Innovation is central to entrepreneurship Withinbusiness terms innovation describes the changes that create a commercialbenefit however within economic terms it describes the development andapplication of ideas and technologies that improve goods and services or maketheir production more efficient (Bank, 2017). Innovation canbe both incremental and radical. Incremental changes refer to changes in orderto keep consumers interested and therefore keep or increase profits byextending the product life cycle. Radical changes refer to changes to a productin a way that changes the actual product, therefore destroying the originalproduct and causing creative destruction. Radical innovations are more linkedtowards creating economic development as stated by Joseph Schumpeter. Entrepreneurshipsuggests the capacity and willingness to develop, organize and manage abusiness enterprise in order to bring about its success (BusinessDictionary, 2017). Successful entrepreneurship doesrequire innovation, therefore the increase in enterprise will result in highereconomic growth and development, therefore implying innovation is central to entrepreneurship.
This show through the fact that in the UK smaller organizations actually makeup the bulk of the British economy 48% of private sector employment and up to99% of all business (Telegraph, 2015). One of themain benefits of innovation as I said before is boosting economic growth anddevelopment. This is because innovation provides incentives to increaseproductivity of workers and firms, therefore suggesting the same input wouldboost a greater output (Bank, 2017). As productivitygrows it leads to further production of goods and services, therefore boostingeconomic growth and shifting the economy’s PPF curve to the right.
Thisinnovation comes from new ideas within the workforce or new technologies usedwithin the workforce that increases efficiency. This can be through new systemsdesigned to decrease time or simply making workforces more capital intensive,therefore having more machinery in the workforce allowing the increase inproductivity. With an increase in goods and services, innovation will boosteconomic growth and will be central to entrepreneurship due to the fact thatthere is such high level of SME’s in the UK. The increase in innovation andproductivity will look to have a multiplier effect which will boost economicdevelopment. This is due to the fact that when productivity and economic growthrises, wages and national income will rise (Bank, 2017). This will give workers with more money to spend and therefore furtherincentives to increase consumption within the economy boost aggregate demandand again increasing economic growth or GDP. The increase in GDP will improveliving standards within any country, therefore improving economic development.
My argumenton innovation with regards to productivity and economic development is backedup by economic theories. For instance, Joseph Schumpeter suggested a linkbetween entrepreneurship and innovation which contributes to economicdevelopment. He believes there is a dependency on entrepreneurs to beinnovative and be able to increase the production of goods and services in theeconomy. The reformation of his theory included new products and new methods ofproduction, as well as to introduce new raw materials as an alternative inproduction (Low, 2010). There are also measures tofind new markets for these products and have a rearrangement of industries. Ultimately,Schumpeter believed that radical innovations would provide that change and leadto a cycle of creative destruction which therefore will lead to the measures Istated before, as well as looking to create more jobs and wealth in the economywhich improves living standards. Examples of creative destruction can be seenthrough Netflix. Netflix started off as mainly a DVD subscription company butnow has rapidly evolved due to new innovative technology and increase internetspeeds into becoming the largest video streaming/ distribution networks in the world (Perry, 2015).
The creative destruction that Netflix has causedhas driven firms like Blockbuster into bankruptcy. The effect of Netflix hasbeen so destructive it has now said to been described as the ‘Netflix effect’.One may suggest that creative destruction brings about newly need change intoeconomies and boost growth, however in many cases it also creates unemployment.Linking back to Netflix, the rise in demand for its network and streamingonline has declined employment severely in the video rental industry. Employmentcollapsed from 153,000 jobs in 2005 to only 11,000 in 2015, this states nearlya 93% decline, the largest in any US industry within that decade (Perry, 2015). With a risein economic growth and development, entrepreneurs may look to increase in theirinvestment. This may cause autonomous investment, one that’s determined by longterm development in areas such as new resourced found or new technology whichcan cause reformation.
However, in some cases small businesses may not be ableto cope with other businesses who have done their reformation and so may fail. Thoseentrepreneurs who will adapt and create new products due to innovation andthose who are able to enter new markets will ultimately look to increaseeconomic development (Low, 2010). Innovationand the new technology which has come from this has enabled firms to enter newmarkets not just regionally but also globally. Firms or businesses can exportto different regions and areas and therefore allow them to contribute to theproductivity and economic development within those areas.
This increase inearnings or revenue of the area strengthens the economy and promotes theoverall welfare of individuals (Sappin, 2016). Innovation islikely to prosper within a country or economy that is operating at it trendrate of growth and less likely in poorer economies or those in recession. Thisis may be due to the fact that for innovation to take places, there needs to bean educated pool of labour as well as those with a collaborative mind.
With this in mind you can therefore alsosuggest that entrepreneurship is also going to prosper within more economicallydeveloped countries. This may be due to the fact of rising national incomecausing greater demand for new products and less demand for inferior goods orthose which seem a given. However, it also said that smaller organisations arealso the back bone of any poor country and are a must when bringing economicgrowth. All of this contributes to economic development and quality of life.
Anothertheory linking with entrepreneurship came from Israel Kirzner, who offered adifferent way of thinking than Schumpeter. He believed that entrepreneurs whoare alert and have an opportunistic nature to them strive to success and helpbring economic development. This is not only done with those who know theresources that are currently on offer but also those who don’t and looking foran opportunity to react to this change in the economy. However what Kirznerstheory lacks is where this change comes about.
However, these opportunities maybe the incentive to raise profits by entering new markets for new business attimes where the economy is at disequilibrium. Peter Drucker once stated that “theentrepreneur always searches for change, responds to it, and exploits it as anopportunity” (Drucker, n.d.).Ultimately knowledge is what will drive entrepreneurs in whatever action theytake, this also brings us back to my point that there is a need for an educatedpool of labour in order to bring about innovation. Kirzners and Schumpeter’stheories both suggest the need for knowledge and education in order to innovateor cease opportunities and they both suggest the fact that entrepreneurs arethe base of any economy and ones which take opportunities and turn them intosuccess. Overall onecould definitely argue that innovation is central to entrepreneurship due to thefact that it helps grow and start up new enterprises, which ultimatelytherefore leads to economic growth and development.
Innovation may well comefrom start-up businesses who look to enter the market trying to tap un-metdemand. Therefore, what innovation also allows entrepreneurs to do, is to takeadvantages of new opportunities within the market and economy. This suggeststhat Kirzners theory may well work in practice, due to opportunistic nature of entrepreneurs.It can be therefore said that those entrepreneurs who try meet new marketdemands are the ones who play a key role in boosting economic growth. Innovationis also a great tool when making firms more collaborative. It allows like-mindedand creative individuals to express the qualities and therefore become moreproductive as well as benefiting the firm as the firm becomes more efficient. However,whilst innovation does promote good competition within markets, it can lead tothe decline of firms and industries in general as I have mentioned before whichcan leave a rise in unemployment figures structurally and regionally, thiscould be more of a problem when there is rising income, therefore causingfurther unemployment and a larger gap between rich and poor. Although one couldargue that at times of economic prosperity innovation also prospers whichallows further start-ups and even further employment opportunities.
Ultimatelyinnovation creates opportunities not just for small organisations but largerorganisations which helps build economic certainty within markets as well asboost growth and development which looks to raise living standards ofindividuals. This all therefore provides a strong argument to why innovation iscentral to entrepreneurship and should be welcomed by all firms to improvetheir efficiency and performance.