Entrepreneurship as a Social and Economic Process

Importance of Entrepreneurship and Innovation

• Entrepreneurship and innovation are crucial for addressing global social and economic challenges (OECD).

• Government strategies should focus on strengthening entrepreneurship and enhancing the innovation capabilities of SMEs (OECD 2010).

• Entrepreneurial activity is a significant source of job creation, offsetting job losses from downsizing in larger corporations (GEM 1999).

• Nearly all net job creation in the US from 1980 to 2005 was generated by firms less than five years old (OECD 2010).

• Long-term economic growth is strongly linked to innovation within industry (OECD 2010).

  • There is a positive relationship between national investment in R&D, the number of patents, and economic/employment growth.

Entrepreneurship as a Strategic Process

• Entrepreneurship is a strategic process that starts at the individual level and extends to the organizational and macro environment (Kuratko & Hodgetts 2004).

• It involves collaboration across government, education, and institutions.

• It emphasizes capturing opportunities and converting them into marketable propositions.

• Entrepreneurship can be found across all sectors and organizations.

• Most new enterprises (70%) enter competitive existing markets, while a smaller percentage (7%) create new market niches (Hindle & Rushworth 2004).

Key Roles of Entrepreneurs in an Economy (OECD 2010)

1. Disruptor:

   • Entrepreneurs disrupt market equilibrium by introducing new products, processes, and marketing techniques.

   • They are agents of innovation and 'creative destroyers' (Schumpeter 1934).

2. Opportunity Identification:

   • Entrepreneurs possess alertness to spot commercial opportunities and bring them to market (Kirzner 1997).

3. Risk Taker:

   • Entrepreneurs are willing to launch new ventures and commercialize innovations, which inherently involves risk.

   • They can deal with uncertainty and ambiguity (Knight 1933).

4. Resource Shifter:

   • Entrepreneurs enhance productivity by finding new ways to configure resources for growth and wealth creation (Drucker 1985).

5. Breakthrough Innovator:

   • Entrepreneurs drive market-disruptive innovation, leading to breakthroughs in technology, business, or marketing (Baumol 1968).

Measuring Entrepreneurial Activity

• Measurements include the number of start-ups, firm incorporations, changes in net tax returns, and self-employment rates.

• Entrepreneurial firms contribute to economic renewal and enable individuals to enter the economic mainstream.

Growth of Interest in Entrepreneurial Behavior

• The interest began in the 1970s due to shifts in economic fortunes in industrialized nations (Gibb 1988).

• New technologies and competition led to a decline in traditional manufacturing and a rise in the service sector.

• Outsourcing and sub-contracting to smaller companies increased in the 1990s.

• Management buy-outs and the desire for independence/flexibility became more common.

• New information technologies from the 1980s facilitated entrepreneurship (Drucker 2002).

  • This was achieved through the creation of new industries and decentralization enabled by ICTs.

Levels of Entrepreneurial Activity

• 45% of people in the EU and 67% in the US prefer self-employment.

• In 2003, 4.5% of Europeans and 13% of Americans were starting new businesses (Kuratko & Hodgetts 2004).

• Entrepreneurs generally experience greater job satisfaction.

• Small and medium enterprises account for approximately two-thirds of employment and over half of the value added (OECD 2010).

Global Entrepreneurship Monitor (GEM) Study

• GEM monitors entrepreneurial activity in various countries and classifies them into three types:

  1. Factor-driven economies:

     • Developing economies focused on agriculture and subsistence farming.

     • Policy should focus on fostering sustainable business growth with investments in education and health (Bosma & Levie 2010).

     • Entrepreneurship is viewed positively as a career, and entrepreneurs have high status in society (Kelley, Singer & Herrington 2016).

  2. Efficiency-driven economies:

     • Industrialized countries relying on manufacturing within scale-intensive industries.

     • Focus shifts to encouraging economies of scale and employment productivity.

     • Entrepreneurship is still seen as a good career choice, but entrepreneurs may be less visible and admired compared to factor-driven economies (Kelley et al. 2016).

  3. Innovation-driven economies:

     • Post-industrial economies focused on services and knowledge-intensive businesses, with high R&D investment.

     • Support is needed for new product development and market access (Bosma & Levie 2010).

     • Entrepreneurs have a reasonable status and media attention, but starting a business may be seen as less attractive compared to other options (Kelley et al. 2016).

Total Early-Stage Entrepreneurial Activity (TEA)

• TEA measures new venture creation, including owner-managers and nascent entrepreneurs.

• It also measures ownership of established businesses and discontinuance rates (Kelley et al. 2016).

• Early-stage entrepreneurial activity is higher in factor-driven economies compared to innovation-driven economies as of 2009 data.

• Discontinuation rates are lower in innovation-driven economies.

• Factor-driven economies often regard entrepreneurship as a necessity due to unstable employment and limited welfare support.

• Advanced economies have greater survival rates for new business ventures.

Table 1.1 Ranking of six stages of entrepreneurial activity by region, GEM 2015

Necessity vs. Opportunity Entrepreneurs

• GEM classifies entrepreneurs into necessity-driven and opportunity-driven.

• Necessity entrepreneurs start their own businesses due to a lack of employment options and are common in countries with low welfare support.

• Opportunity entrepreneurs pursue specific ideas or opportunities that they believe will deliver benefits.

• The majority of early-stage entrepreneurial activity is opportunity-driven.

• Opportunity entrepreneurs are more common in developed economies.

• Necessity-driven entrepreneurship is higher in Africa, Latin America, and the Caribbean.

• GEM also uses a Motivational Index, showing more improvement-driven opportunity entrepreneurs (IDO) than necessity-driven ones, especially in efficiency-driven economies (Kelley et al. 2016).

Gender and Entrepreneurship

• Women are generally less likely to be involved in entrepreneurial ventures globally due to biases in access to bank loans and property ownership (Table 1.2).

• This pattern can be reversed in countries where women are more active, such as Australia (Pilat & Baygan 2001).

Table 1.2 Development phase averages for male and female total entrepreneurial activity (TEA) and necessity proportion of TEA in 60 economies, GEM 2015

Attitudes and Perceptions Toward Entrepreneurship

• GEM examines how entrepreneurship is viewed as a risky activity and as a career choice.

• Fear of failure is a barrier to new venture creation for 33-39% of people across various economies.

• Entrepreneurship is generally viewed as a good career choice, especially in factor and efficiency-driven economies.

• Successful entrepreneurs have high status and receive significant media attention.

High-Growth Firms (Gazelles)

• OECD defines high-growth firms as having average growth greater than 20% per annum over three years, with more employees at the end (OECD 2010).

• 'Gazelles' are high-growth firms less than five years old.

• Gazelles were not all high-tech, venture capital-supported ventures operating within global markets.

• Small entrepreneurial firms can generate twice as many innovations per employee as larger counterparts (Kuratko & Hodgetts 2004).

• Innovation-driven economies are more likely to generate gazelles due to R&D and technology.

• Gazelles in less advanced economies often grow through export activity (OECD 2010).

Global Trends in Entrepreneurship and Innovation (OECD 2010)

• Shift from a 'managed' to an 'entrepreneurial economy' (Thurik 2009):

  • Early 20th century: Entrepreneurs like Henry Ford changed industrial organization (Schumpeter's 'creative destruction').

  • 1940s-1970s: Innovation dominated by large corporations in a 'managed economy'.

  • Late 1970s onwards: Shift to a 'post-industrial' and 'entrepreneurial economy' with a greater role for small firms in innovation and economic growth.

• Rise of the 'knowledge economy':

  • Shift from tangible assets to intangible assets, where knowledge transformed into valuable intellectual property (IP) becomes key for wealth creation (Sveiby 1997).

• Strategically networked innovation:

  • Trend towards strategic alliances as a framework for innovation (Jarillo 1993).

  • Large firms moved from vertically integrated structures to outsourced businesses with sub-contractor networks, evolving into strategic alliances based on knowledge exchange.

• Globalization:

  • Increased global interconnectedness since the end of the Cold War and the rise of China and India.

  • Strategic networks and new ICT have accelerated international collaboration and made it easier for small firms to internationalize.

• Low-, mid- and high-technology innovation:

  • Most firms are engaged in low to mid-technology sectors, not just high-tech like the Silicon Valley model.

  • High-tech firms invest >5% of turnover in R&D; low-tech <3%, mid-tech 3-5% (Hirsch-Kreinsen & Jacobsen 2008).

• Social entrepreneurship and innovation:

  • Growing recognition of social entrepreneurship in the not-for-profit sector, seeking to alleviate social imbalance through innovative mechanisms.

  • For example, Muhammad Yunus founded Grameen Bank, which provides micro-loans to the poor.

What is an Entrepreneur?

• The term is derived from the French verb 'entreprendre' meaning 'to undertake',

• Richard Cantillon defined them as individuals who bear the risk of buying at certain prices and selling at uncertain prices (Messeghem & Torres 2015).

• Schumpeter (1934) expanded this to incorporate innovation, arguing that it's a process by which the economy moves forward through creative disruption.

How to Spot an Entrepreneur?

• Agent of change: Brings new ideas/products to market, creates wealth/employment.

• Motivation: Identifies and pursues opportunities regardless of resources.

• Converting opportunity: Transforms opportunities into marketable ideas, takes risks, and realizes rewards.

• Creating new ventures: Starts own company (entrepreneur) or works on a new project in an organization (intrapreneur).

The Entrepreneurship Domain

• The domain comprises at least seven elements, the first three involve recognition, exploration, and exploitation of opportunities. The next four comprise the creation of new ventures, the creation of new products or components, the creation of new markets or even industries, and the creation of wealth.

• Entrepreneurs challenge the status quo by being alert to opportunities for innovative products, or markets (Kirzner 1997).

• 'Entrepreneurial alertness' involves a rational search process with specialized knowledge.

• Entrepreneurs marshal specialist skills and knowledge of others, and configure resources for commercial benefit (Alvarez & Buzenitz 2001).

Figure 1.2 The entrepreneurship domain

[The image presents a circular diagram illustrating the entrepreneurship domain, encompassing several interconnected elements):

• Macro Environment: Sets the broader context for entrepreneurial activities.

• Opportunity: Recognition, exploration, and exploitation of potential opportunities.

• New Venture Creation: Formation of new businesses or startups.

• New Products/Components: Development of innovative products or parts.

• Industry/Market Creation: Establishing new markets or industries.

• Wealth Creation: Generating economic value and prosperity.

Distinguishing Entrepreneurs from Others

• Entrepreneurs combine creativity/innovation with strong management skills, business know-how, and networking (Timmons 1999).

• Inventors have high creativity but lack business acumen while managers have managerial competencies but lack innovation.

• 'Promoters' lack both technical/creative and managerial skills but promote initiatives without delivering.

Defining Entrepreneurship

• Entrepreneurship involves the discovery, evaluation, and exploitation of opportunities to introduce new goods/services, ways of organizing, markets, processes, and raw materials through organizing efforts that previously had not existed (Venkataraman 1999; Shane & Venkataraman 2000).

• Shane (2003) extends this to include self-employment and the foundation of new businesses (for-profit or non-profit).

• Performance can be measured through survival, growth, and profitability of the venture.

• OECD-Eurostat defines:

  • Entrepreneurs: are those persons (business owners) who seek to generate value through the creation or expansion of economic activity by identifying and exploiting new products, processes or markets.

  • Entrepreneurial activity: is enterprising human action in pursuit of the generation of value through the creation or expansion of economic activity by identifying and exploiting new products, processes or markets.

  • Entrepreneurship: is the phenomenon associated with entrepreneurial activity (OECD 2009).

Other Commonly Used Terms

• Enterprise: is the exercise of enterprise attributes in any task or environment.

• Enterprise culture: is a set of values, attitudes and beliefs supporting the exercise in the community of independent entrepreneurial behavior in a business context.

• Enterprise attributes: include initiative, strong persuasive powers, moderate risk taking, flexibility, creativity, autonomy, problem-solving ability, need for achievement, imagination, leadership and hard work (Gibb 1988).

Differences between Managers, Entrepreneurs, and Entrepreneurial Managers

• Stevenson and Jarillo (1990) suggest that entrepreneurial management is likely reflected by: firms pursing opportunities regardless of resources, pursuit of opportunities being dependent on the attitude of team members, flexibility, etc.

• A key difference lies in seeking new opportunities and using innovation to create dynamic growth.

• Corporate managers maintain the status quo and ensure efficiency while entrepreneurial managers pursue innovation.

Figure 1.4 Entrepreneurial vs corporate management

(Shows the differentiation between Entrepreneurial and Corporate Management styles).

Figure 1.5 Success in new ventures

(Shows the key elements essential to the success of an independent entrepreneurial venture such as ownership, control/management, holistic, market linked, etc.).

Entrepreneurs and Small Business

• While launching a new business can be entrepreneurial, entrepreneurship and small business management are conceptually different.

• Entrepreneurship focuses on theoretical frameworks and forces, while small business management focuses on technical skills (Solomon et al. 1999).

• Entrepreneurs focus on innovation, growth, and profit, while small business owners prioritize lifestyle and security.

• Entrepreneurship involves creating new opportunities and leading change, influenced by the environment and uncertainty.

• The basic environment stimulates enterprising behavior.

Entrepreneurial vs small business ventures

• Small business venture: Any business that is independently owned and operated, not dominant in its field, and does not engage in any new marketing or innovative practices.

• Entrepreneurial venture: A business that engages in at least one of Schumpeter' s four categories of behavior; that is, the principal goals of an entrepreneurial venture are profitability and growth and the business is characterized by innovative strategic practices.

• Small business owner: An individual who establishes and manages a business for the principal purpose of furthering personal goals. Their business is their primary source of income and they view the business as an extension of them.

• Entrepreneur: An individual who establishes and manages a business for the principal purposes of profit and growth. The entrepreneur is characterized principally by innovative behavior and uses strategic management practices in their business.

• Not all small business owners are entrepreneurs. Gerber (1993) argues that most new business launchers are 'technicians', not entrepreneurs.

Defining Innovation

• Innovation is central to entrepreneurial activities. Schumpeter (1934) introduced the concept of innovation as creative destruction.

• Innovation involves new goods, qualities, production methods, markets, supply sources, and industry organization.

• Drucker (1985) suggests effective innovation is customer focused and relatively simple:

  • Managers should seek new ideas/opportunities, innovations should be simple and customer-focused, it's better to start small, seek a niche in the market, innovations need to be trialed, tested and reviewed, there are lessons to be learnt from failure, innovation development needs to be planned and should follow a milestone schedule & rewards successful new ideas - and finally, there is no substitute for hard work.

• It can be technological in nature, encompassing new products and processes, or it can be non-technological and focused on new approaches to marketing and the administration and structuring of the organisation and there a lot of different typologies of innovations, using different names for different categories of innovations and different criteria to define them (Garcia & Calantone 2002).

Definitions of innovation (OECD 2005)

• Product innovation. Product innovation is the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics.

• Process innovation. Process innovation is the implementation of a new or significantly improved product or delivery method. This includes significant changes in techniques, equipment and/ or software.

• Marketing innovation. Marketing innovation-is the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing.

• Organisational innovation. Organisational innovation is the implementation of a new organisational method in a firm's business practices, workplace organisation or external relations.

Types of Innovation (Tushman and Nadler 1986)

• Product: Design/development of new products or improvement of existing ones.

• Process: How a product is made or a service is provided.

• Degrees of innovation:

  • Incremental, involving minor changes or enhancements to existing technologies; made in response to increasing competition, or in response to customer feedback.

  • Synthetic, involves the ability to combine existing ideas or technologies in creative ways to produce new products or processes Examples include Douglas DC-3, Boeing 707, and IBM 360.

  • Discontinuous, involves radical new ideas that provide breakthrough technologies and advance industries to new levels, e.g. the shift from vacuum tubes to transistors and from pistons to jet engines.

Innovation must contain a degree of novelty, and the type of innovation can be new to the firm, to the market or to the world (OECD 2009b).

Figure 1.6: Types of innovation

Figure 1.7: A typology of innovation

Innovation Lifecycles (Tushman and Nadler 1986)

• During the introductory/emergence stage, there is a high level of product innovation with competing standards such as operating systems from Microsoft, Apple and Linux.

• Learning requirements within the firm are high.

• During the growth stage, a dominant design emerges that offers a superior value proposition.

• Process innovation takes precedence over product innovation, with lower learning requirements.

• A substitution threat triggers a new wave of product innovation when dominant designs and technology are likely to remain in place until external factors like government regulation disrupt market dominance.
  Examples include IBM's product innovation problems and Nokia's missed opportunities.

Sources of Innovation (Drucker 1985)

• Unexpected occurrences, failures and problems need to be converted into opportunities.

• Incongruities, important to seek ideas within the existing process and economic realities of established industries. Such as overnight package delivery by Federal Express

• Demographic changes, the rate at which a population ages or changes its ethnic composition.

• Changes in perception, Exercise, health and diet industries have all seen innovatio opportunities due to a growing fitness concern among the ageing and overweight population of the developed world.

• New knowledge/Basic research and invention.

Source: Kuratko & Hodgetts 2004
The Origin of the innovation is also an increasingly discussed point, as more and more firms try to find external inspiration for their innovative process (Chesbrough and Appleyard 2007).
Firms need to develop different strategies of securing ideas from external sources, but also of selling their innovation results (West & Bogers 2014).

Encouraging Entrepreneurship and Innovation

• It is now recognized that National economies need entrepreneurial activitiy for the economic development worldwide.

• Policies and programs are required to stimulate entrepreneurship and small firm growth.

• The European Commission recommended a three-pronged approach:

  1. Reduce barriers to business development and growth, particularly within the small firms' sector.

  2. Taxation to be reformed to reflect the risk and rewards of entrepreneurship.

  3. Foster a more positive attitude toward entrepreneurs within the community.

National and local governments also has a perceived need to foster a more positive attitude towards entrepreneurs within the community as it has beneficial effects on labor productivity and job creation (OECD 2010a).

National Innovation Systems (NIS)

• Over the past thirty years, public investment in R&D, enhanced innovation and industrial commercialization have been key characteristics of national innovation systems (Balzat & Hanusch 2004).
  Specific NIS design tends to vary from country to country with the major goal of growing the overall level of R&D investment and commercialization activity through a combination of direct government funding, R&D tax concessions that lead to basic research, plus technology transfer, intellectual property rights protection.

• Functions:

  • Creation of new knowledge

  • Focusing of research processes within the national scientific community

  • Facilitating access to resources and funding

The Korean War (1950- 1953) left Korea devastated and the economy of the South was largely dependent on agriculture, though in 1962 the first 5-Year Economic Development Plan was launched to target the creation of export-driven industrialization and the Chaebols created industrial cities that concentrated skilled labour as well as R&D centers and investment.

More recently the idea has emerged that regional development could be enhanced by