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Entrepreneurship and Innovation

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entrepreneurship and innovation

In 1968 Gary Fisher’s long blonde hair got him suspended from bike racing, so the 18-year-old “hippie” used his time off from racing to create a product that he sold to San Francisco’s major rock venues, an entrepreneurial venture that some claim foreshadowed Fisher’s future.

Fisher’s product, "The Lightest Show on Earth," was a popular light show, but not the major innovation that would make Fisher revered among a different group of fanatics. Still, it was a hint of what would lie ahead.

During his time away from bike racing, Fisher and some of his close friends discovered something else they loved to do with bikes – something that would inspire a brilliantly successful innovation. They salvaged bikes from a dump, and raced them down the rough, mountain trails of California’s Mount Tamalpais. Fisher started adding parts to these bikes, outfitting them for the mountainous terrain, creating bikes that stood up to this type of off-road biking.

Racing officials eventually allowed Fisher to start racing again in 1972, but by that time, his passion for mountain biking had spread to others – and the term ‘mountain biking’ gained traction. Fisher had begun selling his personalized bikes, and that endeavor kicked off a company called Mountain Bikes, completely changing the bicycle market forever. During the 1990s, a company called Trek bought Fisher’s Mountain Bikes.

The process by which entrepreneurial individuals like Gary Fisher turn innovation into an art form, creating new products and new companies, changing markets and positively affecting the economy, intrigues researchers from multiple disciplines.

But researchers have a notoriously hard time defining entrepreneurship and innovation, and are often guided by the specific individuals, companies, markets, or environments they investigate. Each discipline also has theoretical questions specific to the field or discipline.

Economists want to know, for instance, how entrepreneurship and innovation happens, recognizing that it’s these pursuits that fuel economic growth. But psychologists have different research objectives.

Social psychologists want to know how social situations and environments influence innovative behaviors, motivating individuals to become entrepreneurs. And cognitive psychologists want to know how entrepreneurs, like Fisher, use knowledge structures to assess, judge, and decide on venture creation and growth– creating products and services that capitalize on the zeitgeist of the times.

In addition, a number of other professionals who study human thought and behaviors, especially those specializing in the science of creativity and innovation believe that understanding an entrepreneur’s motivations and decision-making abilities answers many questions about the complexity – and elusiveness - of entrepreneurship.

Are Creativity and Innovation Related?

Vijay Govindarajan, professor of international business at Dartmouth, states that creativity and innovation are not the same.

Considered an expert on business strategy and innovation, Govindarajan wrote in the Harvard Business Review that these two concepts define two different processes. In “Innovation is Not Creativity,” Govindarajan states that creativity occurs before innovation; it’s the process of brainstorming or coming up with ideas.

Innovation, on the other hand, means executing an idea. It’s those who know how to select the most relevant ideas and execute them – or successfully turn them into winning ventures – that are the true innovators.

Defining Entrepreneurship

While hard to define, it’s apparent to any astute observer that entrepreneurship remains distinct from other endeavors. Stated simply, it might be hard to define, yet nearly everyone recognizes it when they see it. Other bike enthusiasts such as Gary Fisher might have customized their bicycles for specific uses, but only Fisher created Mountain Bikes.

And while nearly every study (across disciplines) conducted on entrepreneurship and innovation defines these concepts differently, almost all start with the same foundation. These studies build off one of the most well known definitions developed decades ago:

Schumpeter’s Definition of Entrepreneurship*

Economist Joseph Schumpeter defined a theory of entrepreneurship in the early part of the 20th century, and while many researchers have tried in numerous and often opposing ways to devise their own definitions and theories, they nevertheless almost always begin with Schumpeter’s assumptions.

Schumpeter’s hypotheses on entrepreneurs and entrepreneurship are as follows:

Man of Action**

The entrepreneur is a “Man of Action,” or economic leader. Other economic players are “static,” meaning that they are not interested in doing anything new, satisfied to follow the status quo or traditional approaches to business and problem solving. The Man of Action, however, “does not accept reality as it is.” He creates demand when there isn’t any, and doesn’t let any obstacles – internal or external – stand in his way.

Makes New Combinations

The entrepreneur (Man of Action) does something original or new, meaning that he makes a new combination (innovation) out of already existing resources. But this does not mean that the entrepreneur is an inventor. Rather he introduces “new ways of using existing means” or “factors of production.”

Selecting the Best Combinations

The number of combinations is nearly limitless, but the ability to put together the most successful combination is essential. Also, the ability to select the winning combination from among countless possibilities is the entrepreneur’s unique skill. The static businessperson will stick to combinations known to work, whereas the entrepreneur purposefully moves away from these proven combinations.

Transforming the Right Combination into a Success

Selecting the right combination is not a rational choice but an intuitive one. However, after selecting the best choice, only the best of the best has the force and ability to take this new combination and make it a commercial reality.

*Summarized and quoted from the Marshall, Schumpeter and Social Science conference paper “Rebuilding Schumpeter’s Theory of Entrepreneurship,” by Richard Swedberg, Cornell University.

**Estimates put the number of U.S. women-own businesses at one-third of all small businesses. In early 2011, the Small Business Administration stated that businesses owned by women “are one of the fastest growing sectors of the economy.”  

Innovation or Entrepreneurship or Both?

In addition to trying to define entrepreneurship, researchers have the equally challenging task of defining innovation, and how it relates to entrepreneurship.

Erik Stam, PhD, University of Cambridge, writes that entrepreneurship and innovation have become “fuzzy concepts” that overlap mainly as a result of Schumpeter’s definition, which defines entrepreneurs as those who put together new combinations of elements – in other words, who produce innovations.

Writing in the JENA Economic Research Paper “Entrepreneurship and Innovation Policy,” Stam further states that different types of entrepreneurial ventures have different degrees of innovation associated with them. For example, Stam breaks entrepreneurship into two categories:

Moderate Innovation.

With this type of entrepreneurship, people prefer working for themselves rather than for others, preferring the freedom and independence of self-employment. Some degree of innovativeness is needed at start up, and in most cases, a degree of innovativeness is needed for the business to survive. However, the business model is usually a replicate of an already- established model.

For example, franchise owners or real estate brokers might fall within the moderate innovation category. They aren’t developing a new product from scratch; however, in order to stay competitive, they need a certain amount of innovative thinking to distinguish themselves from others, making their products and services more desirable than competitors.

High innovation.

Highly innovative individuals are the types that form new companies, organizations, markets or economies (Schumpeterian entrepreneurship). In some cases, existing companies are materially transformed. Motivated individuals with a high degree of persistence initiate these changes.

Entrepreneurs falling in the more highly innovative category assimilate their innovation from a number of sources, including:

  • Customers or users. Gary Fisher and his ‘mountain bike’ is a good example of an innovator wanting something more than what was currently on the market - his biking needs translating into market wants.
  • Technological changes. Research that takes place at research-oriented institutions, universities, and other nonprofits leads some innovative individuals to see the economic potential of technology-based discoveries. In most cases, the institutions themselves aren’t organized to effectively commercialize discoveries, but individuals with incredible foresight see the discovery’s future potential.
  • Social and demographic changes. Cultural and environmental changes such as aging populations create new market opportunities for entrepreneurs, as well as trends toward “greener” or environmentally friendly products. Also, trends toward healthier, more active lifestyles create new needs and wants and therefore new opportunities for innovation.
  • Economic and deregulation. Recessions and economic downturns create needs such as more educational options for those retraining or going back to school, more cost-efficient services and products, and less expensive vacations and hobbies. Government deregulation and privatization of certain industries also offer entrepreneurial innovations.

Shahid Yussuf states in “From Creativity to Innovation,” that vast amounts of research on innovation from several different disciplines point to the complexity of defining innovation.

However, as he states in the World Bank Policy Research Working Paper, it’s importance cannot be understated for increasing economic performance and living conditions in a globalized world. Also, he states, innovation is imperative for the “multiple challenges arising from resource scarcities, dire predictions of accelerating climate change, and the threat of pandemics caused by new organisms.”

Yussuf says that innovation comes from original applications of knowledge, giving it two defining qualities: creativity, and a stock of knowledge.

So innovation born from creativity built on a deep knowledge base leads to the most viable commercial ventures – those with the most impactful and measurable economic results.

Entrepreneurial Thinking Within a Company - IDEO

entrepreneurial thinking within a company

Entrepreneurship and innovation are often used interchangeably, or within the same sentence, or breath, but usually regarding business start ups and new ventures. However, one innovative, established company, IDEO, believes that every new project and every product it designs is a new business venture.

Read more about Entrepreneurial Thinking Within a Company...

Are Entrepreneurs Made or Born?

But a question still gnaws at today’s researchers: Where does the type of innovation that turns ideas into viable commercial successes come from?

It’s one thing to define entrepreneurship and all its flavors, and to describe its importance to all cultures and societies. Its economic significance is apparent, which is why Schumpeter’s definition of entrepreneurship in the 1930s clearly had an impact.

However, since Schumpeter’s definition, those interested in how certain individuals become innovative entrepreneurs, and why, began studying personality. These researchers wanted to uncover the common psychological characteristics that entrepreneurs possess, and why they seem more successful than others at this type of activity.

Nurturing Creativity for an Innovative Workforce

nurturing creativity

The following cultural conditions are necessary for a society to produce a creative workforce that has the capability to produce highly innovative products:

A creative society supports a quality educational system strengthened by nurturing families.

Read more about Nurturing Creativity...

Was Fisher born with an innate ability or need to become an entrepreneur, either as a light show producer or mountain bike inventor, or some other product inventor, for example? And does he share common personality traits with other entrepreneurs?

For the first 30 years after the publication of Schumpeter’s definition, researchers focused on the personality traits of entrepreneurs. From this literature, several possibilities for common traits emerged.

Traits of Entrepreneurs

Risk taking. Research suggests that entrepreneurs don’t necessarily crave or seek risk or risky activities, but that they accept risk as part of the entrepreneurial process, and they manage risk well.

Need for achievement. One of the most debated personality traits, the “need-for- achievement” trait first appeared in the research of Harvard psychology professor David McClelland. He stated that because of their need for achievement, entrepreneurs take responsibility for decisions, are goal setters, and have a need for feedback from others.

Locus of Control. An internal locus of control means that individuals have a strong need to control their own fate, and believe that they are able to affect personal outcomes and achievements. Some researchers believe that successful entrepreneurs have an unusually high internal locus of control.

Tolerance of ambiguity. Unlike the other traits, all of the research findings on this personality trait tend to agree. Nearly all entrepreneurs possess a high degree of tolerating ambiguity, and the nature of entrepreneurship demands it. Many also enjoy and thrive on ambiguity whereas for many non-entrepreneurs, ambiguity causes extreme stress and anxiety.

Despite years of research on trying to differentiate the personalities of entrepreneurs from non-entrepreneurs, researchers today note the problematic nature of the early personality studies. Mainly researchers note the inconsistent findings among the studies, resulting from the fact that the definitions of entrepreneurs and entrepreneurship vary widely from study to study.

In the article “Toward a Theory of Entrepreneurial Cognition: Rethinking the People Side of Entrepreneurship Research,” author Ronald K. Mitchell and colleagues note the weak and disconfirming results of these studies.

“At this point in time researchers contributing to the existing entrepreneurship literature have been unable to report a unique set of personality traits that characterize the entrepreneur,” the authors state in the article appearing in Entrepreneurship Theory and Practice.

However, this conclusion doesn’t prevent Mitchell and his coauthors from still probing the question of why some people are more able than others to successfully “exploit particular entrepreneurial activities.”

They state that the current “vacuum” in the entrepreneurship literature – or missing link between people and the entrepreneurial process - is waiting to be filled by cognitive scientists, or what they call “entrepreneurial cognitive research.”

For the past 15 to 20 years, cognitive scientists have started to focus on the entrepreneurial cognition or information processing that more accurately characterizes the entrepreneurial personality.

In the article, they quote one of today’s leading entrepreneurial researchers, Sankaran Venkataraman, PhD, and professor of business administration at the University of Virginia. Venkatarman states that two broad categories of factors influence “the probability that particular people will discover particular opportunities:

  1. the possession of the information necessary to identify an opportunity; and
  2. the cognitive properties necessary to exploit it.

The article goes on to say that future research that contributes to a better grasp of information processing and entrepreneurial cognition is necessary.

The need for this type of expertise in today’s world cannot be understated, and those interested in how innovation and entrepreneurs contribute to a better world should consider a career in one of the many fields specializing in this type of research.

Many career options and paths are available, but most require classes, a degree, or a strong background in psychology. The following fields provide opportunity for study in this area: Cognitive Psychology, Industrial and Organizational Psychology, Social Psychology, Educational Psychology, and Media Psychology. To learn more, request information from schools who offer classes, certificates and degrees in psychology.

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