Role of Entrepreneurship and Innovation in the Current Banking Crisis - Essay Example

Role of Entrepreneurship and Innovation in the Current Banking Crisis Executive summary Innovation and entrepreneurship play a significant role in today’s business. The support that they have on human existence can not be ignored. They play a significant role in strengthening the world economies through improvement of the production process thereby increasing a country’s overall production. Entrepreneurship and innovation contribute towards employment creation as well as a livelihood for many people within several word economies. They play a major role in the development of oligopolies, which utilize them for product differentiation from similar ones from competing industries in the market. Innovation and entrepreneurship have played a significant role in the current banking crisis. Introduction Innovation is a change in product, service or the method of production and marketing, with the aim of improving competitiveness of a business in the market. It can be done continuously in the production process, involving introducing minor changes in the product so as to ensure the business is always ahead of other competitors in the market. (Feldman, 2001:21-24). Entrepreneurship on the other hand is the process of undertaking the risk of obtaining goods and services at a particular cost and selling them at predicted prices. It is the process of combining many factors of production in the creation of new enterprises. Innovation and entrepreneurship are very important for human existence. They have made humans to advance to the current state whereby life has been made easier and essential commodities have been made available. Technological advancements through innovation assist in production of goods and services in a more effective and well-organized manner. Innovations in communication and information technology have made the world to be a global village, making international business a haven for entrepreneurs. Methodology The research process involved collection of theories and concepts in entrepreneurship and innovation from various academic materials such as books, journals, online articles and magazines. The information was carefully analyzed and its relevance to entrepreneurship and innovation assessed. A critique of different approaches in entrepreneurship and innovation provided definition, importance of entrepreneurship and innovation in general as well as the role of entrepreneurship and innovation in oligopolies. Conclusions were drawn from the results of the analysis of the information gathered. Importance of Entrepreneurship and Innovation In the absence of innovation and entrepreneurship in the world population, failure in the existing economic systems is inevitable (John Burton, 2001:1). Many organizations and enterprises seek to employ innovative managers in their determination to achieve the desired objectives. Entrepreneurship and innovation can not be separated from each other. The correspondence between the two phenomena is attributed to the success of many business organizations that have prospered (Fang Zhao, 2005: 25-41). With globalization in today’s business, lack of innovation will most likely lead to lack of competitiveness in the global market. Consumers are always looking towards something new that can give them maximum utility for their money. Innovations that have cropped up in the Asian countries have increased their prospects of moving to a higher ranking in the global business. Faltin and Zimmer (in Kaufmann, 1995: 229) argue that, “Germany, one of the export champions of the past, might loose her leading position due to lack of innovation within the economy.” Innovation is a fundamental component in the prosperity of a nation in the international market. Entrepreneurship and innovation helps to create employment due to the emergence of new enterprises. They also boost a country’s economy through providing market for other products from existing companies within the country, thereby increasing the government’s total tax collection. Through entrepreneurship, many people are earning a livelihood, there by reducing pressure on governments to provide employment for citizens. This is significant especially in developing countries which have been faced with the problem of unemployment due to a relatively high population in regard to the rate of economic growth. Technological innovations play a significant role in stabilizing the economy. A country’s Gross National Product is highly dependent on these innovations. Many developed countries attribute their wealth to technological innovations. Innovations have made companies capable of producing unique products. This is important to a national economy in the sense that; consumers of that unique product tend to believe that other products from the producing country are unique and of the same quality. Consumers tend to get satisfied only when they acquire goods from that country which they believe produces the best goods. The industries within that economy acquire a good name because of an innovative idea from one industry. With this challenge, other industries tend to sacrifice more resources for research and development leading to more innovations and the eventual expansion and improvement of product quality. Entrepreneurship and innovations are of utmost importance in the global business. They have contributed highly to globalization of business. When businesses advance in a particular area due to innovations, there is a tendency to explore different areas whereby there is room for expansion. Innovations empower oligopolies, giving them the capability to explore new opportunities in the global markets. This is because the more innovations within the firms, the more the production capacity and quality. Increased production capacity leads to the need for decongestion of local production to explore new markets elsewhere, thus the advancement in multinational companies (Charlie, 2007: 78). Role of Entrepreneurship and Innovation in oligopolies Oligopolies are composed of a few large industries that control the market, dealing with either similar or diverse commodities, with considerable obstruction for other industries to gain access into the trade. When industries and companies merge while others fail due to incompetence and other related factors, few suppliers are left in the market forming oligopolies. The oligopolies end up restricting free competition in the market. The survival of oligopolies significantly depends on innovation. This is mainly because the other options that could enhance survival are maintaining low prices as well as expanding in size and scope (Raymond J. Mataloni 1999: 27 Nov. 2008). These are not the best options since they have a considerable cost attached to them. Innovation simply ensures that the minor changes in the products keep them ahead of other industries; hence they are able to discourage competition in the market. Oligopolies normally have the likelihood of developing innovations which improve the capacity of equipment, increase manufacturing competence, and uphold economic development with the eventual improvement in the living conditions. The oligopolies are able to change their products to be a bit different from the rest in the market through the innovation acquired from research (Marianne Powell, 2005: 27 Nov. 2008). New varieties of products are offered by the oligopolies in the market, strengthening their competitive advantage. Entrepreneurship and innovations present the best quality results when decision making is decentralized. This decentralization ensures a variety of ideas while appraising the decisions on how to venture in to innovation and entrepreneurship. It gives rise to constructive debates and opinions from the participating parties. Oligopolies benefit substantially from entrepreneurship and innovation due to the fact that decisions are made as a group. They therefore have the capacity to scheme the best innovation plans, thereby improving their output. Role of Entrepreneurship and Innovation in the current banking crisis Banks are accountable to the crises prevailing in the banking system. Initially, banks used to be cautious in matters regarding finances. They had to ensure that a borrower’s eligibility for a loan is proved before a loan is approved. In the United States, the convectional way of approving loans changed in the 1990s. The loans were given in terms of mortgages. Banks no longer earned their profits through customers’ deposits, whereby they lent the money to qualified borrowers to earn interest (Robert R. Farrell, 2008: 16 Nov 2008). In the process, borrowers gave deceitful information to those who appraised loans, and the banks never assessed the capability of the borrowers to repay the loans. The excess loaning by banks and securing of mortgage by so many people led to a surfeit of suburban houses for hire in the United States. This made the price of rental houses to drop. With the rental prices having dropped, the revenue for customers was too little for house owmers to reimburse their mortgage. The anticipated profits by the banks as well the amount that was lent out to borrowers was never realized. This caused hefty losses to the banks. Mortgages became unnecessary to customers since they were viewed as a loss due to their inability to raise funds to repay the expenses spent on them. All this was caused by banks trying to earn more through a risky venture whose viability had not been clearly assessed. (Howard Perlmutter, 1999: 121-126). This problem occurred first in the United States, but with time, it has become a global problem. It spread over to many other parts of the world. The innovativeness of the bank managers was not checked, neither was it given external scrutiny in order to ensure that it gave the desired results rather than becoming a burden to the economy. The banks never discussed the innovative idea of changing from their usual way of lending. They implemented the ideas devoid of consultations in order to establish their viability. In the case of the existing bank crisis, innovations are presented in the negative aspect. They are responsible for the bank crisis. Innovators played a major role in subjecting the banks to risky lending and insecure insurance on mortgages. Innovation and entrepreneurship could have propelled the banks’ net income if they could have been well thought out and discussed. However, the current banking crisis still depends on entrepreneurship and innovation in order for the banking sector to get back to its original state. While innovation entails a change in the production process so as to offer a different commodity in the market, this kind of innovation resulted in calamitous consequences for the banks. They could no longer recover from the dishonored loans they gave to customers. On the other hand technological innovation has adversely affected the banking system (Geoffrey, 2004: 47). Innovation is of much assistance on one hand but becomes exploitative if used in the wrong manner. However, through industrial innovations, the consequences of the banking crisis on developing nations can be alleviated. These innovations will facilitate economic growth. Conclusion Entrepreneurship and innovation are the keys to successful businesses. All the prosperous businesses that exist globally attribute their success to entrepreneurship an innovation, with few having miscalculated on their innovative agendas. Innovation has to be focused, well planned as well as targeted to achieve the desired objectives. Factors that may hamper realization of the goals of entrepreneurship and innovation need to be investigated and documented before embarking on an innovative venture. If banks could have done this, the current banking crisis could have been avoided. However, entrepreneurs should not shy away from innovation due to the crisis that hit the banks. They should be aware that even under the current circumstances; it is only innovation and entrepreneurship that are going to rescue the banks from this situation. The most important thing is to calculate and hypothesize in the most appropriate and applicable manner on the impact of innovation to the enterprise. Innovation and entrepreneurship have played an important role in globalization of industries, as well as creation of employment locally and abroad. Bibliography 1. Charlie S. (2007) the Rise of oligopolies: an Overview of Development, 2nd edition, London: Century Business. 2. Fang Z. (2005) “Entrepreneurship and Innovation” International Journal of Entrepreneurial Behavior & Research. Vol. 11 No. 1, July, pp. 25-41 3. Feldman K. (2001) Innovation in Business: Building Blocks of World Economies, Rockhampton: CQU Press. 4. Geoffrey M. (2004) “Modern Trade: Difficulties Encountered,” International Business Journal, vol. 3, no. 2, August, p. 47 5. Howard P. (1999) “Innovations in Telecommunication: Effective Service Delivery” Journal on Communication. vol. 5, no. 3, September, pp. 121-126 6. John B. 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