Relationship Between Entrepreneurship, Innovation and Economic Development

Last Updated: 19 May 2021
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Discuss the relationship between entrepreneurship, innovation and economic development. What role do creativity and problem solving play in this relationship? Refer to both theory and examples from the business world to support your discussion. From 18th century, economists have paid great attention to the effect which entrepreneurship and innovation have on the development of economy. Hisrich, Peters and Shepherd (2010) have discussed that an entrepreneur can be defined as an individual who has the ability to manage the limited resources more effective, applies creativity and innovation in the marketplace in order to appropriate profits and is keen to bear the uncertain condition.

Since it can act to integrate three factors of production in productive ways to cater to the needs of characters, several economists regard it as a special factor of production besides labor, capital and land. In addition, innovation means not only the creation of better or more effective products, technologies or ideas which are accepted by markets, but also the existing products of which quality are improved to satisfy consumers . It seems that both entrepreneurship and innovation rank high on promoting the development of economy. Accordingly, this essay will discuss the close relationship between entrepreneurship, innovation and economic development in small firms with a few specific examples. Besides, as two key factors in this relationship, creativity and problem solving will be also discussed in this essay.

In general, innovation has been regarded as one of the most momentous factors to the whole process of entrepreneurship. Similarly, entrepreneurship has become one of the most significant factors to innovation. It is said by Castillo that neither entrepreneurs nor innovators has considered themselves as each other, though, entrepreneurship requires innovation and vice versa. Usually, entrepreneurs desire to find out the best way, which can produce newer and better products and improve the quality of their previous goods, to search for new markets and capture purchasers’ attention by using the limited resources, and at the end of this, they can obtain more profits. In this process, when an entrepreneur creates a new product or uses a method that is new to it, it makes a technical change.

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At that time, the first firm which made the change is an innovator. Thus, it is the same with what Drucker  said that, during this process of exploring the right way, innovation is the specific means of entrepreneurs, that is to say, innovators have the abilities to exploit change as a chance for a new product and increase the value of existing products by means of improving its quality. Ultimately, the new and updated products will develop new markets and meet the needs to purchasers through the cooperation between entrepreneurship and innovation. In a word, as a special section of the process of entrepreneurship, innovation always accompanied with entrepreneurship, and meanwhile, they supplement each other.

In the term of entrepreneurship, it is received by a host of scholars that there is an affinitive relationship between entrepreneurship and the development of economy. To begin with, as a matter of fact, there is an approach of which the name is Global Entrepreneurship Monitor (GEM) to examining the complicated relationship between the level of entrepreneurship and the level of economic growth. In this method, researchers considered the growth of a nation’s gross domestic product (GDP) as the representative of the economic development, and then, they set up a GEM model, which is made up of demand side which is represented by entrepreneurial opportunities and supply side which is represented by entrepreneurial capacity factors. After measuring large bodies of data around forty countries, the GEM consortium is sure that entrepreneurship has a positive effect on the development of economy . Moreover, as Hisrich, Peters and Shepherd (2010) stated, entrepreneurship becomes the driving force of the economy from two angles, one is to increase the outputs and profits, and the other one is to enhance the structure of business in the society to promote the development of economy.

The American multinational information technology corporation, Dell Computer Corporation, can be considered as an appropriate example. Initially, the traditional sales model of information technology industry is that manufactures produce typical products in mass production one time, after that, they sell the products to the franchisers, and purchasers get the products ultimately. This kind of sales model results in a series of problems. As an example, franchisers will charge consumers for some extra money, so the price is usually higher than that in the sales model of direct marketing. When the prices of IT productions are higher than the value of them to consumers, the number of sales will decrease rapidly. That will lead to losses of large number of consumers. In contrast, Dell Computer Corporation centers on the needs of consumers, so Michael Dell adopt the direct selling model, which means that manufactures sell productions to consumers directly, instead of old sales systems . By using this kind of sales model, Dell Computer Corporation can prepare a satisfying production for every consumer at a low price. That gives a great opportunity to compete in the marketplace. It is certain that the change on the sales model can increase the profits. Hence, the economy in this company is stimulated by entrepreneurship. To concluded, entrepreneurship plays a crucial role in the process of stimulating the development of economy.

With a mass of successful examples, innovation has becoming an exceedingly contributor to economic development. According to what Peters  said, in an age demanding innovation, a company which cannot innovate and develop itself will be put to the test. Chiefly, innovation can contribute to make more profits by creating new products and improving the existing products. With a large number of competitors around a company, competitions in the market stimulate it to create and update products in order to increase its market share as well as its competitiveness. In addition, innovation can always bring a huge profit, so it also appeals to investment which can be used in the further development.

That can have a positive impact on the output and economic development. By way of illustration, Google Inc. which has triumphed through innovation as of its launch in 1998 can be the representative of innovative companies. Although Google Inc. achieved in the area of Internet search, it has never stopped its steps. Google Inc. employs hundreds of engineers who graduated from first-class universities to create more advanced products, such as Google Translate, Google News and Google Search Appliance. In 2005, Google Inc. purchased Android from Andy Rubin and went on to develop it. Until 2008, Google Inc. released an operating system for mobile devices such as smartphones and tablet computers called Android 1.1 which can be a competitor to Apple’s iPhone (Wired, 2004). In this case, the managers in Google Inc. are not only outstanding innovators but also excellent entrepreneurs. They find a promising field and start their businesses, so innovation brings them a mass of fortunes eventually. Without a doubt, innovation accompanied with entrepreneurship can push the development of economy.

As mentioned above, an entrepreneur who has the ability to apply creativity and innovation well should have a keen observation for existing problems in daily life. Usually, the appearance of a knotty problem leads to the design and development of new products, and that is because entrepreneurs will find a commercial opportunity from the existing problem. During the process of solving problems, creativity can always be put in the first place. It means not only to generate new products but also to combine existing products together in new ways. As Kirby (2003) has shown, creativity can regarded as the ability to think fresh things, whereas, innovation is the ability to do new things. Undoubtedly, the interaction between creativity and innovation is the core of solving problems. After the accomplishment of the new product, it is also extremely important to launch it in the existing market to make profits. That is the whole process from entrepreneurship to economic development. In this process, creativity and innovation become two significant factors. They are the core of solving problems, the essential conditions of entrepreneurship and the catalyst of economic development. Simultaneously, solving problems becomes the main part of entrepreneurship. It is certain that the final aim of these factors is to satisfy consumers’ needs and solve their problems.

To sum up, it is apparent that there is an inseparable and closely connected relationship between entrepreneurship, innovation and economic development. Above all, entrepreneurship is the driving force of the development of economy. Like the example of DELL Computer Corporation, successful entrepreneurs should find a new way or model to make their products more acceptable for consumers. Surly, innovation cannot be ignored during this process. Actually, there may be no innovative and attractive product without innovation. It can be regarded as the key of entrepreneurship. Entrepreneurship accompanied with innovation usually can create perfect products. When consumers are satisfied with the fresh products, the economies of the entrepreneurs’ companies will be promoted unaffectedly. Furthermore, both creativity and problem solving play important roles in these relationships. To meet the need of consumers, entrepreneurs apply the creativity and innovation to produce new products. So creativity can be considered as the catalyst of economic development. Likewise, problem solving can be considered as the main part of entrepreneurship which can promote the process of entrepreneurship.

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Relationship Between Entrepreneurship, Innovation and Economic Development. (2018, Apr 22). Retrieved from

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