Innovation (Telegraph, 2015). One of the main benefits of

Innovation is central to entrepreneurship

 

Within
business terms innovation describes the changes that create a commercial
benefit however within economic terms it describes the development and
application of ideas and technologies that improve goods and services or make
their production more efficient (Bank, 2017). Innovation can
be both incremental and radical. Incremental changes refer to changes in order
to keep consumers interested and therefore keep or increase profits by
extending the product life cycle. Radical changes refer to changes to a product
in a way that changes the actual product, therefore destroying the original
product and causing creative destruction. Radical innovations are more linked
towards creating economic development as stated by Joseph Schumpeter. Entrepreneurship
suggests the capacity and willingness to develop, organize and manage a
business enterprise in order to bring about its success (BusinessDictionary, 2017). Successful entrepreneurship does
require innovation, therefore the increase in enterprise will result in higher
economic growth and development, therefore implying innovation is central to entrepreneurship.
This show through the fact that in the UK smaller organizations actually make
up the bulk of the British economy 48% of private sector employment and up to
99% of all business (Telegraph, 2015).

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One of the
main benefits of innovation as I said before is boosting economic growth and
development. This is because innovation provides incentives to increase
productivity of workers and firms, therefore suggesting the same input would
boost a greater output (Bank, 2017). As productivity
grows it leads to further production of goods and services, therefore boosting
economic growth and shifting the economy’s PPF curve to the right. This
innovation comes from new ideas within the workforce or new technologies used
within the workforce that increases efficiency. This can be through new systems
designed to decrease time or simply making workforces more capital intensive,
therefore having more machinery in the workforce allowing the increase in
productivity. With an increase in goods and services, innovation will boost
economic growth and will be central to entrepreneurship due to the fact that
there is such high level of SME’s in the UK. The increase in innovation and
productivity will look to have a multiplier effect which will boost economic
development. This is due to the fact that when productivity and economic growth
rises, wages and national income will rise (Bank, 2017). This will give workers with more money to spend and therefore further
incentives to increase consumption within the economy boost aggregate demand
and again increasing economic growth or GDP. The increase in GDP will improve
living standards within any country, therefore improving economic development.

 

My argument
on innovation with regards to productivity and economic development is backed
up by economic theories. For instance, Joseph Schumpeter suggested a link
between entrepreneurship and innovation which contributes to economic
development. He believes there is a dependency on entrepreneurs to be
innovative and be able to increase the production of goods and services in the
economy. The reformation of his theory included new products and new methods of
production, as well as to introduce new raw materials as an alternative in
production (Low, 2010). There are also measures to
find new markets for these products and have a rearrangement of industries. Ultimately,
Schumpeter believed that radical innovations would provide that change and lead
to a cycle of creative destruction which therefore will lead to the measures I
stated before, as well as looking to create more jobs and wealth in the economy
which improves living standards. Examples of creative destruction can be seen
through Netflix. Netflix started off as mainly a DVD subscription company but
now has rapidly evolved due to new innovative technology and increase internet
speeds into becoming the largest video streaming/ distribution networks in the world (Perry, 2015). The creative destruction that Netflix has caused
has driven firms like Blockbuster into bankruptcy. The effect of Netflix has
been so destructive it has now said to been described as the ‘Netflix effect’.
One may suggest that creative destruction brings about newly need change into
economies and boost growth, however in many cases it also creates unemployment.
Linking back to Netflix, the rise in demand for its network and streaming
online has declined employment severely in the video rental industry. Employment
collapsed from 153,000 jobs in 2005 to only 11,000 in 2015, this states nearly
a 93% decline, the largest in any US industry within that decade (Perry, 2015).  

 

With a rise
in economic growth and development, entrepreneurs may look to increase in their
investment. This may cause autonomous investment, one that’s determined by long
term development in areas such as new resourced found or new technology which
can cause reformation. However, in some cases small businesses may not be able
to cope with other businesses who have done their reformation and so may fail. Those
entrepreneurs who will adapt and create new products due to innovation and
those who are able to enter new markets will ultimately look to increase
economic development (Low, 2010).

 

Innovation
and the new technology which has come from this has enabled firms to enter new
markets not just regionally but also globally. Firms or businesses can export
to different regions and areas and therefore allow them to contribute to the
productivity and economic development within those areas. This increase in
earnings or revenue of the area strengthens the economy and promotes the
overall welfare of individuals (Sappin, 2016). Innovation is
likely to prosper within a country or economy that is operating at it trend
rate of growth and less likely in poorer economies or those in recession. This
is may be due to the fact that for innovation to take places, there needs to be
an educated pool of labour as well as those with a collaborative mind.  With this in mind you can therefore also
suggest that entrepreneurship is also going to prosper within more economically
developed countries. This may be due to the fact of rising national income
causing greater demand for new products and less demand for inferior goods or
those which seem a given. However, it also said that smaller organisations are
also the back bone of any poor country and are a must when bringing economic
growth. All of this contributes to economic development and quality of life.

 

Another
theory linking with entrepreneurship came from Israel Kirzner, who offered a
different way of thinking than Schumpeter. He believed that entrepreneurs who
are alert and have an opportunistic nature to them strive to success and help
bring economic development. This is not only done with those who know the
resources that are currently on offer but also those who don’t and looking for
an opportunity to react to this change in the economy. However what Kirzners
theory lacks is where this change comes about. However, these opportunities may
be the incentive to raise profits by entering new markets for new business at
times where the economy is at disequilibrium. Peter Drucker once stated that “the
entrepreneur always searches for change, responds to it, and exploits it as an
opportunity” (Drucker,
n.d.).
Ultimately knowledge is what will drive entrepreneurs in whatever action they
take, this also brings us back to my point that there is a need for an educated
pool of labour in order to bring about innovation. Kirzners and Schumpeter’s
theories both suggest the need for knowledge and education in order to innovate
or cease opportunities and they both suggest the fact that entrepreneurs are
the base of any economy and ones which take opportunities and turn them into
success.

 

Overall one
could definitely argue that innovation is central to entrepreneurship due to the
fact that it helps grow and start up new enterprises, which ultimately
therefore leads to economic growth and development. Innovation may well come
from start-up businesses who look to enter the market trying to tap un-met
demand. Therefore, what innovation also allows entrepreneurs to do, is to take
advantages of new opportunities within the market and economy. This suggests
that Kirzners theory may well work in practice, due to opportunistic nature of entrepreneurs.
It can be therefore said that those entrepreneurs who try meet new market
demands are the ones who play a key role in boosting economic growth. Innovation
is also a great tool when making firms more collaborative. It allows like-minded
and creative individuals to express the qualities and therefore become more
productive as well as benefiting the firm as the firm becomes more efficient. However,
whilst innovation does promote good competition within markets, it can lead to
the decline of firms and industries in general as I have mentioned before which
can leave a rise in unemployment figures structurally and regionally, this
could be more of a problem when there is rising income, therefore causing
further unemployment and a larger gap between rich and poor. Although one could
argue that at times of economic prosperity innovation also prospers which
allows further start-ups and even further employment opportunities. Ultimately
innovation creates opportunities not just for small organisations but larger
organisations which helps build economic certainty within markets as well as
boost growth and development which looks to raise living standards of
individuals. This all therefore provides a strong argument to why innovation is
central to entrepreneurship and should be welcomed by all firms to improve
their efficiency and performance.