Relationship Between Innovation and Economic Growth

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Relationships between Entrepreneurship and Economics
Oyvin Kyvik1
- 16.06.2009 The following is written as an introduction to the role as co-chair for the track on Entrepreneurship and Economics at the ICSB World Congress, Seoul, Korea – 2009.

1. Entrepreneurship and Economics – An Economic Perspective This is written based on the conviction that both entrepreneurship and economics are important phenomena, both in theory and in practice. It is further deduced that less entrepreneurship has as a consequence less innovation and fewer business start-ups with its consequences on employment and economic growth. In this context, entrepreneurs are needed to organize, manage and assume the risks of business or enterprise which represent processes which are positive for society. The perspectives on entrepreneurship as a phenomena in social, business and economics are varied, and ranging from the processes individuals go through from becoming “motivated to discover” an innovation and converting it into something of value to themselves and to society, to the managed entrepreneurial processes in large firms and further to the macro-economic impacts on economic growth through innovation. Entrepreneurship thus is personal and individual, but with a local, regional and national impact. Also the taxonomy of the consequence of entrepreneurial activities varies, from value created in a small business start-up to the collective creation of economic value on the level of society, the latter with obvious more complex measurement and even political consequences. Traditionally, that is in classical economics, three means of production are usually discussed, namely capital, labor and land – and to this many would add entrepreneurship and possible competence or knowledge to coordinate and organize the value creation process. Neo-classical economics and its positivistic and rational market assumptions, however, do not have space for the entrepreneur beyond the role of allocation of existing resources. However, as we now know, decision makers suffer from bounded rationality, markets do fluctuate and market opportunities and “temporary monopolies” indeed do occur. And this is where the entrepreneur enters in his role as an opportunist (Coase, 1937 – transaction costs) or 1

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alternatively as an arbitrageur (Kirzner, 1997 – the Austrian School). In Kirzner´s perspective entrepreneurs drive the market by being vigilant to new opportunities (for entrepreneurial profits). The Austrian school assumes subjectivism and is similarly opposed to the positivist and mathematical modeling of neo classical economics (methodological subjectivism: focus on knowledge, beliefs, perceptions and expectations of individuals). Schumpeter (1942) sees the entrepreneur as an innovator and as the motor force of growth, technological change and economic development, partly through creative destruction (with a gradual changing focus on the individual person, innovator and entrepreneur in direction of a wider social perspective in course of his scholarship). Later, Penrose (1959), Barney (1991) and Wernerfelt (1984) introduced a resource-based view with entrepreneurship and innovation in a more social perspective including notions of networking and social interactions between actors. Knight (1921) introduced the relationship between the entrepreneur, risk, uncertainty and profit to shed light on the dynamics of entrepreneurship. In a similar manner as Schumpeter, Knight finds it difficult to consider an entrepreneurial role within the strict assumptions of neoclassical economics. In Knight´s perspective, only the entrepreneur´s ability to handle uncertainty generates profit. In their review of recent developments in the economics of entrepreneurship, Minniti and Lévesque (2008) argue the emergence of a new heterodox mainstream and claiming a move from Homo Economics to Homo Sapiens with a declining distance between economics...
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