Entrepreneurshipis an essential part of economic development, and it has been so, especiallysince the industrial revolution. Development is achieved, for example throughinnovation, which the Organisation for Economic Co-operation and Development (OECD, 2005) defines as the ‘implementationof a new or significantly improved product (good or service), or process, a newmarketing method or a new organisational method in business practices,workplace organisation or external relations’. Innovative performance is anessential part when determining competitiveness and progress on a societallevel. The following chapters will focus solely on innovative and opportunityentrepreneurs, as necessity entrepreneurs and entrepreneurs that imitate otherscontribute little to none towards economic development. Entrepreneurshipsoften quoted definition is that it is about the “discovery and exploitation of opportunities”(Shane & Venkataraman 2001).
Why is innovative entrepreneurship important? Innovativeentrepreneurship plays an important role in today’s society across differentcountries and institutional contexts and by contributing to economic development,it is a catalyst for institutional development and structural change, and ithelps addressing challenges that policy makers are trying to overcome. Suchchallenges include economic growth, climate change, sustainable development,maintaining biodiversity, socioeconomic issues, job creation and poverty. Thelevel and type of impact innovation has on an economy will differ at differentlevels of economic development and thus, innovations by entrepreneurs will beof increasing importance now and in the future. Innovation can lead to a moreefficient productivity, which in other words means that an input generates agreater output than before said innovation. When production becomes moreefficient, additional goods and services are produced, and therefore theeconomy grows.
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A classic example of such innovation is the development of the externalcombustion engine in the 18th century. The stationary steam enginewas one of the main catalysts of the Industrial revolution, it allowedfactories to be located in locations previously unavailable, which enabledeconomies to make big advances in the development of the society. A more recentexample is the development of information technology, that reshaped the waycompanies produce and sell their products while expanding to new markets andbusiness models. The modern state of living standards has been achieved through constant innovationthat originates to the industrial revolution.
Social challenges such as healthand demographic challenges, and social exclusions and inequalities amongothers, can be mitigated through innovation (innovationpolicyplatform.org,2014). As an example, the older demographicof the population can, through innovation, remain healthier, live at home forlonger and counteract the declining levels of physical ability that becomes inevitablewith age. Of course, social innovation is not limited to just one demographicof the population, but every single one of them. Healthcare products havebecome more predictive and preventive, and therefore more personalisedtreatment can be given, and thus the quality of human health is improved. Forexample, innovation and development in medical and dental equipment allowssafer births and the control of genetically transmitted diseases, henceallowing people to live a longer and healthier life.
In addition, throughfrugal or inclusive innovation, the prices of existing goods and servicesbecome cheaper, and thereby reduce the inequalities between the differentdemographics in society. Besides addressing social exclusion, innovationresults in other social benefits such as new employment opportunities and addressingchallenges the lower income demographic of society faces. Global travel hasbecome cheaper and faster through innovation, opening totally new job andbusiness opportunities, and therefore local economies are improved and as aconsequence socioeconomic differences diminish and the life of people improve. Innovationhas led to a higher level of education, that is at the same time moreaccessible and more affordable than ever before, making people academicallymore intelligent. That said, by founding and operating a new business, theentrepreneur can create value and new jobs, even if the business has or does nothinginnovative. This way, the entrepreneur might still have a positive impact onthe overall economy, and indirectly help development move forwards.One of the most famous definitions of an entrepreneur is by Schumpeter (1950,1961), that defines the entrepreneur as the coordinator of production and agentof change (creative destruction).
Creative destruction, according to Schumpeter(1950), is the “process of industrial mutation that incessantly revolutionizesthe economic structure from within, incessantly destroying the old one,incessantly creating a new structure. This process of creative destruction isthe essential fact about capitalism”. The “Schumpeterian” entrepreneur is seenas heroic, but above else as an innovator. Entrepreneurship, under Schumpeter,is thus the expression of the human impulse to be creative (Khalil, 2007). Thecontribution of entrepreneurship is considered to be more important during thelater stages of economic development by Schumpeterian scholars, where growth ismainly driven by knowledge and competition, than during the earlier stages ofeconomic development. Factor accumulation drives growth during the earlierstages of development, making entrepreneurship less important.
Schumpeter’s basicrealisation was that economic growth resulted not from capital accumulation,but from innovations and “new combinations” (Landström, 2005). Entrepreneurshipis not necessarily synonymous with innovation, as the German-Austrian schoolpresents it, but it also involves imitation, which doesn’t drive economicdevelopment forwards. Entrepreneurs that imitate others are usually necessity entrepreneurs,that have no other choice than to seek self-employment. On the other end of thespectrum are opportunity entrepreneurs that are seen as innovators, they drivethe economy forwards under optimal circumstances. Schumpeter is more explicitabout the economic function of an entrepreneur than other economists. The processof economic development could be, according to Schumpeter (1911, 1934), dividedinto 3 different phases.
The 1st phase entails the discovery of newgoods and services or methods, which Schumpeter states as invention. During the2nd phase, innovation takes place, which means that new goods andservices are successfully commercialised. This happens due to the technicaldiscoveries arising during the 1st phase, or more commonly due to acombination of old and new knowledge. The final phase of this process concernsa more general assimilation and dispersal of the new good, service or method tothe markets. One of entrepreneurship’s early definitions constitutes of twophenomena: the presence of lucrative opportunities and the enterprising individual(Venkataraman, 1997).
Shane and Venkataraman (2000, p.218) developed thedefinition further to involve the nexus of three phenomena: the presence of anopportunity, the presence of enterprising individuals who can “see it,” and thepresence of enterprising individuals who are capable enough to respond to itirrespective of the existing resources. An excellent example of Schumpeter’screative destruction is the success of the US based video streaming company Netflix.The company disrupted the market so severely that it ultimately led to thedownfall of Blockbuster, a company that used be the market leader in the videotape and disc rental industry. Netflix’s impact on existing industries has beenso disruptive, that some call the phenomenon “the Netflix effect”. IsraelKirzner’s theories represent the other end of the spectrum, he represents thesame school of thought that the Irish-French Richard Cantillon, who has been creditedfor discovering the economic theory and fully considering the role ofentrepreneurship in an economy. Kirzner’s (1973) entrepreneur is above else anobserver who notices or is alert to new opportunities, and facilitates the adjustmentfrom a disequilibrium to an equilibrium.
Kirzner’s view has gained tractionamong scholars who emphasise the type of entrepreneurship that grabs onopportunities to make profit. This type of entrepreneurship is found especiallyin developing countries, where market disequilibrium is more common. A goodexample of Kirznerian entrepreneurship is the company Whatsapp, that created afree instant messaging platform for mobile devices.
One of Whatsapp’s founders,Jan Koum, told that he discovered the idea in the late 90’s, when he had aconstant unsatisfied need of communicating with friends. This is a good exampleof the Kirznerian entrepreneur, someone who discovers existing opportunities. Thedifferences between the Schumpeterian and Kirznerian school of thoughts can bedivided the into five different sections. The first comparison is betweenSchumpeter’s idea of innovation and Kirzner’s idea of arbitrage. “Schumpeterianopportunities are innovative and break away from existing knowledge, whileKirznerian opportunities are less innovative and tend to replicate existingforms” (Shane, 2003: p.
21). As stated above, Schumpeter views entrepreneurs asindividuals, who by combining and creating, innovate and commercialise their product.To Kirzner’s entrepreneur doesn’t need innovation to be able to profit, he is afast acting arbitrageur who recognises opportunities and buys products cheapand sells them for profit. The 2nd comparison point is betweendisequilibration and equilibration. “Schumpeterian opportunities are marked bydisequilibrating activities due to (new to the market) innovations. Incontrast, Kirznerian opportunities are the result of equilibrating forces (by arbitragedrawing on market errors).
Schumpeterian opportunities disrupt the exiting system,while Kirznerian ones reinforce established ways of doing things” (Shane, 2003:p. 20). Schumpeter’s entrepreneur disruption is the ‘Netflix-effect’. Kirzner’sentrepreneur tries to by his own actions make a profit by trying to shiftdisequilibria to equilibria.
The 3rd comparison is strongly linkedto the 2nd comparison, it is between Schumpeter’s idea of creationand Kirzners idea of discovery. “Kirzner’s approach also differs in thatopportunities are not created by the innovative entrepreneur, but presupposedto already exist and to be eligible for discovery by any individual” (Shane,2003). In other words, the Kirznerian entrepreneur discovers opportunities,whilst the Schumpeterian individual creates them. The 4th comparisonis between rare and common. Schumpeterian entrepreneurs are a rare occurrence,whereas a Kirznererian is alert to new opportunities and therefore more commonas everybody is able to be alert. The final comparison is between theSchumpeterian entrepreneurs need of new information and the Kirznerian, whorequires no new information. The Schumpeterian entrepreneur needs newinformation to recombine resources, which results in innovation. The Kirznerianonly needs access to existing information, to see the already existing opportunities.
Innovation is central to modern growth theories and development, but it is notcentral to entrepreneurship. Innovation is central to Schumpeterianentrepreneurs, but to Kirznerians, discovery and use of existing information isthe key element. Innovation is a key element in development but at the sametime it can lead to firm closures and job destruction, this is ‘creativedestruction’ as Schumpeter puts it, if goods and services are replaced by amore competitive option or they become obsolete. Innovation has allowed humansto live longer and healthier by numerous different innovations, such as thedevelopment of medical and dental equipment, better living standards and so on.This said, innovation drives societies forwards, but it isn’t necessary toentrepreneurship, as other methods exist.