Relationship between Entrepreneurship, Innovation, and Economic Development - Essay Example

of the of the Concerned Finance and Accounting 24 November Relationship between Entrepreneurship, Innovation and Economic Development Introduction If one takes into consideration the economic developments wrenched in the last three decades, one notices a significant breakthrough as to studying the relationship between knowledge and economic growth on one hand and between innovation and economic growth on the other hand. Such an analytical approach has furnished ample insight into the interrelationship existing between knowledge, innovation and entrepreneurship. However, it goes without saying that there is a lacuna as to the understanding of the comprehensive relationship between entrepreneurship, innovation and economic growth. The understanding of the relationships between micro economic sources of growth and the consequent macroeconomic outcomes is still too nascent as to the establishment of the relationships between varied interacting forces impacting the economic growth. Hence, in an academic perspective it will be really enlightening to analyze the recent advancements into the understanding of the varied forces influencing the creation of knowledge, the promulgation and diffusion of this knowledge aided by apt innovation and the role played by entrepreneurship in the overall growth process. For its goes without saying that the primary process of knowledge creation has to be continually and commensurately supported by forces originating from innovation and entrepreneurship, which give way to mechanisms that help in the conversion of this knowledge to societal and commercial needs. It is amply relevant as the developing countries of today could learn a lot from the course followed by the developed countries in their quest for economic growth. It will also immensely help the developed countries in the sense that they are faced with the challenging responsibility of devising growth policies in a futuristic context. Thus, it is emphatically valid to attempt an understanding into the relationship existing between entrepreneurship, innovation and economic growth. Entrepreneurship and Economic Development The very fact that entrepreneurship is closely tied to economic growth is amply corroborated by the commonsensical observation and economic acumen in the sense that the crux of any innovative entrepreneurial endeavour is to convert ideas and knowledge into commercially valid economic opportunities. Entrepreneurship is the bedrock on which rest the possibilities for innovation, change and growth. In a world economy that is getting globalized at a fast pace, entrepreneurship is a sources of competitiveness in the sense that it gives way to knowledge and flexibility. With the ensuing shift in the industrial frameworks and structures vying for an augmented decentralization and minimal concentration, the entrepreneurial vigour operating at all the levels in an economy is indeed a source of viable competitiveness. In that context if one takes into consideration the accompanying technological developments and changes and a resultant augmenting global competition and economic liberalization, the very assumption that promoting entrepreneurship in a way leads to the promotion of the economic growth appears more valid today than it did in the past. The available economic, social and psychological knowledge do points towards the fact that entrepreneurship is a process that tends to be dynamic in its scope and ramifications. Though some experts may tend to think of entrepreneurship as a mechanical economic factor, yet, in reality it is far from being so (Pirich 2001, p. 14). Entrepreneurship has as much to do with change as with the choices related to a change era or process. In that context, the existing definitions of entrepreneurship delve on the functional aspects of entrepreneurship that may be allocation of the scarce resources, coordination, making decisions, innovation, capital augmentation and uncertainty management. Entrepreneurship unleashes the dormant growth opportunities inherent in an economy by the dint of its salient characteristics. The entrepreneurship vies to deals with the risks associated with the growth opportunities existing in an economy. Entrepreneurship helps in the identification and exploitation of the growth opportunities existing in an economy. Above all, innovation is the primary bulwark of any entrepreneurial endeavour in the sense that entrepreneurship help in the generation, promulgation and commercial exploitation of new ideas. Wennekers and Thurik aptly grasp the functional role of entrepreneurship in economic development in the sense that, “the manifest ability and willingness of individuals, on their own, in teams within and outside existing organizations, to perceive and create new economic opportunities (new products, new production methods, new organisational schemes and new product-market combinations) and to introduce their ideas in the market, in the face of uncertainty and other obstacles, by making decisions on location, form and the use of resources and institutions." (1999, p. 46–47).” Yet pragmatically speaking, it is in the Joseph Schumpeter’s Theory of Long Waves that one comes across the prominent role of entrepreneurship as the driving force behind economic growth. According the Schumpeter, any person willing to dabble in new combinations is a precursor of economic growth. This willingness on the part of an entrepreneur to experiment with novel combinations of factors of production is an act of genuine entrepreneurial discovery that pulls the wagon of economic development. This dabbling in new combinations results in the discovery of new ways of meeting the existing demands or a possibility of the creation and production of new products. This in turn results in a process of creative destruction which makes the existing products and technologies practically obsolete. An innovative approach on the part of an entrepreneur enables one to wrest the market share from the already operating suppliers and to increase the overall demand for the products in the market by expanding the boundaries of economic activity in a society. The process of creative destruction is for all means and purposes a deliberate act and is really conducive for the additional and yet to come innovation opportunities and profit making situations. It was primarily on the basis of the phenomenon of creative destruction that Schumpeter came out with his theory of long waves of business cycles and economic growth. Realistically speaking, the business cycles are the net result of innovation that lead to the generation of novel ideas and the actual implementation of these ideas to give way to new products, services or processes culminating into a net growth in a nation’s economy, the creation of new employment opportunities and the gleaning of pure profit for the innovation driven enterprises (Schumpeter 1911, p. 78). As per the standard models of economic growth, the developing economies tend to grow owing to enhanced specialization and the collection of physical and human capital, yet, once a capitalist economy enters the phase of rapid industrialization, the accompanying drivers of economic growth witness a qualitative change. In the advanced capitalist industrial economies, it is the R&D driven knowledge accumulation and technological advancement that drives the engine of economic growth (Peretto 1999). Thus in such economies it is the entrepreneurial activity that serves as the key determinant of productivity growth. It will be really appropriate to use a business example given by Schumpeter to elaborate on the theory of creative destruction. According to Schumpeter, the influx of railroads in the Middle West was initiated by Illinois Central. The introduction of railroads by Illinois Central not only resulted in an unprecedented augmentation of business opportunities and production potential as the railroads were built and as the new towns and cities were built around the railroad and as new lands were brought under cultivation, but it also resulted in the demise of the old systems, patterns and models of agriculture in the West (Schumpeter 1994, p. 349). Hence, to put it simply, entrepreneurship is less about the inauguration of new business ventures and more about a set of specific abilities and attitudes embodied in some individuals. It is usually a new opportunity or an impending necessity that unleashes the entrepreneurial potential lying dormant in an economy. The entrepreneurs resort to their innovative genius either to cash a new opportunity that has arisen in an economy or to make the best out of an existing impossibility of tracing new sources of income. Innovation and Economic Development As already said, entrepreneurship is the single most important factor that determines the long term economic growth. In that context, innovation is the key driving forces that help the entrepreneurial potential in an economy to take advantage of a new business opportunity or to make out the best out of the already constrained productive potential in an economy. In an economy their generally exist only two ways of augmenting the productive output, that is either by increasing the magnitude and number of inputs that go into milking the productive potential, or to think out the new ways of enhancing the resultant productivity from the existing magnitude and number of productive inputs. Generally speaking, the entrepreneurial talent in an economy generally resort to exploiting the innovation opportunities in an economy to enhance the productivity. Besides, in the developed economies, the concepts of entrepreneurship and innovation tend to achieve new meanings and scope. In the technology driven developed economies, the economic uncertainties are a major sources of stress and tension for the large and resource rich firms. For example, in the United States of America alone there are about 16,000 companies that run their own hi tech R&D facilities and out of these firms, there are at least twenty firms whose R&D budget is in the excess of US $ 1 Billion. Still, irrespective of such gargantuan R&D expenditures, it would certainly be wrong to say that these big firms are free of economic uncertainties and the accompanying financial risks. Many reasons could be attributed to these uncertainties. Many a times large R&D expenditures simply fail to yield the scientific knowledge that has the commercial potential. Besides, even if this R&D results in commercially propitious scientific information, it may fail to result in a pragmatically marketable product. Otherwise, even if the ventured R&D results in a commercially viable knowledge and a practically marketable product, it may still leave many questions unanswered as to whether the new product will perform beyond the prototype stage or is it possible to produce it at an affordable cost. Hence, to grapple with such uncertainties, it is imperative for both the big and upstart companies to retain the innovative edge. Meeting uncertainties is a factor that lies at the heart of any innovation process and the consequent economic growth. Conclusion In the contemporary knowledge driven economies, innovation, entrepreneurship and economic growth are the concepts that are so interrelated that many a times they are taken to be synonymous. Entrepreneurship and innovation are the key factors that allow the business talent in an economy to grow and flourish irrespective of capital constraints, thereby giving way to economic growth and development. Reference List Peretto, Pietro 1999, ‘Industrial Development, Technological change, and Long Run Growth’ , Journal of Development Economics, Vol. 59, pp. 389-417. Pirich, Amir 2001, ‘An Interface between Entrepreneurship and Innovation: New Zealand SMEs Perspective’, Paper Prepared for the 2001 DRUID Conference, Aalborg, Denmark. Schumpeter, Joseph 1911, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycles, Harvard University Press, Cambridge, MA. Schumpeter, Joseph 1949, ‘The Historical Approach to the Analysis of Business Cycles’, in Essays on Entrepreneurs, Innovations, Business Cycles, and the Evolution of Capitalism, Transaction, Brunswick, NJ. Wennekers, Sander & Thurik, Roy 1999, ‘Linking Entrepreneurship and Economic Growth’, Small Business Economics, Vol. 13, pp. 27-55. Read More