This report explains what is an entrepreneurship
and innovation and compares different economic theories of entrepreneurship. The
report also analyses how the entrepreneurship and innovation contribute to the
economic development of the society and gives few examples of incremental and
What is an Entrepreneurship?
The basic definition of entrepreneurship
that I can think of is a process of creating and managing a new business
venture in order to breakeven and make a sustainable profit. Entrepreneurs are
individuals or group of people who have an innovative business idea and who
want to benefit from the opportunities of launching new business venture. Entrepreneurs
are responsible for the risks of implementing the idea and are willing to take
all the financial risks associated with the business, they want to benefit from
the opportunities of launching a new business.
However, entrepreneurship is not just
about making the business profitable, but is also about changing our planet and
solve global problems. Social entrepreneurship focuses on making a positive
impact on our society, it could be cultural, social or environmental. This
includes issues such as inequality, poverty and global warming.
Economic Theories of Entrepreneurship
The theory of entrepreneurship was
developing throughout many centuries and was mainly influenced by few economists,
each of whom had a different thinking of who the entrepreneurs are and what the
entrepreneurial process is. Based on the economic theory, there are few main
schools of thought I would like to consider and compare.
Uncertainty: The French School
of Thought Part 1: Richard Cantillon
economist who recognised the crucial role of the entrepreneur in economic
development was French economist Richard Cantillon (Deakins D., Freel M., 2010,
part 1). Richard Cantillon defined the entrepreneurship as “working for
oneself by assuming a level of personal risk” (Hannah Hoke, 2017). His
French School of Thought suggests that entrepreneurs work under conditions of uncertainty, which means that they are not
sure with the outcome of their business ideas. However, uncertainty is not same
as risk! Risk is a potential to gain or loss something in the future due to
predicted or unforeseen actions.
Cantillon identified that
shifts in “demand and supply in a market create opportunities for buying
cheaply and selling at a higher price and that this sort of arbitrage would
bring equilibrium to competitive market” (H.
Landstrom, 2005, p28).
Uncertainty: The French School
of Thought Part 2: Jean Baptiste Say
In 1821, the French School of Thought was developed by another French
economist Jean-Baptiste Say. Say defined the entrepreneurship
as a “process of using resources
intelligently to better manage uncertainty thereby unites all factors of
production (resources) – labour,
capital, land and entrepreneurship”
(Hannah Hoke, 2017).
Equilibration: The Austrian
School of Thought: Israel Kirzner
Israel Kirzner and Joseph Schumpeter are two of the most recognised
economists of the 20th century. They both had a deep interest in the
development of entrepreneurship theory. Their entrepreneurship views were
different from Richard Cantillon. Kirzner truly believed it is crucial for entrepreneurs
to be alert and have an ability to find new opportunities to generate some
profit. Those opportunities exist when the economy is not at its perfect
equilibrium point, therefore, if entrepreneurs can notice and take advantage to
some of those opportunities then they can make money and restore equilibrium,
which is the right way to the economic development. “An example of such an entrepreneur would be someone in a college town
who discovers that a recent increase in college enrolment has created a profit
opportunity in renovating houses and turning them into rental apartments” (Russell
S. Sobel, 2008).
German-Austrian School of Thought: Joseph Schumpeter
Schumpeter, on the other hand, suggested that only radical innovations can
change the economy by creating something completely new and never seen before. Schumpeterian
entrepreneurs were described as innovators and creators, who’s entrepreneurial
activities would cause market disequilibrium and future economic changes. “Schumpeter emphasized the beneficial process of creative destruction in
which the introduction of new products results in the obsolescence or failure
of others. The introduction of the compact disc and the corresponding disappearance
of the vinyl record is just one of many examples of creative destruction: cars,
electricity, aircraft, and personal computers and others” (Russell S. Sobel,
is an innovation?
Innovation is central to entrepreneurship.
Innovation can be defined as the process of introducing something new or more
effective, such as new products, services, ideas or methods. From the business prospective, innovation does not only
means inventing something new, this could simply mean changing the way that the
business operates or adapt to changes in the market to end up with better performance
that will provide some commercial benefits to the business. “In economic terms, innovation describes the development
and application of ideas and technologies that improve goods and services or
make their production more efficient” (European Central Bank, 2017). Innovation
can not only improve the overall productivity of the business but also helps to
become more competitive on the market, reduce some operational costs and
establish new partnerships with other businesses. It is important to state that
“Innovation is not same as entrepreneurship, however, successful
entrepreneurship requires Innovation” (Hannah Hoke, 2017).
can be divided into two categories: Incremental and Radical. Incremental
innovation, also known as Kirznerian innovation is a process when business
attempt to improve their existing products, services or day to day operational
activities. As example of such Innovation would be iPhones and other products
produced by Apple plc. Apple launches new IPhones with better features once
a year with better camera, improved screen, more storage space and wireless
charging, however, the design of the smartphones is pretty much the same no big
difference could be seen. These improvements keep consumers interested to what
the business produces and helps the company extend life cycle of its products.
is the one that might change the things forever or for a period of time until
new innovation come out. This type of Innovation is also known as Schumpeterian
radical innovation, and can not only improve the things, but also destroy them.
An example of such innovation is the first ever produced car, which completely destroyed
horse-drawn vehicles. Another example is that CDs overtook vinyl and cassette
tapes for audio recording and playback.
Analysis of the Innovations contribution to
and Innovation are very beneficial to
businesses, society and the economy as a whole. When businesses implement
innovation into their operations, it helps them to produce more products and
services. High productivity can benefit workers by increasing wages. As workers
produce more, businesses are able to pay them more. Productivity
growth enables businesses to produce goods and services at a lower cost. Low
production costs allow businesses to change their pricing strategy and reduce prices
on many goods. This increases workers disposable income; therefore, people are
able to afford more products and services. At the same time, businesses
generate more money, which gives them an opportunity to expand further and build
new manufacturing factories, warehouses and stores. All that requires higher
labour force, so more people are being hired. This reduces unemployment rate
and there are more people in the society with some kind of income to spend on
goods and services. High employment rate enables the government to collect more
money from the employers and workers. Both have to pay National Insurance,
which go towards state benefits and services, such as the National Health
Service, different sickness and disability allowances, unemployment and support
allowances and the State Pension. Employees also have to pay Income Tax,
whereas businesses need to pay Value Added Tax, Corporation Tax and others. All
that positively impacts on the governments’ budget and increases economic
How Innovation grants improve the UK economy
“Over a 13-year period (2004-2016),
the UK government invested £8bn
into 15,000 businesses for their Innovations and Research & Development, according
to the research from Enterprise Research Centre. The Innovation grants from
government have created an extra 150,000 jobs and stimulated growth worth £43bn turnover. Main findings from ERC show
that across all recipients, employment grew by 6% in the short term and 23% in
the longer term, turnover grew by 6% in the short term and 28% in the longer
term, productivity was unaffected in the short term, but grew by 6% for those
firms involved in the longer term. The biggest growth in both employment and
turnover occurred among manufacturing firms, which grew 24% and 33%
respectively” (Enterprise Research Centre, 2017).
is central to Entrepreneurship. This report showed the Entrepreneurship and
Innovation are not the same, however, only by being innovative and creative, businesses
contribute to the economic development and improve standard of living of the
society. The government initiative to support innovative
ventures benefits the whole economy and creates new jobs, improves the
productivity, employment and turnover of many businesses.
incremental and radical innovations are beneficial for businesses and society,
however, radical innovation is the key to the economic development.