Discuss the relationship between entrepreneurship, innovation and economic development. What role does sustainability play in this relationship? Refer to both theory and examples from the business world to support your discussion. In today’s economy, entrepreneurship is an important subject and entrepreneurial abilities have become a pivotal requirement both nationally and globally. However, enterprises that succeed mostly do so as they are capable of change for the better, through innovation. So for an enterprise to be successful innovation is required.
Creativity and innovation is at the heart of the 21st century. For example in the United States alone, more than 16,000 firms operate their own research labs! These successful enterprises and their advancements in innovation as a result lead to a country’s economic development. Economic development has become a focus of attention by governments around the world. As the UK Office of Science and Technology (2007) put it, “Innovation is the motor of the modern economy.. ” Thus there is no doubt that a connection between entrepreneurship, innovation and economic development prevails.
The three factors are complementary because innovation helps any form of entrepreneurship to prosper, thereby increasing its economic value, thus contributing to economic development. This paper will examine this relationship of entrepreneurship, innovation and economic development, and explore the extent of its connection. To begin, it will define these terms, and then connect them accordingly, using economic literature and real life examples for evidence. Secondly, the essay will look at what sustainability is, types f sustainable innovation, whether it’s a threat or opportunity for enterprises, and its effect on economic development.
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The term entrepreneurship can take numerous definitions. Simply put, entrepreneurship is the act of an entrepreneur, and that is someone who assumes the risk for and organizes a business project. Economist Richard Cantillon first used the term entrepreneurship in his book Essai Sur La Nature de Commerce en General (1959) where he explains that an entrepreneur is one who buys things at a lower price, and sells them at a higher price, undertaking the risk factor. More recently, Joseph Shumpeter provided a thorough description, where he divided entrepreneurship to two types: allocating and catalytic.
Further, Shumpeter (1934) stressed on the importance of an entrepreneur to be innovative, “Whatever the type, everyone is an entrepreneur only when he actually carries out a new combinations and loses that character as soon as he has built up his business”. This leads into the connection of entrepreneurship with innovation. Mintzberg (1983) defined innovation as “the means to break away from established patterns. ” Innovation is the creation of something new; and in the business world, it would be for moneymaking benefit. According to Shumpeter, it can be the creation of a new product, opening a new market and so on.
Thus, it can be stated that innovation is required for an enterprise to succeed, so is a factor contributing to the process of entrepreneurship. Innovation can take two forms, incremental or radical. A radical innovation can be stated as a “gap-filler” as economist Harvey Leibenstein (1968) put it, which is a novel creation that fills a “gap” in the market. Radical innovation is a vital for economic development as the problem is missing markets is solved. There we see the connection of innovation with economic development.
Economic development can be defined as a positive progress in an economy, usually through government expenditures to promote the wellbeing of the economy and society as a whole. It can be measured by taking into account a country’s standard of living, economic health, environmental sustainability and other factors. According to Harvey Leibenstein in his book The American Economic Review (1968 p77), there is no universally accepted theory of economic development, but there are two important elements that contribute to development, one of which is the “Interaction between the creation of economic capacity and the related creation of demand [.. The entrepreneur is probably the prime mover of the ‘capacity creation’ part of these elements of the growth process. ” In addition, as said in the Hamilton Project (2012), “Innovation has transformed the American economy through the development of automobiles and highways, airplanes, telecommunications, and the internet, all of which have made it progressively easier for businesses to market their products.. ” which as a result, help the business enterprises. Thus, it is undeniable that there is strong connection between entrepreneurship, innovation and conomic development, as has been stated in literature time and time again. It can also be proven with the use of real life examples, for instance in the software industry, which today is globally worth $489 billion. Microsoft, “the worldwide leader in software technology”, an innovation founded by Bill Gates, had a revenue of $28. 37 billion in the year 2002, and employed more than 50,000 employees in 78 countries as said in Andriopoulos and Dawson’s, Managing Change, Creativity & Innovation Textbook (2009 p94).
Microsoft’s software is an example of an incremental innovation, and a successful enterprise, which thus became a major contributor to USA’s economic development. An example of a radical innovation that majorly contributed to economic development was Henry Fords simple invention of the assembly line method of production in the 1920’s. Its application to the production of Ford cars reduced the time to produce the Model T Ford by 68%, thereby increasing efficiency, and reducing its cost by 62%, thereby increasing the demand for the car.
This a result increased employment in America, increased travel around the country, helped all businesses reduce costs, and raised the standard of living of the middle-class American family who could now afford a car, which had once been a luxury. All these factors contributed to of economic development of the US economy, which was booming at the time. Therefore, it can be firmly stated that a strong connection between entrepreneurship, innovation and economic development does exist, and that they are often times co-occurring.
A change in one can have an effect on the other; however, they are not dependent upon on another. For example, economic develop does have other factors contributing to it, aside from entrepreneurial gain. Secondly, I believe that entrepreneurships can succeed without innovation. This is where I disagree with Schumpeter’s theory of Creative Destruction. In this, Shumpeter claims that an entrepreneur has to do something novel to be successful, however in world of business there have been instances that prove his theory wrong.
For example, in the 1990s’s, a team of entrepreneurs from the US implemented a set of multi screen cinemas in Mexico City called Cinemax, which was a well-known and established business model in the US. This was very successful in Mexico City, and the chain of cinemas was sold for $300 million ten years later. This is very entrepreneurial, but not innovative. Therefore I believe that whilst innovation and entrepreneurship go hand in hand, an entrepreneur does not necessarily need to be innovative in his/her thinking to be successful.
Hence, I agree with Schumpeter’s theory only to an extent, in that they are strongly related, but disagree with the fact that an entrepreneurship has to be novel in order to be successful and contribute to economic development. Almost all economies today are growing rapidly, China and India for example. Though this is a primary objective of all countries, governments and other environmentally friendly organizations are far more concerned on ensuring that this development occurs without excessive damage to the environment.
The aim is to ensure human needs are met; but also conserved for the needs of the future generations, and as a result conserving the environment. This is also known as sustainable development. According to the Brundtland report (1987), sustainable development is “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs. ” Sustainability can take many forms, including economic, social and environmental. This essay will look at sustainability in the economic form and understand sustainability from the business point of view.
The implementation of government regulations, such as UK’s DEFRA, which look at conserving and protecting the environment, and fine or reprove businesses that do not, may initially seem as a problem for many companies. But in actuality, in can help the businesses and even be an opportunity for innovation. The need to be sustainable has created environmentally friendly inventions, an internal driver of sustainability, boosting economic growth accordingly. Sustainability in business encourages enterprises to cut down on its costs and produce more with less. Companies today reduce, reuse and recycling waste material.
In addition, it gives way for invention of environmentally friendly products, such as the Panasonic’s Rhythm eShower for water conservation and Toyota’s invention of the Prius, an electric car, which would in turn reduce fuel consumption. Toyota even won the title of “Best Global Green Brands 2012” (BusinessWeek, 2012) for the second time in a row. Further, it has resulted in the invention of renewable energy methods such as solar photovoltaic cells and tidal stream generators, a new industry in the market. British company, Lunar Energy has decided to build the worlds first tidal energy farm deep sea, providing energy for 5000 homes.
As a result, creating employment too. The requirement for businesses to be sustainable has created employment, promoted innovation and has even opened up a whole new industry in renewable energy, thereby contributing to economic growth. The contribution sustainable development makes to the economy is clear in the long run, as the economy is sure to sustain in the future as well. The Stern Review on the Economics of Climate Change (2006) explains how there is a negative impact on economic growth if governments and businesses are not environmentally friendly.
Economist Nicholas Stern stated that if we don’t act in a sustainable manner, the impacts that occur would cost damage worth of 20% of a country’s GDP. Whereas in contrast, investment in greener and more sustainable development today, would only cost 1% of global GDP each year. I believe that while sustainable development may result in some businesses to lose out, overall it opens new industries, encourages innovation and also works in favor of the economy in the long run.
To conclude, It can be stated that sustainability can play an important role in economic development, and can encourage enterprises to innovate environmentally friendly technology, cut costs, and thus be more successful. It also helps a country’s economy in the long run as it would not have to heavily spend on the damages caused by global warming. As said by Schumpeter, (1934 p367) “The entrepreneur is the prime mover in economic development and his function is to carry out new combinations. ” This is true in the sense that through innovation, enterprises can succeed and contribute to an economy’s development.
Thus, it is clear that businesses and innovation have a positive effect on economic development are strongly connected. But again, I do not believe that all enterprises must be innovative to succeed, and that for a new business to open, a current one must be eroded. Therefore in conclusion it can be stated that entrepreneurship, innovation and economic development are complementary in real life, and are at often times co-occurring, but are not dependent on one another. And encouraging businesses to be sustainable will only have a positive impact on the economy, when taking the long run impacts into account.
Bibliography The American Economic Review Harvey Leibenstein. (May 1968) Page 77. Volume 78, No. 2, American Economic Association. Entrepreneurship and Small Businesses Paul Burns. (2007) 2nd Edition, Palgrave MacMillan, New York Stern Review of the Economics of Climate Change Nicholas Stern. (October, 2006) The Theory of Economic Development Joseph A. Shumpeter. (1983) Transaction Publishers, New Brunswick, New Jersey Our Common Future (The Report of the Brundtland Commission) United Nations World Commission on Environment and Development. 1987) BusinessWeek Bloomberg. (July 2012) Power In and Around Organizations (The Theory of Management Policy) Henry Mintzberg. (January 1983) Published by Prentice Hall, College Division Hamilton Project Michael Greenstone, Adam Looney and Leslie B. Samuels. (May 2012) Managing Change, Creativity & Innovation Constantine Andriopoulos and Patrick Dawson. (2007) Published by TJ International Ltd. Padstow, Great Britain Essai Sur La Nature de Commerce en General Richard Cantillon. (1959) Published by Frank Cass and Co. , London
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