Discuss the relationship between entrepreneurship, innovation and economic development. What role do creativity and problem solving play in this relationship? Refer to both theory and examples from the business world to support your discussion. ’ There are many links that bring together a relationship between entrepreneurship, innovation and economic development, and both creativity and problem solving play a large role within this relationship. Entrepreneurial activity can lead to innovation within a market for a product or service, which can therefore lead to increased economic development.
Within this report I will attempt to analyse this relationship and create further links. The definition of an entrepreneur and entrepreneurship has been argued since introduced by Richard Cantillon in 1755 in his work ‘Essai Sur La Nature de Commerce en General’. He originally suggested that an entrepreneur was an “individual who pursue(d) the profits from buying at a lower price than they expect to sell under conditions of uncertainty” (Entrepreneurship from Creativity to Innovation, 2007, p. 12).
However, under Joseph Schumpeter, the term has since developed into recognising “the element of difference, uniqueness and innovation” and he believed that “to generate a new product or process, then we can be called entrepreneurial” (Entrepreneurship from Creativity to Innovation, 2007, p. 12). Here it has been shown that an entrepreneur is required to have the ability to be creative to ‘generate a new product or process’ and that innovation is often a necessary skill to succeed as an entrepreneur. Entrepreneurship is a combination of what entrepreneurs do and refers to the events and results they produce and their economic impact.
However, by going into this in more depth, we are able to reveal that entrepreneurship requires creativity to survive. Creativity arguably allows us to construct something new and so far unimagined and is essential to what Harvey Liebenstein believes an entrepreneur has the ability to “gap-fill (and) spot opportunities in the market earlier than others” (Entrepreneurship from Creativity to Innovation, 2007, p. 13). Creativity can be brought about from a variety of sources, such as: “divine inspiration and through determinism” (Entrepreneurship from Creativity to Innovation, 2007, p. 9) and there are millions of recent examples that show this, such as: The Million Dollar Homepage (MillionDollarHomepage, 2005), Social Networking sites e. g. Facebook (Facebook, 2004) and the Apple tablet Computer, the iPad (iPad, 2010). Clearly creativity can also be seen as a form of innovation, as many products such as: the original iPod are a development upon an already existing product, the MP3 player, which has gone on to be an extremely successful product, with over 250 million sold since their release in 2001 (Apple, 2010).
Apple’s brand has risen significantly since this introduction and has been put down to the opinion that “they used better hardware, software, packaging, and marketing techniques than anyone else” (BestTech, 2010), helping increase their market share. Therefore, there are clear links shown here between entrepreneurship, creativity and consequently, innovation, which have lead to economic success within specific markets. However, this relationship does not end there, as ‘Schumpeter’s Theory of Economic Development’ shows.
Schumpeter was able to “highlight the entrepreneur’s role as the catalyst for economic development” (Entrepreneurship from Creativity to Innovation, 2007, p. 14) as he explained 2 separate types of change within ‘Schumpeter’s economy’. Schumpeter’s economy consists of a collection of businesses where each represented a particular combination of production factors. As all enterprises relied upon customer demand and for all businesses, changes in the level of economic activity and development would only be generated via either “gradual” or “discrete” change (Entrepreneurship from Creativity to Innovation, 2007, p. 4). Gradual change and Incremental creativity are alterations to already existing products, therefore linking the suggestion that creativity is a form of innovation, which can lead to economic development. Creativity is necessary for this gradual change, for example, within the MP3 player market (MPEG, 2008) since introduced in 1998, there have been small modifications to the product, leading to large profits for many firms, therefore generating economic development. The world’s first MP3 player was released by SaeHan Information Systems in 1998 and was called the MPMan F10 (Hardware, 2008).
Since then developments to the MP3 player have taken place, such as: improved aesthetics, larger memory, different sizes and more features, i. e. the Creative Zen X-Fi MP3 Player (Creative, 2010). These gradual changes may reflect market research and customer demand, as they seek the features most important to the consumer and it is also an easier form of change for firms as they are altering an existing product rather than another form of innovation,’ discrete change’. These gradual changes can be seen as creativity and a form of innovation, and as they are able to generate more revenue and produce new goods, economic development.
Schumpeter’s other form of change is ‘discrete change’. Here, rather than gradual alterations to a product, an entirely new product, which “cannot be traced back to the previous gradual version” (Entrepreneurship from Creativity to Innovation, 2007, p. 14), is created. In this situation there are links to what Harvey Liebenstein argued, as he stated that an entrepreneur “spots opportunities in the market earlier than others”, and is therefore innovative by producing such a product. Although, it has been argued by Schumpeter that entrepreneurs are in fact reactive and only seize opportunities, rather than create them.
However, products and services can also be generated via creativity in the form of, serendipity, whereby a product is created via a “fortuitous coincidence of thoughts and events” (Entrepreneurship from Creativity to Innovation, 2007, p. 19). For example, the Microwave Oven, created in 1946, was brought about when a magnetron melted a candy bar in Raytheon engineer Percy Spencer’s pocket (MicroTech, 2006), therefore generating the notion that this could be encapsulated and sold as a product.
Obviously this product is a form of discrete change as there was no similar product at the time and this innovation lead to economic development throughout the world. However, discrete change can also be linked to de Bono’s “lateral thinking”. Lateral thinking involves “Idea generation and is a problem solving technique in which new concepts are created” (Business Dictionary, 2010), a different approach to linear thinking. By using lateral thinking, entrepreneurs can solve problems quicker than that of the linear approach and are able to spot opportunities within the market before others.
However, Schumpeter argues that there is often significant resistance to any method of entrepreneurial thinking due to its high risk. In a survey by NESTA, it was found that only 1 in 100 inventions more than cover its costs (Entrepreneurship from Creativity to Innovation, 2007, p. 6), therefore leading to a lack of investment. Not only is resistance caused by cost, for example, there has been little significant development in the recent transport market i. e. cars and trains, due to the fact they are already very practical and safe, even though other options are available such as Segways and Hovercrafts.
Schumpeter consequently suggests the idea of “creative destruction”, whereby a successful entrepreneur breaks through such resistance and enables innovation of a new product or service. This will ultimately lead to a new level of economic development, which has been established through an entrepreneur’s creativity and innovation. However, entrepreneurship isn’t limited to two separate changes in products and services and this is shown by the Austrian’s view of “allocating entrepreneurs” (Entrepreneurship from Creativity to Innovation, 2007, p. 16).
Here it is argued that entrepreneurs are incentivised by profit and, similarly to Liebenstein’s suggestion of being the first person to spot the opportunity in the market, they are the first to notice and respond to increasing demand and charge higher prices, whilst others remain constant. This is clearly different to Schumpeter’s creative and innovative approach whereby catalytic entrepreneurs produce new ideas, as here; entrepreneurs are constantly allocating and are reactive to opportunities, and therefore increasing economic development through this process.
Nevertheless, it cannot just be suggested that all entrepreneurs are seeking economic development and increasing profits. Often they are seen as those who will identify and create opportunities and after realising new concepts within an appropriate market to attempt to bring value to that area of study. ”, for example social and environmental values, i. e. The Greenshop have been “providing sustainable and low impact products for almost 20 years” (Greenshop, 2010), such as: natural watercolour pains, in a bid to help increase the knowledge of sustainable products rather than many current carbon emitting ones.
During this analyse of entrepreneurs, and their ability to innovate, it has been suggested that they are often reactive (Schumpeter). However, in Liebenstein’s book ‘Beyond Economic Man’, he believes entrepreneurs are able to spot opportunities within the market, and this concept is in agreement with ‘Kirk’s space’. Kirk’s space is more about the pre-concept stage of entrepreneurship activity and innovation, than the reactive nature of Schumpeter’s entrepreneurs. The ‘Our knowledge’ section represents our knowledge of the problem or opportunity, whereas the ‘Our capabilities’ represents our ability to solve the problem or opportunity.
For example, within the top left point of the diagram we have a large understanding of the problem, but we are yet to think of any suitable solutions to this issue, e. g. world poverty. Kirk’s space is a relevant theory to analyse as it’s the pre concept of the innovation stage, and as an entrepreneur moves further up and to the right within the diagram, they are using their creativity to help problem solve and innovate within a market to help economically develop.
Problem solving is obviously a major section to be measured within Kirk’s space and with more understanding of the problem, the higher the point within the diagram. Innovation within Kirk’s space can be seen as a shift to the right within the diagram, as entrepreneurs are creatively generating more and more suitable solutions to the problem. Kirk’s space can be seen as the overall summary behind other theories such as the Pugh method. The Pugh method was originally designed to help reduce previous methods which were producing “somewhat less than adequate” (Entrepreneurship from Creativity to Innovation, 2007, p. 1) results. The method is a creative evaluation technique using new concepts and ideas in an advantage-disadvantage format, whereby the best existing concept is used as a ‘datum’ against which the new concepts are compared. Entrepreneurs can successfully use this method of creativity and innovation to help challenge previously accepted products to help generate “gradual change”, or even start at the top left point within Kirk’s space and uses Schumpeter’s “discrete change” to generate a new product that can help produce economic development.
The Pugh Method is a simple method of problem solving that entrepreneurs use to innovate and generate new products and alter existing concepts. There are several benefits to this method, which also generates further links between entrepreneurship, innovation and economic development. As entrepreneurs are forced to consider a large variety of options and using its weaknesses and strengths approach, it is able to systematically remove flaws from the options.
In using this method, groups can hold discussions that “lead to creative leaps between different concepts” and they are also able to solve problems such as “preventing a business from making costly mistakes” (Entrepreneurship from Creativity to Innovation, 2007, p. 72), which is therefore beneficial to the firm and can lead to increased innovation within the market place and greater levels of economic development. A good example of this method would be if a firm were trying to innovate upon the current best selling product in their market, i. e. Blackberry mobile smartphone (Blackberry, 2010), obviously the firm would need to assess the features a new mobile phone would require to give an equal, or higher standard than that of the Blackberry, and they would also need to generate ideas on how to improve upon this model. Innovation can be created using the “Four Pillars for Sustaining Innovation in an Organisation”, whereby the 4 main conditions will increase the likelihood for entrepreneurs to innovate and therefore develop economically, these are: education, application in teams, organisational climate supported by management and open communication between all levels.
A combination of these factors can help generate easier working conditions for entrepreneurs as: greater education, greater number of minds working together, a more enterprising climate and ease of access to management will allow entrepreneurs to act creatively and will significantly benefit a company as they both innovate and problem solve. Therefore, there are clearly several links that can be made between entrepreneurship, innovation and economic development.
Creativity and problem solving will often play a large role in generating higher levels of innovation for entrepreneurs, so that they can develop economically. Although, this is not always the case, as occasionally problem solving will not always be at the route for innovation and it may just be a creative idea that becomes popular within the public domain.