To the environment. Innovation can have a lasting effect

To conclude, entrepreneurship and innovation are two very
closely related concepts in the sense that innovation does require some form of
entrepreneurial skills and vice versa. Both need each other in order to be
successful in business and due to this similarity, it can be confirmed that
entrepreneurship must and should be connected to the usage of new innovative
ideas and not to firms as a whole.

The final area I will look at regards the social side of things,
such as health and inequality. Innovation contributes to this area of life through
companies such as 3D4Medical who use 3D training tools for their employees.
This help to improve the quality of healthcare provided and therefore leads to
higher productivity levels within the population, which could cause increases
in economic development and growth.

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The second area regards the environment. Innovation can have a
lasting effect here as it can provide aid to combat problems such as climate
change or sustaining biodiversity. This is achieved through mainly organisation
innovation, for example firms would try to bring about new ways to manufacture
goods in order to maintain sustainability and designed in such a way that it
takes product lifespan into account.

Given all that has been said regarding the Schools of Thought
and the economic theories of entrepreneurship, the final point I will consider
is how innovation has made an impact to society in general. There are three
main areas that will be focused on during this evaluation, the first being economic
growth and employment. This can be referred back to the neoclassical economic
theory where technological progress leads to more growth in the long run. Linking
to innovation, this can lead to new enterprises opening up meaning that more
radical or incremental ideas can be developed whilst creating hundreds of new
employment opportunities as a result. However if these innovative products
become less desirable due to other competitive firms, then innovation could
cause existing businesses to close and therefore a loss of jobs.

In evaluation, this theory shows a significant contrast with
Kirzner’s vision as stated previously – a stance firmly planted inspired by the
works of Austrian economists Carl Menger and Ludwig Von Mises (Menger 1971, pp.
175-80, Mises 1966, chs. IV and V). In addition Schumpeter does see his theory
as a stimulant for socio-economic development, however unlike Kirzner who sees
it with just this market, Schumpeter applies this concept within all types of
economy. With this being said, this provides enough evidence to support the
statement that innovation is in fact central to entrepreneurship.

The flipside of the coin leads the way to Schumpeter’s
Innovation theory. He defines innovation as “the market introduction of a
technical or organisational novelty, not just its invention.” (Schumpeter
1949). He questioned early on the potential reasons for fluctuations of the
business cycle that have ever been recorded, eventually concluding that not one
change within the cycle is ever the same. His explanations for these events are
narrowed down to his “economic process model.” Changes in this process are most
likely a result of continued innovation, which as a result provides the basis
for capitalist economic development. “There is the joy of creating, of getting
things done, or simply of exercising one’s energy and ingenuity… Our type seeks
out difficulties, changes in order to change, delights in ventures.”
(Schumpeter 1934, pp. 93-4).

Evaluating
this theory, the market process can be sharply contrasted with Schumpeter’s
multiple theories concerning development. This can be supported by a report
from the Mises Institute which explains that unlike the theories from the
Austrian School of thought, Schumpeter’s theories do not have any place for
consumer demand or market exchange at all; if they were to have a role in these
theories they would only serve the purpose of being a “sideshow” to
entrepreneurial innovation and cause temporary profits made to decrease.
(Bostaph 2013). It can therefore be concluded from this contrast that the
Market Process theory does not support the claim that innovation is central to
entrepreneurship.

“What
the market process does is to systematically translate unnoticed opportunities
for mutually profitable exchange among individuals into forms that tend to
excite the interest and alertness of those most likely to notice what can be
spontaneously learned.” (Ibid., p. 150.)

Furthermore,
economists such as Friedrich Hayek quoted that “the absence of entrepreneurs in
neoclassical economics is due to the assumption of market equilibrium.” (Casson
1982). This leads on to another theory of entrepreneurship known as the Market
Process theory supported by Hayek and Kirzner of the Austrian School of
Thought. In 1963 Kirzner conceptualizes this theory as the constraint of
actions of all as a result of the actions of each and every individual. The
process involves interactions between the decisions made by all participants
within a certain market.

This
particular theory strongly contrasts with the neoclassical economic theory, a
theory supported by Richard Cantillon of the French School of Thought. Mark
Casson states that both theories have different perceptions when it comes to
rationality which would “limit the extent to which individuals plan to exploit
all the opportunities available, and to satisfy all the constraints to which
they are subject.” (Casson, 1982).

Another
interesting theory is Harvey Leibenstein’s X-Efficiency theory initially
established in 1966, x-efficiency being defined as “the degree of inefficiency
in the use of resources within a firm.”  He
explains that the entrepreneur has 2 main roles – a gap filler and an input
completer. In essence, if there are imperfections within the market due to the
factors of production not being marketed the entrepreneur has to fill these
gaps to ensure the market stays in motion. Regarding input completion the
entrepreneur must ensure efficiency of production methods are maintained
through input availability and make sure flow of information is clear. (Casson
1982).

The first
theory I will examine is Knight’s theory of Risk Bearing and the Role of
Uncertainty. Knight explains that one of the most common features of the
entrepreneur is receiving profits as rewards, whose quantity is dependent upon
the degree of uncertainty bearing. (Casson, 1982). Further, risks such as theft
or getting involved in an accident can be insured and therefore makes it easier
for the entrepreneur to reduce such risks when necessary. However a key flaw
with this theory is that it is very one sided in the sense that it ignores all
other factors that could contribute to profits made by them. This particular
theory has a different outlook on entrepreneurship compared to for example Schumpeter,
however combining the two theories together can go to explain why there are a
handful of innovators and why they all appear so unexpectedly.

With
the Economic Schools of Thought in mind the attention can now be drawn on the
different economic theories of entrepreneurship and how each of them have made
an impact on innovation in modern day society, or perhaps argue against the
vitality of innovation in entrepreneurship.

In
comparison to the other Schools of Thought, Schumpeter’s entrepreneur is even
more likely to have troubles finding people that would support their vision,
therefore making it harder to gather funds for research and development. As an
entrepreneur with a predominantly innovative mind set, not many others can
forecast the potential positive impact that this radical idea may have on
society.

 This can be further explained through a
concept created by Schumpeter himself called “gales of creative destruction.”
Increasing innovation would have a significant impact on the economy and as a
result some products or production processes that currently exist would become
outdated and worthless. Competitive firms would then attempt to imitate these
new innovative ideas, meaning that if the original company stopped innovating
their products further, they would experience a reduction in profits (a prime
example of this behaviour is Apple and their range of iPods and iPhones, with other
companies such as Samsung trying to create similar goods in order to be
competitive). This herding behaviour is reiterated in a report from the Harvard
University Business School, suggesting that due to concerns about reputation in
the labour market, some managers are found to have simply mimicked investment
decisions from their close rivals. Schumpeter justifies this particular
behaviour, saying that “entrepreneurs are unique in that not everyone can
create new combinations.”  (David,
Scharfstein, Stein, 1990).

The final main School of Thought
(German-Austrian) describes the entrepreneur from the view point of them being
innovators. “The entrepreneur is seeking
out new combinations doing of new things or the doing of things that are already
being done in a new way.” (Schumpeter, 1934). Although more concerned with
explaining economic development rather than entrepreneurship, Schumpeter
believed that entrepreneurship and innovation were highly dependent on each
other; creating new technologies would drive the market forward and therefore
provides a stable platform for positive economic growth.

 Both the Austrian and French Schools argue
against the statement that innovation is central to entrepreneurship; this can
be supported by Kirzner’s concept of entrepreneurial “alertness.” Due to
exploitable gains to be made from trade when the market is in a state of
disequilibrium profit opportunities are discovered. Therefore the primary goal
for entrepreneurs in Kirzner’s eyes is to seek opportunity before taking
action, thus leaving innovation and creativity as a latter priority. (Bostaph,
2013).

The Austrian School of Thought on the other hand describes
entrepreneurs around the themes of equilibration and resource allocation,
quoted by Kirzner in 1973 as “the pursuit of opportunity without regard to
the resources currently under one’s control or influence.” (Chicago
1973). A report from the Mises Institute further emphasises this, along with a
clear comparison between his beliefs and other theories of entrepreneurship. This
thought is a development from the French School with the ideology that resource
acquisition and management take priority over creativity and innovation, thus
having the capability to recognise opportunities that others would let slip
away. (Bostaph 2013)

Evaluating Cantillon’s vision of entrepreneurship, it is clear
that organisation and management could be seen as more important than an
innovative mind as some entrepreneurial leaders may lack certain skill sets,
such as creativity. To solve this problem the entrepreneur would then have to
hire a team of employees who do match the criteria required in order to
maintain an innovative level of production and therefore stay competitive in
the market.

One important aspect that we must consider
is the different potential definitions of an entrepreneur. Richard Cantillon
(French Economic School of Thought) came up with the earliest known definition
in 1755, describing entrepreneurs as “individuals who pursue profits
under conditions of uncertainty”. Here the entrepreneur is being examined from
the perspective that they are risk takers. This particular definition is very
different to the other definitions that we see today and was far from that of
someone with an innovative mind set. Closely linking to neoclassical economic
theory, Cantillon believed that the entrepreneur aided with commencing the
production process and ultimately the business, thus causing the market to
achieve equilibrium between supply and demand and so stabilising the economy.

Being in the competitive environment,
innovation and entrepreneurial leadership are essential within an organisation
for its survival and success. One of the benefits of innovation is that it
increases the competitiveness of goods and services and supports high levels of
profits and growth. However due to a lack of experience of innovation in
practice, studies suggest that we may not expect significant levels of
development of innovation in the near future. This essay will critically
evaluate the above statement, focusing primarily on the justification of the
connection between innovation and entrepreneurship whilst looking at different
theories and practical examples to support the proclaimed correlation between
the two concepts.