Entrepreneurship said innovation. When production becomes more efficient, additional

Entrepreneurship
is an essential part of economic development, and it has been so, especially
since the industrial revolution. Development is achieved, for example through
innovation, which the Organisation for Economic Co-operation and Development (OECD, 2005) defines as the ‘implementation
of a new or significantly improved product (good or service), or process, a new
marketing method or a new organisational method in business practices,
workplace organisation or external relations’. Innovative performance is an
essential part when determining competitiveness and progress on a societal
level. The following chapters will focus solely on innovative and opportunity
entrepreneurs, as necessity entrepreneurs and entrepreneurs that imitate others
contribute little to none towards economic development.

Entrepreneurships
often quoted definition is that it is about the “discovery and exploitation of opportunities”
(Shane & Venkataraman 2001). Why is innovative entrepreneurship important? Innovative
entrepreneurship plays an important role in today’s society across different
countries and institutional contexts and by contributing to economic development,
it is a catalyst for institutional development and structural change, and it
helps addressing challenges that policy makers are trying to overcome. Such
challenges include economic growth, climate change, sustainable development,
maintaining biodiversity, socioeconomic issues, job creation and poverty. The
level and type of impact innovation has on an economy will differ at different
levels of economic development and thus, innovations by entrepreneurs will be
of increasing importance now and in the future. Innovation can lead to a more
efficient productivity, which in other words means that an input generates a
greater output than before said innovation. When production becomes more
efficient, additional goods and services are produced, and therefore the
economy grows. A classic example of such innovation is the development of the external
combustion engine in the 18th century. The stationary steam engine
was one of the main catalysts of the Industrial revolution, it allowed
factories to be located in locations previously unavailable, which enabled
economies to make big advances in the development of the society. A more recent
example is the development of information technology, that reshaped the way
companies produce and sell their products while expanding to new markets and
business models.

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The modern state of living standards has been achieved through constant innovation
that originates to the industrial revolution. Social challenges such as health
and demographic challenges, and social exclusions and inequalities among
others, can be mitigated through innovation (innovationpolicyplatform.org,
2014). As an example, the older demographic
of the population can, through innovation, remain healthier, live at home for
longer and counteract the declining levels of physical ability that becomes inevitable
with age. Of course, social innovation is not limited to just one demographic
of the population, but every single one of them. Healthcare products have
become more predictive and preventive, and therefore more personalised
treatment can be given, and thus the quality of human health is improved. For
example, innovation and development in medical and dental equipment allows
safer births and the control of genetically transmitted diseases, hence
allowing people to live a longer and healthier life. In addition, through
frugal or inclusive innovation, the prices of existing goods and services
become cheaper, and thereby reduce the inequalities between the different
demographics in society. Besides addressing social exclusion, innovation
results in other social benefits such as new employment opportunities and addressing
challenges the lower income demographic of society faces. Global travel has
become cheaper and faster through innovation, opening totally new job and
business opportunities, and therefore local economies are improved and as a
consequence socioeconomic differences diminish and the life of people improve. Innovation
has led to a higher level of education, that is at the same time more
accessible and more affordable than ever before, making people academically
more intelligent. That said, by founding and operating a new business, the
entrepreneur can create value and new jobs, even if the business has or does nothing
innovative. This way, the entrepreneur might still have a positive impact on
the overall economy, and indirectly help development move forwards.

One of the most famous definitions of an entrepreneur is by Schumpeter (1950,
1961), that defines the entrepreneur as the coordinator of production and agent
of change (creative destruction). Creative destruction, according to Schumpeter
(1950), is the “process of industrial mutation that incessantly revolutionizes
the economic structure from within, incessantly destroying the old one,
incessantly creating a new structure. This process of creative destruction is
the essential fact about capitalism”. The “Schumpeterian” entrepreneur is seen
as heroic, but above else as an innovator. Entrepreneurship, under Schumpeter,
is thus the expression of the human impulse to be creative (Khalil, 2007). The
contribution of entrepreneurship is considered to be more important during the
later stages of economic development by Schumpeterian scholars, where growth is
mainly driven by knowledge and competition, than during the earlier stages of
economic development. Factor accumulation drives growth during the earlier
stages of development, making entrepreneurship less important. Schumpeter’s basic
realisation was that economic growth resulted not from capital accumulation,
but from innovations and “new combinations” (Landström, 2005). Entrepreneurship
is not necessarily synonymous with innovation, as the German-Austrian school
presents it, but it also involves imitation, which doesn’t drive economic
development forwards. Entrepreneurs that imitate others are usually necessity entrepreneurs,
that have no other choice than to seek self-employment. On the other end of the
spectrum are opportunity entrepreneurs that are seen as innovators, they drive
the economy forwards under optimal circumstances. Schumpeter is more explicit
about the economic function of an entrepreneur than other economists. The process
of economic development could be, according to Schumpeter (1911, 1934), divided
into 3 different phases. The 1st phase entails the discovery of new
goods and services or methods, which Schumpeter states as invention. During the
2nd phase, innovation takes place, which means that new goods and
services are successfully commercialised. This happens due to the technical
discoveries arising during the 1st phase, or more commonly due to a
combination of old and new knowledge. The final phase of this process concerns
a more general assimilation and dispersal of the new good, service or method to
the markets. One of entrepreneurship’s early definitions constitutes of two
phenomena: the presence of lucrative opportunities and the enterprising individual
(Venkataraman, 1997). Shane and Venkataraman (2000, p.218) developed the
definition further to involve the nexus of three phenomena: the presence of an
opportunity, the presence of enterprising individuals who can “see it,” and the
presence of enterprising individuals who are capable enough to respond to it
irrespective of the existing resources. An excellent example of Schumpeter’s
creative destruction is the success of the US based video streaming company Netflix.

The company disrupted the market so severely that it ultimately led to the
downfall of Blockbuster, a company that used be the market leader in the video
tape and disc rental industry. Netflix’s impact on existing industries has been
so disruptive, that some call the phenomenon “the Netflix effect”.

Israel
Kirzner’s theories represent the other end of the spectrum, he represents the
same school of thought that the Irish-French Richard Cantillon, who has been credited
for discovering the economic theory and fully considering the role of
entrepreneurship in an economy. Kirzner’s (1973) entrepreneur is above else an
observer who notices or is alert to new opportunities, and facilitates the adjustment
from a disequilibrium to an equilibrium. Kirzner’s view has gained traction
among scholars who emphasise the type of entrepreneurship that grabs on
opportunities to make profit. This type of entrepreneurship is found especially
in developing countries, where market disequilibrium is more common. A good
example of Kirznerian entrepreneurship is the company Whatsapp, that created a
free instant messaging platform for mobile devices. One of Whatsapp’s founders,
Jan Koum, told that he discovered the idea in the late 90’s, when he had a
constant unsatisfied need of communicating with friends. This is a good example
of the Kirznerian entrepreneur, someone who discovers existing opportunities.

The
differences between the Schumpeterian and Kirznerian school of thoughts can be
divided the into five different sections. The first comparison is between
Schumpeter’s idea of innovation and Kirzner’s idea of arbitrage. “Schumpeterian
opportunities are innovative and break away from existing knowledge, while
Kirznerian opportunities are less innovative and tend to replicate existing
forms” (Shane, 2003: p. 21). As stated above, Schumpeter views entrepreneurs as
individuals, who by combining and creating, innovate and commercialise their product.

To Kirzner’s entrepreneur doesn’t need innovation to be able to profit, he is a
fast acting arbitrageur who recognises opportunities and buys products cheap
and sells them for profit. The 2nd comparison point is between
disequilibration and equilibration. “Schumpeterian opportunities are marked by
disequilibrating activities due to (new to the market) innovations. In
contrast, Kirznerian opportunities are the result of equilibrating forces (by arbitrage
drawing on market errors). Schumpeterian opportunities disrupt the exiting system,
while Kirznerian ones reinforce established ways of doing things” (Shane, 2003:
p. 20). Schumpeter’s entrepreneur disruption is the ‘Netflix-effect’. Kirzner’s
entrepreneur tries to by his own actions make a profit by trying to shift
disequilibria to equilibria. The 3rd comparison is strongly linked
to the 2nd comparison, it is between Schumpeter’s idea of creation
and Kirzners idea of discovery. “Kirzner’s approach also differs in that
opportunities are not created by the innovative entrepreneur, but presupposed
to already exist and to be eligible for discovery by any individual” (Shane,
2003). In other words, the Kirznerian entrepreneur discovers opportunities,
whilst the Schumpeterian individual creates them. The 4th comparison
is between rare and common. Schumpeterian entrepreneurs are a rare occurrence,
whereas a Kirznererian is alert to new opportunities and therefore more common
as everybody is able to be alert. The final comparison is between the
Schumpeterian entrepreneurs need of new information and the Kirznerian, who
requires no new information. The Schumpeterian entrepreneur needs new
information to recombine resources, which results in innovation. The Kirznerian
only needs access to existing information, to see the already existing opportunities.

Innovation is central to modern growth theories and development, but it is not
central to entrepreneurship. Innovation is central to Schumpeterian
entrepreneurs, but to Kirznerians, discovery and use of existing information is
the key element. Innovation is a key element in development but at the same
time it can lead to firm closures and job destruction, this is ‘creative
destruction’ as Schumpeter puts it, if goods and services are replaced by a
more competitive option or they become obsolete. Innovation has allowed humans
to live longer and healthier by numerous different innovations, such as the
development of medical and dental equipment, better living standards and so on.

This said, innovation drives societies forwards, but it isn’t necessary to
entrepreneurship, as other methods exist.

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