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The relationship between entrepreneurship, innovation and economic development Essay

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‘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.’

In today’s fast-paced competitive environment, one of the most impressing concerns is the condition of economy. Since economies have closely associated with human beings’ living condition, salary, welfares and the trust of government. Especially, recent years are the recovery period of economic crisis. Have no doubt that innovation and entrepreneurship have serious effect on the condition of economic. This paper will present an overview of the relationship between entrepreneurship, innovation and economic development. What’s more, creativity and problem solving also play an important role in the relationship. Firstly, the definition of entrepreneurship and innovation will be stated; then, the relationship between innovation and entrepreneurship will be present; thirdly, how innovation and economic development interrelated with each other will be mentioned; furthermore, the effect of entrepreneurship to economic development will be present; the lastly, the board overview of the triadic relationship. Additionally, how do creativity and problem solving impact the relationship will be mention.

The general relationship between entrepreneurship, innovation and economic growth is seemed to have a strong connection and interplayed with each other. At the first step, there will be present the definition of entrepreneurship. According to a famous economist Schumpeter (1943), the entrepreneur is a sociologically distinctive individual who has a speciality to discover precious opportunity and creates a new product, change the course of manufacturing or totally create an innovative marketable to the economy. Moreover, as Hisrich (2011) indicated that, entrepreneurship is a process of creating incremental wealth. This process is risky, mainly because of lacking the methodology. Particularly, high-tech entrepreneurs and innovation are more difficult and riskier. However, Bell Lab and IBM proved high-tech entrepreneurship not high-risk. It needs to be managed. Above all, it needs to be based on purposeful innovation (Drucker, 1985). Then, there will be a brief introduction to innovation. Schumpeter (1950) stated that innovation can be defined as an action that causes to a new production function and the sole domain of the entrepreneur. There are five specific acts that innovation can bring to a new production function. They are introducing new products, introducing a new method of producing, expanding a new market, applying a new type method of organizing and digging a new source of a raw material. Innovation is most simply the application of an idea or concept to the production of goods and services (McDaniel, 2002). In the following context will present the relationship between innovation and entrepreneurship.

On account of the definition of innovation and entrepreneurship were mentioned in the last paragraph. It seems innovation and entrepreneurship has a strong connection. Innovation is not only the foundation of the relationships but also the inspiration of entrepreneurship. It is essential that innovation can stimulate the output of an enterprise. Brazeal and Herbert (1999) estimated that the process of entrepreneurial is consisting of technology, psychology and business. In another word, innovation, change and creativity are the main force of the entrepreneurial process. Concern to entrepreneurship aspect, innovation is the specific tool of entrepreneurs, which means exploiting innovation as a chance for different business or service. Entrepreneurs can search purposely for innovation, the changes and apply the opportunity for successful innovation (Drucker, 1985). Innovation is the result of entrepreneurial behaviour, which is the key point (McDaniel, 2002). On the other hand, according to Baumol (2011) that the serious pressure competition of the market forces corporate to systematize the innovation process and depending passed by other competitors.

To settle this kind of situation, business enterprises have incorporated innovation into routine operation. To have a clearly illustrate the important effect of innovation and entrepreneurship, there is an example. Apple Inc is an American multinational corporation. For the innovation aspect, its product with the philosophy of comprehensive aesthetic design, such as IPad, iPhone and Mac, lead the upsurge of flat computer and smart phone, which is never happened in the past. For the entrepreneurship aspect, Apple Inc is founded by Steve Jobs and other two people. The creative idea impelled Jobs to start a company. The establishment of the company simulated the output of these products and the scale of the company become bigger and bigger. According to Gupta and Campos (2011), as of September 2011, Apple has recently been the largest publicly traded company in the world by market capitalization, and the largest technology company in the world by revenue and profit. Therefore, entrepreneurship and innovation can be seen as interrelated with each other. In general, innovation has multiple impacts to economic development. Innovation can bring a positive effect on economic development. Schumpeter (1943) presented a definition of innovation, which is innovation is the critical dimension of economic change. In addition, economic change revolves around innovation, entrepreneurship and market power. Technological innovation is regarded as a main force in economic growth.

The activity of innovation has been the single and the most essential ingredient of long-term economic development (Rosenberg, 2004). China is a good example to explain the innovation play an essential role in economic growth. In recent year, China has significantly increased the expenditure on research and development, which results in its almost top GDP rank. It is found that innovation have positively impact on China’s economic development while research and development intensity has positively affect on regional innovation (Wu, 2010). However, Schumpeter (1943) argues that technological innovation often creates temporary monopolies, which may cause abnormal profits. To prevent being soon competed away by rivals and imitators, this kind of monopolies is necessary to exist, which can stimulate firms to develop new product and processes. Wu (2010) also estimated that economists are increasingly of the view that different innovation capacity and potential are accountable for persistent variations in the performance of economy and hence wealth among the nations in the world in recent years. Otherwise, considering the social and institutional condition in an economy is necessary to consider the effects of innovation.

Considering entrepreneurship, entrepreneurship plays the role not only involves per capita output and income but also involves initiating and constituting to transform in the structure of business and society. This kind of change causes the growth of output, which will lead more wealth to be separate by the various, participates. Innovation is definite as a key force of economic growth, both in developing new products or service and stimulating the new ventures to be created (Hisrich, 2011). Obviously, entrepreneurship is crucial to economic growth. Entrepreneurship can keep the equilibrium of the process of innovation and organization in many aspects. Schumpeter (1942) stated early, the ‘entrepreneur as innovator’ as a key figure in pushing development of economy. The innovative activity of entrepreneurs supplies a creative ’destruction process’ by disturbing an economy system in equilibrium, creating opportunities for economic rent. To adapt equilibrium, some innovations are spun off and more entrepreneurs go into the system of economy. Therefore, the increase of entrepreneurs will cause an increase in economic development (Wong, Ho and Autio, 2005). Hong Kong is a remarkable entrepreneurial economy example. This city has a tradition of approving profit seeking and the legitimacy of entrepreneurship has been well established by citizens. The number of enterprises and the company formation rates were higher in Hong Kong than in USA (Yu, 1997). Hong Kong also keeps high GDP rank in Asia. In brief, innovation and entrepreneurship are the basis of realizing economy growth.

Regardless of expansion or decline in innovation and entrepreneurship will lead directly changes in the economic growth of a country. To further illustrate, in 1980s, Margaret Thatcher and Ronald Reagan, support the opinion of market capitalism transform into the ideology espoused. This had resulted in the rapid economic growth that is brought by innovation and entrepreneurship, which became a worldwide phenomenon in that time. This kind of activity was strengthened by the declining acceptance of socialist-based economic in the world and USA had recognized that innovation can enhance the world trading power and leading high efficiency in manufacturing. Furthermore, the hallmark of some good quality corporate is innovation that has become a necessary requirement (McDaniel, 2002). A society cannot be prosperous without the contribution of innovation and entrepreneurship. For example, as McDaniel (2002) pointed that in the early 19th century, a lot of western manufacturing like the vehicle industry use innovation led to major economic growth. Innovation and entrepreneurship led manufacturing produce effectively and progress in almost all aspects of technology and a huge number of edge-cut products after the Great Depression and World War II.

However, if lacking of a management and good process of entrepreneurial process, innovation may draw negative effect to economic growth. In modern time, creativity and problem solving play an important foundational role in the relationship of entrepreneurship, innovation and economic growth. In the following section, a brief review of the relationship between creativity and innovation is given. Creativity can be found in many different fields in the world, such as, art, science, and technology. In general, creativity can be multi-faced understood. To put it simply, creativity is the precipitating factor of innovation. In more detail, creativity is a procedure of discovering what has not been utilized – the act of making new connections (Gilliam, 1993). Put creativity to a practical dimension, creativity pertains to ideas and innovation pertains to the products and service which are derived from creativity (Thompson, 2003). As Mann and Chan (2011) state that the important prerequisite of innovation is creativity in modern economies. Actually, creativity can be treated as a process of idea generation. The relationship between creativity and innovation can be described as a series of intersecting circles, where creativity can be seen as input and innovation are output. In the process of input and output, large amounts of ideas are screened and select useful ones (Majaro, 1988).

It means that creativity is the first step in innovation, which is the successful implementation of the novel and amazing ideas. There is an example to illustrate innovation. Wong et.al. (2005) estimated that the city-state of Singapore is famous for its high efficiency and innovation and gain rapid economic development. Singapore is a favourable perception of an innovative city. Furthermore, problem solving also plays an essential role in the relationship. Problem solving is a tool in the process of innovation. In this part, solving problem can sift a lot of useless solutions and determine the best solution. Problems exist in every area; entrepreneurs also may meet such a hard nut to crack. There is a simple problem solving structure contains three sections. One is the definition which is all about preparation. Second one is the discovery that is aimed to generate ideas and the last one is determination, which is evaluating ideas. As Schumpeter (1943) stated that entrepreneur was reactive. Nevertheless, a successful entrepreneur can also identify and analyses problems. Solving problem creatively is a character of entrepreneurs. Actually, nobody can get success in any area without really trying. To sum up, both creativity and problem solving are main forces to the process of innovation. In conclusion, this paper has explained the relationship of innovation, entrepreneurship and economic development.

Additionally, the effect of creativity and problem solving also be discussed. In general, innovation is the basis of this relationship, which not only can be the inspiration of the entrepreneurship but also being the main force of economic development. Innovation and entrepreneurship are interacted and connected with each other. Innovation is the foundation of entrepreneurship, which also provides positive circumstance to itself. Meanwhile, entrepreneurship is crucial to economic development, which keeps equilibrium; seek opportunities to get economic growth. Economic development is resulted in combined action of the two main forces. However, not all innovation and entrepreneurship have positive effect on economic development; circumstance need to be considered. Creativity is the process of ideas generating, which can be described as the precipitating factor of innovation. Solving problem can be seen as a tool which is used to help entrepreneurs to pass difficulties. Therefore, the consequence of economic development in the entire world cannot lack of innovation and entrepreneurship, creativity to generate ideas and problem solving to be a tool are necessary during the process.

Reference list:
Baumol, W. J. (2011) Entrepreneurship, Innovation and Growth: The David-Goliath Symbiosis Drucker, P. L. (1985) ‘Practice and Principles’ Innovation and Entrepreneurship Gilliam, T.K, (1993) Managing the power of creativity

Gupta, P. and Campos, R. (2011) Apple briefly passes Exxon as largest U.S. company [online] Available from :; http://www.reuters.com/article/2011/08/09/us-apple-exxon-idUSTRE7784RX20110809; [22 November 2011] Hisrich, R. D., Peter, M. P. and Shepherd, D. A. (2011) Entrepreneurship. Singapore Kirkham, P., Mosey, S. and Binks, M (2009) Ingenuity in Practice: A guide for clear thinking. Nottingham Majaro, S. (1988). The Creative Gap. London: Longman

Mann, L and Chan, J (2011) Creativity and innovation in business and beyond: social science perspectives and policy implications McDaniel, B. A. (2002) Entrepreneurship and Innovation: An Economic Approach New York: Sharpe
Rosenberg, N. (2004) Innovation and Economic Growth [online] Available from :; http://www.oecd.org/dataoecd/55/49/34267902.pdf;[19 November 2011] Schumpeter, J. A. (1942) Capitalism, Socialism and Democracy, New York: Harper and Row. Schumpeter, J. A (1934) The Theory of Economic Development

Thompson, L., (2003), “Improving the creativity of organizational work groups”, Academy of Management Executive Wong, P., Ho, Y. and Autio, E. (2005) Entrepreneurship, Innovation and Economic Growth: Evidence from GEM data Wong, P.K., Ho, Y., and Singh, A. (2005) Singapore as an Innovative City in East Asia: An Explorative Study of the Perspectives of Innovative Industries. Singapore Wu, Y. (2010) Innovation and Economic Growth in China [online] Available from :; http://www.uwa.edu.au/__data/assets/pdf_file/0004/888448/10-10_Innovation_and_Economic_Growth_in_China.pdf ; [20 November 2011] Yu, T. F. (1997) Entrepreneurship and Economic Development in Hong Kong London: Routledge

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