To conclude, entrepreneurship and innovation are two veryclosely related concepts in the sense that innovation does require some form ofentrepreneurial skills and vice versa. Both need each other in order to besuccessful in business and due to this similarity, it can be confirmed thatentrepreneurship must and should be connected to the usage of new innovativeideas 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 throughcompanies such as 3D4Medical who use 3D training tools for their employees.This help to improve the quality of healthcare provided and therefore leads tohigher productivity levels within the population, which could cause increasesin economic development and growth. The second area regards the environment. Innovation can have alasting effect here as it can provide aid to combat problems such as climatechange or sustaining biodiversity. This is achieved through mainly organisationinnovation, for example firms would try to bring about new ways to manufacturegoods in order to maintain sustainability and designed in such a way that ittakes product lifespan into account.Given all that has been said regarding the Schools of Thoughtand the economic theories of entrepreneurship, the final point I will consideris how innovation has made an impact to society in general. There are threemain areas that will be focused on during this evaluation, the first being economicgrowth and employment.
This can be referred back to the neoclassical economictheory where technological progress leads to more growth in the long run. Linkingto innovation, this can lead to new enterprises opening up meaning that moreradical or incremental ideas can be developed whilst creating hundreds of newemployment opportunities as a result. However if these innovative productsbecome less desirable due to other competitive firms, then innovation couldcause existing businesses to close and therefore a loss of jobs.In evaluation, this theory shows a significant contrast withKirzner’s vision as stated previously – a stance firmly planted inspired by theworks 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 theoryas a stimulant for socio-economic development, however unlike Kirzner who seesit with just this market, Schumpeter applies this concept within all types ofeconomy. With this being said, this provides enough evidence to support thestatement that innovation is in fact central to entrepreneurship.
The flipside of the coin leads the way to Schumpeter’sInnovation theory. He defines innovation as “the market introduction of atechnical or organisational novelty, not just its invention.” (Schumpeter1949). He questioned early on the potential reasons for fluctuations of thebusiness cycle that have ever been recorded, eventually concluding that not onechange within the cycle is ever the same.
His explanations for these events arenarrowed down to his “economic process model.” Changes in this process are mostlikely a result of continued innovation, which as a result provides the basisfor capitalist economic development. “There is the joy of creating, of gettingthings done, or simply of exercising one’s energy and ingenuity… Our type seeksout difficulties, changes in order to change, delights in ventures.”(Schumpeter 1934, pp. 93-4).
Evaluatingthis theory, the market process can be sharply contrasted with Schumpeter’smultiple theories concerning development. This can be supported by a reportfrom the Mises Institute which explains that unlike the theories from theAustrian School of thought, Schumpeter’s theories do not have any place forconsumer demand or market exchange at all; if they were to have a role in thesetheories they would only serve the purpose of being a “sideshow” toentrepreneurial innovation and cause temporary profits made to decrease.(Bostaph 2013). It can therefore be concluded from this contrast that theMarket Process theory does not support the claim that innovation is central toentrepreneurship.
“Whatthe market process does is to systematically translate unnoticed opportunitiesfor mutually profitable exchange among individuals into forms that tend toexcite the interest and alertness of those most likely to notice what can bespontaneously learned.” (Ibid., p.
150.)Furthermore,economists such as Friedrich Hayek quoted that “the absence of entrepreneurs inneoclassical economics is due to the assumption of market equilibrium.” (Casson1982). This leads on to another theory of entrepreneurship known as the MarketProcess theory supported by Hayek and Kirzner of the Austrian School ofThought.
In 1963 Kirzner conceptualizes this theory as the constraint ofactions of all as a result of the actions of each and every individual. Theprocess involves interactions between the decisions made by all participantswithin a certain market.Thisparticular theory strongly contrasts with the neoclassical economic theory, atheory supported by Richard Cantillon of the French School of Thought. MarkCasson states that both theories have different perceptions when it comes torationality which would “limit the extent to which individuals plan to exploitall the opportunities available, and to satisfy all the constraints to whichthey are subject.
” (Casson, 1982).Anotherinteresting theory is Harvey Leibenstein’s X-Efficiency theory initiallyestablished in 1966, x-efficiency being defined as “the degree of inefficiencyin the use of resources within a firm.” Heexplains that the entrepreneur has 2 main roles – a gap filler and an inputcompleter. In essence, if there are imperfections within the market due to thefactors of production not being marketed the entrepreneur has to fill thesegaps to ensure the market stays in motion. Regarding input completion theentrepreneur must ensure efficiency of production methods are maintainedthrough input availability and make sure flow of information is clear.
(Casson1982).The firsttheory I will examine is Knight’s theory of Risk Bearing and the Role ofUncertainty. Knight explains that one of the most common features of theentrepreneur is receiving profits as rewards, whose quantity is dependent uponthe degree of uncertainty bearing. (Casson, 1982). Further, risks such as theftor getting involved in an accident can be insured and therefore makes it easierfor the entrepreneur to reduce such risks when necessary. However a key flawwith this theory is that it is very one sided in the sense that it ignores allother factors that could contribute to profits made by them. This particulartheory has a different outlook on entrepreneurship compared to for example Schumpeter,however combining the two theories together can go to explain why there are ahandful of innovators and why they all appear so unexpectedly.
Withthe Economic Schools of Thought in mind the attention can now be drawn on thedifferent economic theories of entrepreneurship and how each of them have madean impact on innovation in modern day society, or perhaps argue against thevitality of innovation in entrepreneurship. Incomparison to the other Schools of Thought, Schumpeter’s entrepreneur is evenmore likely to have troubles finding people that would support their vision,therefore making it harder to gather funds for research and development. As anentrepreneur with a predominantly innovative mind set, not many others canforecast the potential positive impact that this radical idea may have onsociety.
This can be further explained through aconcept created by Schumpeter himself called “gales of creative destruction.”Increasing innovation would have a significant impact on the economy and as aresult some products or production processes that currently exist would becomeoutdated and worthless. Competitive firms would then attempt to imitate thesenew innovative ideas, meaning that if the original company stopped innovatingtheir products further, they would experience a reduction in profits (a primeexample of this behaviour is Apple and their range of iPods and iPhones, with othercompanies such as Samsung trying to create similar goods in order to becompetitive). This herding behaviour is reiterated in a report from the HarvardUniversity Business School, suggesting that due to concerns about reputation inthe labour market, some managers are found to have simply mimicked investmentdecisions from their close rivals. Schumpeter justifies this particularbehaviour, saying that “entrepreneurs are unique in that not everyone cancreate new combinations.” (David,Scharfstein, Stein, 1990).
The final main School of Thought(German-Austrian) describes the entrepreneur from the view point of them beinginnovators. “The entrepreneur is seekingout new combinations doing of new things or the doing of things that are alreadybeing done in a new way.” (Schumpeter, 1934). Although more concerned withexplaining economic development rather than entrepreneurship, Schumpeterbelieved that entrepreneurship and innovation were highly dependent on eachother; creating new technologies would drive the market forward and thereforeprovides a stable platform for positive economic growth.
Both the Austrian and French Schools argueagainst the statement that innovation is central to entrepreneurship; this canbe supported by Kirzner’s concept of entrepreneurial “alertness.” Due toexploitable gains to be made from trade when the market is in a state ofdisequilibrium profit opportunities are discovered. Therefore the primary goalfor entrepreneurs in Kirzner’s eyes is to seek opportunity before takingaction, thus leaving innovation and creativity as a latter priority. (Bostaph,2013).The Austrian School of Thought on the other hand describesentrepreneurs around the themes of equilibration and resource allocation,quoted by Kirzner in 1973 as “the pursuit of opportunity without regard tothe resources currently under one’s control or influence.” (Chicago1973). A report from the Mises Institute further emphasises this, along with aclear comparison between his beliefs and other theories of entrepreneurship.
Thisthought is a development from the French School with the ideology that resourceacquisition and management take priority over creativity and innovation, thushaving the capability to recognise opportunities that others would let slipaway. (Bostaph 2013)Evaluating Cantillon’s vision of entrepreneurship, it is clearthat organisation and management could be seen as more important than aninnovative mind as some entrepreneurial leaders may lack certain skill sets,such as creativity. To solve this problem the entrepreneur would then have tohire a team of employees who do match the criteria required in order tomaintain an innovative level of production and therefore stay competitive inthe market.One important aspect that we must consideris the different potential definitions of an entrepreneur.
Richard Cantillon(French Economic School of Thought) came up with the earliest known definitionin 1755, describing entrepreneurs as “individuals who pursue profitsunder conditions of uncertainty”. Here the entrepreneur is being examined fromthe perspective that they are risk takers. This particular definition is verydifferent to the other definitions that we see today and was far from that ofsomeone with an innovative mind set.
Closely linking to neoclassical economictheory, Cantillon believed that the entrepreneur aided with commencing theproduction process and ultimately the business, thus causing the market toachieve equilibrium between supply and demand and so stabilising the economy. Being in the competitive environment,innovation and entrepreneurial leadership are essential within an organisationfor its survival and success. One of the benefits of innovation is that itincreases the competitiveness of goods and services and supports high levels ofprofits and growth. However due to a lack of experience of innovation inpractice, studies suggest that we may not expect significant levels ofdevelopment of innovation in the near future. This essay will criticallyevaluate the above statement, focusing primarily on the justification of theconnection between innovation and entrepreneurship whilst looking at differenttheories and practical examples to support the proclaimed correlation betweenthe two concepts.