation that produces fresh parameters for economic activity. Because every new object has a commercial value, innovation and entrepreneurship go hand in hand. Therefore, innovation is more significant than invention, which simply serves the interests of the inventor. Entrepreneurship and innovation are closely related phenomena in that innovation requires entrepreneurial behaviour. Normally, innovation is a process from idea to innovation and growth which is driven by various functions conducted by different actors. While inventors create ideas, researchers, or other visionary thinkers, they are identified by the entrepreneur. There is, therefore, a huge difference between entrepreneurship and innovation as different individuals perform both. According to Schumpeter, the entrepreneur’s main function is converting ideas to commercial use hence driving innovation forward. An innovation will be worthless if an entrepreneur does not push it forward to benefit both the society and the innovator.

Contribution of innovation to economic development

Innovation has brought about new technology and new products that have helped address global challenges. It has introduced new ways of producing goods and delivering services which have, in turn, led to the creation of more jobs and hence an improvement in the quality of life. Economic growth is calculated using variations in the total value of goods and services created by an economy, known as a gross domestic product (GDP). Innovation plays a critical role in addressing economic growth objectives. First of all, it is crucial to note that the prospect of any economy depends on the ability of that economy to innovate. Innovation is hence the key to development and advancement of any economy. Creative destruction is a phrase that was advanced by Schumpeter as he argued that flow of economic activity and employment are crucial in growth. Schumpeter defined innovations as the introduction of new products, new methods of production and he cited examples such as the discovery of raw materials. Through creative destruction, every innovation is followed by short-term phases of job loss and business strain as the economic system is recreated to convert to a more efficient one. After the temporary periods are over, they are followed by permanent periods of economic growth through improved GDP.

Economic growth caused by innovation can be categorised into three main economic improvements. First is the growth of the economy through growth in employment (Moulaert 2013, p. 27). The Neoclassical growth models consider knowledge accumulation and technological progress as one of the ways of achieving long-run economic growth. It states that the economic growth helps reduce the effects of diminishing returns to capital, advances to the theory have recognised the contribution of innovation to increase in employment levels. As the level of innovation increases so does the level of employment since the introduction of new products and production processes requires additional workforce.

Innovation also plays a major role in solving environmental challenges such as restrictive climate change and global greenhouse gas radiations as well as preserving biodiversity. Innovation has contributed to solving environmental problems through the use of new technologies, and non-technological innovations. The non-technological innovations such as organisation innovations have enabled the creation of an environmental, technological innovation. For instance, innovation in climate change mitigation technologies has increased in the recent years which has enabled manufacturing companies to upgrade their efforts towards sustainable manufacturing. The manufacturing companies have devised ways through which their manufacturing activities have reduced pollution hence making a positive contribution to the environment and the economy at large. Most of the large manufacturing companies such as Apple, Microsoft among others have embraced sustainable manufacturing which is aimed at reduced innovation through the use of innovative production processes. Such companies have used solar energy as one of their innovative processes with the aim of reducing pollution.

The third contribution of innovation to the economy is helping alleviate the social challenges which include health, demographic challenges and inequalities among others. Innovation in the health sector has led to the introduction of new and effective machines which are used to diagnose diseases as well as the introduction of new medication which has helped cure diseases that were considered incurable in the past. For instance, innovation has enabled the elderly remain healthier hence more productive, which has contributed to the increase in the economy’s GDP. Through innovation, the world has experienced more preventive and predictive healthcare which in turn has improved the quality of life. When the people in the economy are healthy, their standards of living increase as such people are more productive. Additionally, innovation addresses social benefits by creating employment opportunities and addressing the challenges caused by low-income earners hence bridging the gap between the poor and the wealthy which in turn leads to economic development.

Economic Theories of Entrepreneurship

The Leibenstein X-efficiency theory

X-efficiency is the variation between efficient behaviours of firms and their observed behaviour in practice. The X-efficiency occurs when businesses do not achieve technical efficiency owing to lack of competitive force. According to the X-efficiency theory, when the market settings do not create perfect competition, there is normally inefficiency. The X-efficiency assumes that managers in businesses work to maximise economic profits which are only achieved through adjusting the outputs and inputs. Leibenstein views entrepreneurs as a creative response to X-efficiency. The opportunity for an entrepreneur is created after other people have a shortage of effort and inefficiency in the organisation. Therefore, entrepreneurial undertakings create a competitive risk to inefficient organisations. Leibenstein continued to name two key functions of entrepreneurs. The first function is the completion of input which includes making the inputs available to develop the efficiency of the methods of production as well as to facilitate the introduction of new methods through innovation. The entrepreneur is hence expected to be the driving force behind any innovation. The second role is to fill gaps which are close to the arbitrage function as outlined by Kirzner. According to Leibenstein, filling gaps refers to viewing the economy as a net made up of nodes and pathways (Frantz 2013, p. 19). The nodes are the households and industries who receive inputs and consumer goods through the pathways which, in turn, sends outputs. In a perfect competition model, the net is complete in that it has pathways that are well-marked and definite, with well-marked and definite nodes.

Frank H. Knight Risk Bearing Theory

Frank was an economist who is well known for distinguishing between risk which is manageable through insurance, uncertainty and which is not a risk. According to Frank, the risk is the occurrence of events whose frequency is relative to past experiences (Barreto 2013, p. 22). The uncertainty, on the other hand, relates to unique events whose probability of occurrence is subjectively estimated. Through innovation, insurance companies came up with the concept of pooling of funds. In this process, they can estimate the relative certainty of a certain risk hence charge the risk premiums necessary. In the same way, the entrepreneurs can lay off risks, but they will be left to bear with the uncertainties themselves. An entrepreneur is content with bearing the risks because the profit they will gain will compensate the psychological cost they incurred.

Innovation theory by Schumpeter

Like stated earlier, Schumpeter defined an entrepreneur as a person who carries out a combination of many things such as the introduction of new products and processes. Schumpeter hence gave a heroic vision of an entrepreneur as he portrayed him as a person who is motivated by the will to create a private kingdom, the determination to overcome and ascertain they are superior to others (Camisón and Monfort-Mir 2012, p. 779).

Other entrepreneur theories

Other scholars who have advanced entrepreneurial theories are Hayek with the theory of market equilibrium. According to Hayek, the absence of entrepreneurs in Neo-classic economics is associated with the assumptions of market equilibrium. The changes in the volume of real investments made by entrepreneurs cause instability in business. McClelland also advanced a theory known as the Tenets which states that economic development depends on the vigorous activities of several individuals who behave like entrepreneurs (Woodside et al. 2016, p. 142). The motivation behind entrepreneurs is the strong need for achievement. The theory identified that there is a short supply of motivation in the developing countries than in rich countries. Therefore, to improve the conditions of developing countries, entrepreneurs should be increased. According to Kirzner, entrepreneurs have several characteristics. The main role is an adjustment of price followed by alertness to disequilibrium, and lastly, entrepreneurs are unpredictable (Tang et al, 2012, p. 79). The theory hence stresses the ability of entrepreneurs in grabbing opportunities in the market.

Conclusion

Entrepreneurship plays a major role in the economy of a country. Be it in the creation of jobs, improvement of social status and introduction of more efficient methods and processes of production. Like stated by McClelland in the Tenents theory, countries with a high level of innovation are rich while those with low levels of innovation are poor. Although the different economists have focused on different aspects of entrepreneurship, all the economist have agreed that at its core, entrepreneurship involves judgment. In the mathematical models developed by economists, individuals and firms in the economy have perfect information. Therefore, there is no role for entrepreneurs. As the years have gone by, economists have dropped the assumption of perfect information, hence allowing the role of entrepreneurs in the economic model. Schumpeter defined who an entrepreneur is and stated that their main role in the economy is the introduction of new products and processes which increase efficiency. Knight advanced the Schumpeter definition by stating that entrepreneurs are individuals who know how to identify risk, uncertainty, and what is not a risk. They are people who know how to pool the risks and bear the uncertainties with the aim of benefiting from the profits after bearing the uncertainties. McClelland, on the other hand, stated that it is through the motivation of entrepreneurs that countries become rich. The economist compared developing countries with rich countries noting that in developing countries, the motivation of entrepreneurs is lower than that in rich countries. The notable common conclusion from all the economists is that entrepreneurs play a major role in the economic development of a country.

References

Barreto, H., 2013. The Entrepreneur in Microeconomic Theory: Disappearance and

Explanaition. Routledge.

Camisón, C. and Monfort-Mir, V.M., 2012. Measuring innovation in tourism from the Schumpeterian

and the dynamic-capabilities perspectives. Tourism management, 33(4), pp.776-789.

Frantz, R.S., 2013. X-efficiency: Theory, evidence and applications (Vol. 2). Springer Science &

Business Media.

Moulaert, F. ed., 2013. The international handbook on social innovation: collective action, social

learning and transdisciplinary research. Edward Elgar Publishing.

Tang, J., Kacmar, K.M.M. and Busenitz, L., 2012. Entrepreneurial alertness in the pursuit of

new opportunities. Journal of Business Venturing, 27(1), pp.77-94.

Woodside, A.G., Bernal, P.M. and Coduras, A., 2016. The general theory of culture,

entrepreneurship, innovation, and quality-of-life: Comparing nurturing versus thwarting enterprise start-ups in BRIC, Denmark, Germany, and the United States. Industrial Marketing Management, 53, pp.136-159.