The Driving Force Behind Economic Development

Economic development cannot be achieved without innovation from entrepreneurs. In order

to truly understand the relationship between entrepreneurship, innovation and economic
development, one must understand what these terms actually mean. Despite the complexities
in describing such terminology definitively, I will try to interpret them to help give a clearer
understanding of how exactly they relate. In this essay, I will explore Joseph Schumpeter's
founding view on entrepreneurship and innovation, what he thinks makes an entrepreneur,
and how he believes they link to economic development. I will look at intrapreneurs and
explain how they relate to entrepreneurship. I will distinguish the different types of
innovation and will explain how differing amounts of development are produced from each.
Sustainability, which is just as difficult to define, is having an increasingly big effect on this
relationship, and in this essay the consequences of this will be shown. By the end of the
writing, the reader will see that there is a very real link between development and
entrepreneurship.
Entrepreneurs bring together factors of production (land, labour and capital) in novel ways.
The factors of production need not be new themselves. According to Joseph Schumpeter,
"they [entrepreneurs] have employed existing means of production differently, more
appropriately, more adventurously" (1934, p.132), and they lose this entrepreneurial trait
when their creation is developed further into a functioning business (Schumpeter, 1934).
Entrepreneurs simply (or not so simply) bring together new combinations of these factors,
which "endows resources with a new capacity to create wealth" (Drucker, 1985), thus leading
to economic development. It is important to note that being an entrepreneur is not the same as
being an inventor. Inventors discover new things - they make something that's not been seen
before, or find a new way of doing something. Entrepreneurs are the individuals that "get
things done" (Schumpeter, 1947, p.152). They take the ideas generated by inventors and
realise them as opportunities for economic gain. The exploitation of these opportunities is
what we know as innovation.
It is interesting to realise a sector of entrepreneurship known as intrapreneurship. The
American Heritage Dictionary defines an intrapreneur as "a person within a large corporation
who takes direct responsibility for turning an idea into a profitable finished product through
assertive risk taking and innovation." The most famous example of intrapreneurship can be

found within Google, where employees are actively encouraged to spend time innovating,
choosing what they want to work on so long as it develops Google's technology or business
somehow. This form of entrepreneurial activity is not only important as it helps firms to
expand, but it also allows for innovations that may not have been realised without business
backing to develop. Employees in large firms carry much smaller risk than normal
entrepreneurs, and can behave knowing they have the security of the firm.
Innovations developed by entrepreneurs and intrapreneurs are what eventually lead to
economic development. It is important however to realise that there are different types of
innovation. I will categorise innovation into two parts - gradual change, and radical change
(otherwise known as discrete change). Let us explore gradual change in more depth.
Gradual change is simply an improvement upon an existing product, service, methodology,
process or structure. The innovation will be very similar to the existing technology, but will
have been adapted to meet consumer desires. It occurs so that businesses can continue to reap
profits from an existing product or service, and to prevent competitors from stealing market
share when consumers start to find less use from it, or when they start to get bored of the
brand and want something 'new'. The mobile phone industry is one dominated by gradual
change. Fundamentally, all mobile phones still serve the same purpose and perform their
functions in similar ways, however the design, user interface or some other functionality may
be changed slightly. This type of innovation brings about minimal amounts of economic
development at a time - things are changed only slightly and so wealth and welfare increase
proportionally.
Radical change, however, completely transforms a technology, affecting the entire industry.
Using digital photography as an example of this, we see that there is no way of building
incrementally upon film to reach this new technology; it is completely discontinuous. The
advent of the digital camera and imagery was completely unrelated to the previous form. This
type of innovation more closely relates to the idea that entrepreneurs combine the factors of
production in novel ways. The new technology being innovated led to a whole host of
economic effects. Schumpeter describes this in more detail, arguing that "individual
innovations imply, by virtue of their nature, a big step and a big change. A railroad through
new country, i.e., country not yet served by railroads, as soon as it gets into working order
upsets all conditions of location, all cost calculations, all production functions within its

radius of influence; and hardly any 'ways of doing things' which have been optimal before
remain so afterward" (1939, p.101). The suggestion that destroying an 'old way' with a new
one helps create further economic opportunities led to new meaning of the term "creative
destruction".
The term "creative destruction" was popularised in the 1950s in Schumpeter's Capitalism,
Socialism and Democracy (1942). It was used to refer to the "process of industrial
mutation ... that incessantly revolutionizes the economic structure from within, incessantly
destroying the old one, incessantly creating a new one" (1942, p.83). Schumpeter argued
against Karl Marx's theory that capitalism experienced cyclical waves of unbalance which
devalued wealth gained during periods of economic equilibrium, instead saying that this
process was a necessity for development. Economic development must be distinguished from
economic growth - it is an increase in welfare and the standard of living of a population, not
just an increase in the economic wealth (or gross domestic product) of a country. Depending
on the type, innovation leads to new businesses being started, increasing overall trade and
growth in the country (as well as inciting existing businesses to innovate accordingly in order
to remain competitive); it increases employment opportunities, as labour is required to
produce the new product; it can increase the efficiency and productivity of firms, especially
through the lowering of costs and the increase in competition - all of which lead to economic
growth. On top of growth, which is one of the easiest effects to measure, innovation brings
about a range of other effects which improves the quality of life of consumers. For example,
in the transport industry: comfort could be improved, maybe in improving seating or tracks;
safety could be improved, through more advanced navigational systems; transport may get
quicker due to technological advances in engines; convenience can be increased perhaps if
new systems allow for larger networks; and so on.
Sustainability is now playing a much bigger role in innovation. So what does it mean to
become more sustainable? According to the Brundtland Report, "Sustainable development is
not a fixed state of harmony, but rather a process of change in which the exploitation of
resources, the direction of investments, the orientation of technological development, and
institutional change are made consistent with future as well as present needs" (1987, p.17). In
other words, the human race must behave so as to increase welfare today whilst not damaging
prospects of future generations. This effects entrepreneurs as they must consider the
environmental, social and financial costs of their innovations, not only in the production of it,

but when using it, and throughout the whole life-cycle (including disposal by the consumer).
It's also quite interesting to see that, with the increasing pressure for businesses to become
more sustainable, a whole new realm of entrepreneurship seems to have developed. Not only
are entrepreneurs concentrating on being sustainable whilst innovating, they are now
innovating ways to be sustainable (perhaps by developing a new process).
In conclusion, there is a very strong relationship between entrepreneurship, innovation and
economic development. Entrepreneurs are the driving force behind the economy. Their work
leads to innovation, where new ideas are then realised and actualised. Businesses start up to
market and sell the innovation, and this leads to a whole host of economic effects.
Employment rises in the long term and economic growth is experienced. Standards of living
increase as the innovation improves upon something already in existence or widens choice.
The economy develops. Within the past decade, the need to be sustainable has played an
increasing role in entrepreneurship, and will continue to do so as resources are continually
exploited. This will be necessary to ensure economic development is derived from
entrepreneurship today, and in the future.

References:
Drucker, P. (1985) Innovation and Entrepreneurship. New York: Harper & Row.
Morris, W. (1992) The American Heritage Dictionary. Vol.3. Boston: Houghton Mifflin.
Schumpeter, J. (1934) The Theory of Economic Development. Massachusetts: Harvard
University Press.
Schumpeter, J. (1939) Business Cycles: A Theoretical, Historical, and Statistical Analysis of
the Capitalist Process. New York: McGraw-Hill.
Schumpeter, J. (1942) Capitalism, Socialism and Democracy. London: Routledge.
Schumpeter, J. (1947) "The Creative Response in Economic History", Journal of Economic
History. Vol.7(2), pp. 149-159.
UN-Documents.net (1987) "Our Common Future", Report of the World Commission on
Environment and Development. Downloaded from http://www.un-documents.net/ourcommon-future.pdf as at 15/11/2012.