The Relationship between Entrepreneuship, Innocation and Economic Development - Term Paper Example

? The Relationship Between Entrepreneurship, Innovation and Economic Development Introduction Recent years have witnessed tremendous changes in the world economic structure. While China has experienced staggering growth patterns, beginning in 2008 both the United States and Europe have become entrenched in considerable recession. Even as the United States has managed to find a modicum of stability, Europe is experiencing a sovereign debt crisis, with countries such as Greece and Italy falling into severe economic hardship. Within these contexts of understanding, the nature of economic development has come to the forefront of social and political concerns. A variety of theories and policy approaches have been advanced with Keynesian influenced stimulus packages being infused into Western economies with varying degrees of success. Still, a growing body of support has turned to the potentials of economic development occurring through entrepreneurship and innovation. Theorists such as Joseph Schumpeter argue that entrepreneurship and innovation are core elements for economic development, and subsequent city and state governments have oftentimes-established incubators and given increased funding to ensure that innovation is supported. This essay examines the relationship between entrepreneurship, innovation and economic development. The essay also considers the role creativity and problem solving play in this relationship, with reference to both theory and examples from the business world. Analysis When examining the relationship between entrepreneurship, innovation, and economic development perhaps the most groundbreaking theorist has been Joseph Schumpeter. While Schumpeter’s insights into economic development span a wide array of understandings, there are a number of specific considerations that are relevant for this specific mode of investigation. One of Schumpeter’s most important notions is that of ‘creative destruction’. While originally a Marxist term, Schumpeter adopted this term to articulate his notion of the way that innovation and entrepreneurship contribute to economic development. For Schumpeter, an entrepreneur innovates a new product. This product then expands throughout the market creatively destructing past market forces, while creating new products and business models. Individuals such as Alan Greenspan have noted that this process underlines economic development. He notes, “"Capitalism expands wealth primarily through creative destruction—the process by which the cash flow from obsolescent, low-return capital is invested in high-return, cutting-edge technologies" (Greenspan 2002). There are a number of specific means by which entrepreneurship and innovation carries out such creative destruction. In his text ‘Theory of Economic Development’ Schumpeter argued that entrepreneurship didn’t simply create new industries, but also resulted in the combination of past industries (Schumpeter 1982). One example of this is that the development of the steam engine combined with carriage development techniques to form the automobile. The development of the automobile then drastically shifts previously held economic and social structural elements, reenergizing the economy and contributing to economic development. While Schumpeter’s theories have received a degree of criticism that remain prominent and highly relevant in the contemporary world environment. In large part, Schumpeter’s understanding of entrepreneurship and innovation as contributing to economic development has been echoed through endogenous growth theory. This perspective contends that a nation’s economic growth occurs through internal rather than external factors. In this context of understanding it’s clear how Schumpeter’s theory on entrepreneurship is squarely rooted within the endogenous means of growth. While entrepreneurship is popularly viewed in terms of inventions and small business owners, in further examining its impact on economic development one must consider the more abstract notion of innovation as a driving factor. In this context of understanding, theorists argue that government agencies can spur economic development through policies that encourage human capital and knowledge. For instance, policies that grant tax breaks to small businesses would be a major contributor to economic development. Education also plays a significant force, as education and knowledge are central to the innovative development, particularly in high tech industries. In addition to the reshaping and restructuring of market relations through Schumpeter’s ‘creative destruction,’ it’s also argued that entrepreneurship and innovation contribute to a spillover effect and positive externalities. Some of the most prominent examples of these elements have occurred within the context of city environments. Oftentimes economic development boards create and fund high technology incubators that encourage and support the development of innovative businesses. In cultivating these industries in the community, it’s recognized that there is oftentimes a beneficial effect through increased employment and subsequent increased spending in the area. Individuals contributing to the development of high technology are also generally educated and commit less crimes. The city then benefits from this infusion of employment and money, as well as saves tax funding in reduced law enforcement spending. This process can then be expanded to the state and national level, with entrepreneurs and innovators being drawn from foreign nations. Ultimately, this process is argued to form the backbone of economic development and expansion. While Schumpeter’s endogenous perspective on economic development through innovation and entrepreneurship is perhaps the most accepted model, this perspective has received criticism from exogenous growth theories. This model contends that rather than entrepreneurship driving economic development, external factors can be understood as the primary determinants of growth. This perspective holds that elements such as world productivity and technological progress combine with countrywide capital accumulation and population growth to determine economic development. This neoclassical theory runs directly counter to Schumpeter’s understanding, as innovation is only a cursory factor of development. In terms of evidence supporting the exogenous growth perspective are statistics that show parallel growth patterns between countries based on exogenous elements. While macroeconomic approaches to economic development through entrepreneurship and innovation are essential to understanding this relationship, it’s also necessary to consider the more specific nature of creativity and problem solving. Investigations into the nature of creativity and problem solving in economic development have been in existence throughout the majority of the 20th century. Indeed, when formulating theories on entrepreneurial economic development renowned economist Joseph Schumpeter (1935) references personality traits such as innovativeness, creativity, and achievement orientation. On a larger scale, economists have attributed the economic success of nations to the personality characteristics of their inhabitants (McClelland 1961). A contemporary interpretation of such formulations -- considering national moves towards globalization in the 21st century -- might deem such a theory racially biased, and it seems that indeed in the later part of the 20th century the personality approach to entrepreneurship took on a more specialized mode of inquiry. Other prominent personality approaches to entrepreneurship includes Smith as cited in Miner (1997, p.6) who developed a fusion between psychological and sociological distinctions in dividing, Entrepreneurs into craftsmen and opportunistic types and their firms into rigid and adaptive types…Opportunistic entrepreneurs are expected to head adaptive firms which grow more rapidly. Craftsmen entrepreneurs head rigid firms which exhibit less growth. One only need consider the pioneering work of Florida (2002) who identified a newly emergent ‘creative class’ of individuals who have functioned to beneficially shape and transform market economies. In this sense, it is necessary to move beyond distinctions of ‘entrepreneurial’ personality approaches, and continually reassess and incorporate a wider spectrum of business activity. While researchers have noted the issue of defining entrepreneurial personality in regards to either the individual or collective entity (Baum, Frese, and Baron 2007), it seems that in the 21st century globalized world, research must devise a methodology that examines the corporate personality of entrepreneurship. A notable application of this paradigm occurs in Shane’s A General Theory of Entrepreneurship (2003). In the chapter, ‘Psychological Factors and the decision to exploit,’ Shane investigates proximal/distal variables, in specific situations, as they relate to the individual entrepreneur’s tendency to implement creativity and innovation in contributing to economic development patterns. Shane is arguing that dynamic personality factors are essential elements of the entrepreneurial process. Baum, Frese, and Baron (2007) note that past conceptions of entrepreneurial personality research has always attempted identified a positive correlative connection between creativity and success. That is, “Many personality advocates assume that there are linear relationships between this personality variable and success (or performance). However, it is necessary to test in all cases whether there are non-linear relationships” (Pg. 43). When considering the practical application this has for economic development it’s necessary for researchers to test for these characteristics. One might consider the development of psychological assessment traits from a linguistic perspective. Finally, the promulgation of analysis of analysis, such as this one, has contributed a great deal towards a shift in perspectives concerning the nature of specific variables that may alter future economic development. Conclusion In conclusion, this essay has examined the relationship between entrepreneurship, innovation and economic development. The essay also considers the role creativity and problem solving play in this relationship, with reference to both theory and examples from the business world. In these contexts of understanding, it’s revealed that entrepreneurship and innovation are understood to drive economic development through a process of creative destruction that restructures market patterns and reenergizes the economic structure. In addition, creativity is examined in terms of the individual entrepreneur as contributing to this innovation and large-scale economic change. References Baum, R., Frese, M., Baron, R. (2007) The Psychology of Entrepreneurship. Lawrence Erlbaum Associates. Florida, Richard. (2003). Rise of the Creative Class. Basic Books. Greenspan, Alan (2002). ‘Stock Options and Related Matters. The Federal Reserve Board. http://www.federalreserve.gov/Boarddocs/Speeches/2002/20020503/default. htm McClelland, D.C. (1961) The Achieving Society. New York: Free Press. Miner, John (2003). A Psychological Typology of Successful Entrepreneurs. CT: Quorum Books. Schumpeter, Joseph (1935). Theory of Economic Growth. Munchen: Von Duncker Und Humbolt. Schumpeter, Joseph. (1982). The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Transaction Publishing. Shane, Scott (2003) A General Theory of Entrepreneurship. Mass: Edward Elgar Publishing. Read More