The Relationship Between Entrepreneurship, Innovation and Economic Development

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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.

Date of submission: 26 November 2010

Name: Chen Wanxin
School: the University of Nottingham, Ningbo, China

Module convenor’s name: Maris Farquharson
Module title: Entrepreneurship and Business
Module code: P11440 (2010)

Length: 1885 words
Entrepreneurship, which was a notion put forward approximately three centuries ago and soon becomes a contentious topic, contributes positively to economic development mainly through innovation. Whilst creativity and problem solving are required at all points in this relationship, for the reasons that creativity is the origin of innovation and effective problem solving is an indispensable skill required at every link in this process. The essay will firstly give definitions to the notion “entrepreneurship” relating to some theories and then throw light upon the term “innovation”. The third part will clarify how entrepreneurship contributes positively to economic development through innovation. After that, moreover, the essay will figure out the link between creativity and innovation as well as the role problem solving play in this whole relationship.

Entrepreneurship, mainly based on four historical theories, has become increasingly thorough all the way from the early 1700s to the 21st century. The first use of the term entrepreneurship on record was by Richard Cantillon (168?-1734) in his book Essai Sur La Nature de Commerce en General. In Cantillon’s theory, the notion entrepreneur refers to those individuals who buy staffs at a low price and expect to sell them at a higher price under the condition of uncertainty (Lumsdaine and Binks, 2007). While after that, the economist well known as a populariser of Adams Smith’ work, Jean Baptiste Say (1767-1832), attributed Britain’s industrial success to the “wonderful practical skills of her entrepreneurs” (Lumsdaine and Binks, 2007). Entrepreneurship here is no longer simply about the producing process or the product market; it is also concerned with the ability to deal with financial and raw material markets as well as the awareness of relevant legislations when they apply to their business activities. However, one important factor is still missing in Say’s theory—entrepreneurial creativity. Beyond these quests for entrepreneurship, a prominent economist and political scientist—Joseph Alios Schumpeter (1883-1950), highlighted the entrepreneur’s role as the catalyst for economic development through innovation. Here is one of his famous statements, ‘whatever the type, everyone is an entrepreneur only when he actually carries out new combinations, and loses that character as soon as he has built up his business.’ (Schumpeter, 1934) It is not hard to find out that Schumpeter’s theory is highly rigorous about the element of difference, uniqueness, innovation and change that is missing from those previous perceptions of entrepreneurship. Schumpeter also accounted for what it means by “new combinations”—‘They have employed existing means of production differently, more appropriately, more adventurously. They have ‘carried out new combinations’. They are entrepreneurs.’ (Schumpeter, 1934) His entrepreneurs might even be salaried employees so long as they are engaged in carrying out new combinations; nonetheless, individuals are acting as Schumpeterian entrepreneurs only when they are innovating: ‘it is just as rare for anyone always to remain an entrepreneur throughout the decades of his active life as it is for a businessman never to have a moment in which he is an entrepreneur, to however modest a degree.’(Schumpeter, 1934) In short, entrepreneurship in Schumpeter’s theory is about breaking down the stalemate of resistance and enabling the wave of innovation to occur, it is a process of...
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