Tuesday, 12 June 2012

Innovation in Entrepreneurship by Dr. Munish Yoginder Alagh, Devesh Baid, Dr. Narendra Mohan Mishra, P. Sathyapriya

            We have studied the work of Social Scientists in the development of field of entrepreneurship, which has actually happened in recent years in business school community. Social sciences have contributed a lot both to the theoretical understanding as well as practical enterprise of entrepreneurship. Insights which the social sciences have generated can act as do’s and don’ts for the future entrepreneurs. Further new ideas about the entrepreneurship theory and practice can be provided by social sciences by looking at innovative business behaviour in different cultures, societies and times and also by looking at it from different angles and much wider range of action than what is being done.

            The word entrepreneur comes from the French word ‘entreprendre’ which means ‘to do something’. Hoselitz in 1951 wrote that the word entrepreneurship was used first time in the Middle Ages to mean a person who is active and who gets things done. Essay on the Nature of Commerce in General by circa in 1730 covered economic theory of entrepreneurship. The term ‘entrepreneur’ was coined by Say in seventeenth century and it was taken in a larger perspective later. Schumpeter in 1954 wrote that John Stuart Mill in the mid nineteenth century used the term entrepreneur as a general currency among English economist.

            The industries were flourishing during 1970’s and 1980’s and the growth rate of US during this period was multifold. This is because of the emergence of new needs and it resulted in growth of entrepreneurs in this era. The economic liberalization in 1991 developed the spirit of entrepreneurship in India. The concept flourished as the young people were willing to take risk and do business than take up a secured job.

            Entrepreneurs in those days started small business as owners and invested capital and took the risk of earning returns. This situation was like an owner-manager. Later many contributors emerged and the concept of entrepreneurship had a different perspective with Joseph Schumpeter in 1911. These contributors added some inputs ot the existing theory. Joseph Schumpeter is the most important contributor in developing an economic theory centered on the entrepreneur. He has put his thoughts in the book, “The Theory of Economic Dynamics” which he revised in 1926 with the contradictions to the basic principles of Say. He[1] “postulated that, entrepreneurship is a dynamic disequilibrium brought on by the resources from the places of availability to the needed area” in his first edition of the book. Thus it involves mobilization of resources form the places of availability to the places of necessity.

            In the second edition of the book, Schumpeter included the broader perspective of entrepreneurship. According to him entrepreneurship includes innovation of a new element in production, marketing, finance in the way of cost reduction and human resource.
Schumpeter[2] has identified “five types of entrepreneurial behaviour which includes:
  1. Introduction of a new goods – that with which consumers are not yet familiar
  2. Introduction of  a new method of production that is one not yet tested by experience in the branch of manufacture concerned
  3. The opening of a new market, that is a market into which the particular branch of manufacture of the country in question has not previously entered,
  4. The conquest of a new source of supply of raw materials or half-manufactured goods, again irrespective of whether this source already exists or whether it has first to be created
  5. The carrying out of the new organization of any industry, like the creation of a monopoly position or the breaking up of a monopoly position”

            Schumpeter is of the opinion that as the economy moves forward, and as the population increases, innovations emerge to meet the requirements of population. He says that innovation is “an adaptive response or change in the economic system, which after a while reached a new equilibrium; and it was this process, from one equilibrium to another, that economists should study.” Thus what was entrepreneurship in earlier days changed and these changes portrayed the changes in the economy. He says that, “What is rarely, if ever mentioned, is that Schumpeter’s theory of entrepreneurship is part of an attempt to construct a whole new type of economic theory, which was to complement”[3]

            Schumpeter is quoted by Swedberg as reacting to these ideas of Walras that there will be a disturbance in the economy itself that will change the environment and these changes need not come from outside the system. Swedberg[4] explains about Schumpeter that, “His general argument was that all truly important changes in the economy are set off by the entrepreneur, and that these changes then slowly work themselves through the economic system, in the form of a business cycle. Schumpeter also suggested that his idea of internally generated change, as opposed to change induced from the outside, was not only applicable to economic phenomena, but to all social phenomena.”

            ‘Schumpeter’s theory of the entrepreneur’ is found in the second edition of “The theory of Economic Development” (1926) and more precisely in the translated version (1934) of the second German edition in the second chapter. In this chapter it is explained that entrepreneurship is meant to produce some goods or services by utilizing the resources and these resources should be combined in the best possible way to yield profitable output. The output may be same or different depending on the combinations of resources. There is a need for ‘new combinations of productive means’. Swedberg[5] has pointed out that, “Entrepreneurship can be defined as the making of a ‘new combination’ of already existing materials and forces; that entrepreneurship consists of making innovations, as opposed to inventions; and that no one is an entrepreneur forever, only when he or she is actually doing the innovative activity.”

            Max Weber has given some brilliant ideas on entrepreneurship based on his theory of charisma. His early definition states (Weber [1898] 1990:57) “Entrepreneurship means the taking over and organizing of some part of an economy, in which people’s needs are satisfied through exchange, for the sake of making a profit and at one’s own economic risk.”          

            Two important contributions were made by Weber in the field of entrepreneurship in his study. First he stated that a change in the attitude towards entrepreneurship came because of the reformation in the western world from attitude of hostility and alienation to that of acceptance and active promotion. And second Weber stated that a positive attitude by society towards money making and work facilitated the more general change in attitude towards the entrepreneur. Youngsters were determined to take risk and earn more return than earn an average monthly compensation.

            Another interesting theory of innovation was suggested by Emile Durkheim where he talks that new institutions and new values appear in situations where the intensity of social interaction reaches such a height that it practically boils over. According to him examples of such moments in the history include the revival of learning and culture, French revolution, early stage of the industrial revolution in England, the time around the turn of the century in United States and the more recent history of silicon valley.

            A Norwegian Fredrik Barth developed an anthropological theory of entrepreneurship in 1960 by studying a central African village. According to Barth entrepreneurship is connecting two different spheres in society where something is cheap in one sphere and expensive in another sphere. In his case study from central Africa, Barth uses an example of an economy where in one sphere cash is used, in the other not. In the former people trade in a few products such as onions and tomato; while in the second spheres millet production and work to build houses can be exchanged for beer and not for cash. Local population saw these two spheres as separate from one another and this was also the way it had always been. One day, however, an Arab merchant appeared and connected the two spheres by offering bear in exchange for helping in cultivating tomatoes which he then sold for the cash on the market at a good profit for himself. Barth analysis of economic spheres illustrates not only that entrepreneurship is about spotting new opportunities but also as Robert K Merton has suggested, that entrepreneurship may involve a challenge to some of the basic values that exist in a community. 

            Innovation was introduced by Peter Drucker in 1980’s and he has suggested that in order for there to be ‘systematic innovation’, the leadership in the organisation should be able to update the changes and make the organisation to realize what it want to be and what it is? The changes may be in production, technology, supply chain, environment change, demographic change of the customers, changes in the market, etc. Innovations in the modern business firm were studied by Rosabeth Moss Kanter. “Kanter starts out by arguing that the typical kind of innovation, which is produced in the modern business firm, goes through several stages:
            1) An innovative idea has to be produced;
            2) Support for the idea has to be generated;
            3) The idea has to be turned into a finished product; and       
            4) The finished product has to be diffused to the consumer.
These four stages may happen haphazardly; and one then relies on luck, intuition and the like for innovations to emerge”. Thus jobs can be experimented with new ideas and tasks in order to offer innovative products to the customers. (Swedberg, 2000, Section III, page 162).

            Kanter introduced different types of entrepreneurs like, ‘intrapreneur’ or ‘corporate entrepreneur’. These terms emerged in order to increase the involvement of the entrepreneurs in organisation. This involvement makes them emerge with creative and innovative ideas which set aside the non-innovative entrepreneurs. Changing to innovation takes time and efforts. It is noted by Kenneth Arrow that the decision making structure tends to differ between firms, depending on their size. Thus smaller the size more flexible is the organisation to innovation and bigger the size the possibilities to adapt to innovation becomes difficult. This is because a small change in large organisations will create major changes in the existing system which may disturb the whole environment.

            Arrow suggests that small firms will be more innovative and large firms will buy their innovations. The small firms may have constraints in developing these researches further and these activities can be taken care by the large firms. Thus every large firm should promote large number of small innovative firms and help them to evolve new ideas and concepts. These ideas should be multiplied by the large firms. Thus there should be a good mixture of small and large firms. Small firms inorder to compete with the larger ones, become unique in its existence with its innovative skills.

            Innovation demands good networking relationship. “The focus is on the new kind of relationship between computer system firms and their main suppliers, which has developed after a severe crisis hit the region in the mid 1980’s. Instead of arm’s length relationships, industrial networks have emerged which are characterized by deep, long-lasting and equal relationships. This way, the computer system firms have become free to specialize and to compete more effectively, and the suppliers free to develop into more sophisticated and less labor intensive outfits. Working so closely together has also facilitated the emergence of many new products, the result of ‘complementary innovation’, in the author’s terminology. According to Saxenian, this type of collaboration has made it possible for Silicon Valley to once again become a world leader in an industry, which is extremely volatile.”

            Apart from economics, other social science disciplines have also conducted studies on entrepreneurship since last five decades. Business history, sociology, psychology, economic history and economic anthropology have conducted studies on entrepreneurship. But no comprehensive study exists till now which covers all of these.  Even except for economics there are no comprehensive reviews in individual social sciences which cover all the work on entrepreneurship. However there is a huge and emerging urge for entrepreneurship which results in its new forms. This inturn urges the concept of innovation in entrepreneurship inorder to make them competitive.

  1. Richard Swedberg (1911), “Entrepreneurship: The Social Science View”, Oxford University Press: Newyork.
  2. Peter F. Drucker (1985), “Innovation and Entrepreneurship – Practice and Principles”, Heinemann: London.

[1] Peter F. Drucker (1985), “Innovation and Entrepreneurship – Practice and Principles”, Heinemann:  
    London, p. 24.
[2] Richard Swedberg (1911), “Entrepreneurship: The Social Science View”, Oxford University Press: New  
  York, p.2.
[3] Richard Swedberg (1911), “Entrepreneurship: The Social Science View”, Oxford University Press: New  
  York, p. 12
[4] Ibid.
[5] Ibid.

1 comment:

  1. Saxena
    I beg to differ from few points ofthe articles , first thing is enterpreneurship itself as word emerged form analysis of a personality , mintzberg's contribution in defining the word enterpreneur and also giving there chracteristics is base for many of the work that is being done . Management and behaviourial sciences gave the only on basis of the way enterpreneurship was classified further in rural , business and so on. Thirdly innovation is a problem solving mechanism which comes from cognitive abilties of a person , a typical behaviourial science orientation . FOurht point is intrpaneurs were never meant for getting entperpreneures attracted to organisation, they were there for human resource management and proble solving mechansims applied by human capital of the organisation. Thus giving a conclusion that economics predominantly contributed in studies of this ever growing phenomenon will be unfair