Relationship Between Innovation And Economic Development

Submitted By tushar-bagla
Words: 1983
Pages: 8

We all know what a ‘Triangle’ is. A polygon with three sides and thus three angles. And attributing each angle to the three concepts, namely entrepreneurship, innovation and economic development is the best way to describe the relationship between the three. Depending on the definition, as there are many, we use for each individual concept we can vary the degree of their angle measure or importance in this triangle or relationship. Supporting this view of relationship Schumpeter(1934) argued that economic development requires the disruption of the general market equilibrium by entrepreneurial activity which causes radical change and innovation. He defined ‘entrepreneurship’ as the act of making ‘new combinations’ out of existing economic resources so that the same amount of economic resources generated a larger amount of output from a given amount of inputs causing economic development. He also named this transformation productivity ‘innovation’. Hence proving that innovation and entrepreneurship is vital for economic development. Furthermore we cannot deny the existence of sustainability in this relationship as the study of economic development does concern itself with sustainability. Sustainability should be the focus of all the three concepts listed above. Therefore in this triangular depiction of the relationship between the three concepts sustainability for the circumcentre of the triangle that is the relationship between entrepreneurship, innovation and economic development.

The field of entrepreneurship studies the discovery and exploitation of opportunities (Shane and Venkataraman 2000). Economists usually define entrepreneurship from three points of view, namely, occupational, behavioural or outcomes point of view (Naudé 2011). But as Davidsson (2004: 4) points out, and I agree, that ‘some of the variations in entrepreneurship definitions, I believe, are relatively minor and of little import’. This in turn does in no way nullifies the role of an entrepreneur in economic development. But for the sake of the argument I will look at entrepreneurship from all three points of view.

According to the outcomes point of view “Economic development requires sustainable and shared increases in per capita income accompanied by changes in the structural composition of an economy towards higher value added goods and more efficient production methods. Entrepreneurs can contribute to economic development by facilitating the reallocation of resources from less to more productive uses (Acs and Storey 2004), by performing ‘cost-discovery’, ‘gap-filling’, and ‘input-completing’ functions in the economy (Leibenstein 1968; Hausmann and Rodrik 2003) and by supporting structural change (Lewis 1954; Gries and Naudé2010)” (Szirmai et al 2011).

From the behavioural point of view, Joseph Schumpeter argued “Whatever the type, someone is an entrepreneur only when he actually carries out new combinations, and loses that character as soon as he has built up his business” (1934). He also creates a distinction between entrepreneurship and other related activities, such as business ownership, business financing or business management. While, still from the be behavioural point of view, “Others, such as Knight (1921), Kirzner (1973) and Schultz (1975) have emphasized additional functions of an entrepreneur, such as risk-taking and the exploitation of opportunities which lead to arbitrage and a reallocation of resources” (Szirmai et al 2011). This reallocation of resources as pointed out earlier leads to economic development.

The occupational point of view definition of entrepreneurship is the most widely used definition with relation to economic development. From this point of view self-employed person and/or business owners are entrepreneurs (Szirmai et al 2011). According to the data compiled by Robson(2007) in developing countries the rates of self employment is higher, for example 44.8 per cent in Sri Lanka , 44.7 per cent in Indonesia and