Notes on Readings
Theories of Entrepreneurship and Innovation
PLEASE NOTE BEFORE YOU BUY THIS SUMMARY, THAT I HAVE READ ALL THE
PAPERS AND TOOK ALL IMPORTANT PARTS OF THESE PAPERS TO PUT THEM
TOGETHER IN THE LITERAL SENSE. THIS SUMMARY WAS MERELY MADE TO
HAVE A CLEAR OVERVIEW OF WHAT WAS IMPORTANT IN EVERY TEXT SO THAT
I ONLY HAD TO READ 100 PAGES AS A REVIEW BEFORE THE EXAM INSTEAD OF
1000.
Lecture 1 (05-09):
Sledzik, K. (2013) - Schumpeter’s View on Innovation and Entrepreneurship:
According to Schumpeter “carrying out innovations is the only function which is fundamental in
history”. It is entrepreneurship that “replaces today’s Preto optimum with tomorrow’s different new
thing”.
One of the most common themes in Schumpter’s writings was the role of innovation (“new
combinations'') and entrepreneurship in economic growth. In his earlier view he saw the occurrence of
discontinuous and “revolutionary” change as the core of “economic development”, which breaks the
economy out of its statis mode (“circular flow”) and sets it on a dynamic path of fits and starts. Three
decades later, he saw that dynamic capitalism was executed to fail because the very efficiency of
capitalist enterprise would lead to monopolistic structures and the disappearance of the entrepreneur.
Schumpeter’s innovation theory:
According to him, consumer preferences are already given and do not undergo spontaneously, so they
cannot be caused by the economic change. Schumpeter described development as a historical process
of structural changes, substantially driven by innovation which was divided by him into five types:
1. Launch of a new product or a new species of already known product;
2. Application of new methods of production or sales of a product (not yet proven in the
industry);
3. Opening of a new market (the market for which a branch of the industry was not yet
represented);
4. Acquiring of new sources of supply of raw material or semi-finished goods;
5. New industry structure such as the creation or destruction of a monopoly position.
Innovation is an essential driver of competitiveness and economic dynamics. It is in the center of
economic change causing gales of “creative destruction” and it is a “process of industrial mutation,
that incessantly revolutionizes the economic structure from within, incessantly destroying the old one,
incessantly creating a new one”. The process of innovation can be divided into 4 dimensions:
1. Invention (low impact)
2. Innovation
3. Diffusion (high impact)
4. Imitation (high impact)
What matters in terms of economic growth, investment and employment, is not the discovery of basic
innovation, but rather the diffusion of basic innovation, which is the period when imitators begin to
,realize the profitable potential of the new product or process and start to invest heavily in that
technology.
Discovery and executing are two different things though. It is not the power of ideas, but the power
that gets things done. Creative destruction is the essence of capitalism, since there needs to be a shock
in order to change the reactive, repetitive, and routine circular flow of our economy. The
entrepreneur’s main function is therefore to allocate existing resources to “new uses and new
combinations”. In other words: innovation is the “creative destruction” that develops the
economy, while the entrepreneur performs the function of the change creator. Entrepreneurship
can, however, not be confused with the four complementary functions of invention: 1) risk-taking, 2)
error-correction and administration, 3) distinctive, and 4) non-entrepreneurial in nature.
Schumpeter’s First Entrepreneurship Theory:
There are many different definitions of an entrepreneur. According to Schumpeter entrepreneurs are:
the administrators of the means of production, in addition to companies manufacturing, are those units
which took bank loans for the purchase of these measures about to comply with the new combination.
This is different from the other writers, who saw an entrepreneur as simply the organizer and manager
of production or trade. In Schumpeter’s opinion the entrepreneur does not have to be the owner of
capital and gives banks the possibility of implanting innovations in the economy.
In his early work he used the following definition: “the function of entrepreneurs is to reform or
revolutionize the pattern of production by exploiting an invention or, more generally, an untried
technological possibility for producing a new commodity or producing an old one in a new way, by
opening up a new source of supply of materials or a new outlet for products, by reorganizing an
industry and so on”. He can also “act with confidence beyond the range of familiar beacons” and
“breaks down old, and creates new, traditions”.
In his view a person who has organized his company is immediately losing his entrepreneur function
and begins to lead his company in accordance with a “Schumpter’s circular motion”. The profit goes
to the capitalist (owner of the company) and not specifically to the entrepreneur. According to
Schumpeter there are three more motivates to act (next to talent and the will to act):
1. The desire to create “own kingdom”. Modern man, through his successes in industry or trade,
can get a sense of power and independence similar to the situation of the European medieval
lord;
2. The desire for gain. An entrepreneur can realize his wish to fight, to compete, to show his
superiority over others, winning for the sake of winning. In the economic life, there is
“financial racing”, but there is “financial boxing” too;
3. The joy of creation. To achieve something or to just exercise the energy and ingeniousness.
Schumpeter’s Second Entrepreneurship Theory:
Here he moves away from his earlier theory of entrepreneurship. He puts a smaller emphasis on the
entrepreneur and more on innovation in the strict sense rather than on entrepreneurship. It is less
individualistic and he says that an entrepreneur does not have to be one person (can also be the
country itself or its agenda). He was influenced by American economic life, where the idyllic vision
of the banker as the most important authority was replaced by the realistic image of modern
impersonal prudent banks (embarrassing flexibility to innovators seeking control over enterprise).
,The last theory was widely ignored, since he stated that the historical method of cycle research was
for instance more important than the theoretical and statistical ones. This shocked the American
economists.
Conclusions:
Innovation no longer depends on personalities, but rather on cognitive capabilities that increase the
diffusion and thus the understanding of innovation leading to entrepreneurship. Schumpeter’s words
have never seemed so appropriate as nowadays, when modern capitalism is experiencing a serious
crisis and has lost its strength during the last subprime and euro-debt crises.
Blank, S. (2013) - Why the lean start-up changes everything
A research by Harvard Business School shows that 75% of all start-ups fail. A methodology called
“the lean start-up” has emerged, which favors experimentation over elaborate planning, customer
feedback over intuition, and iterative design over traditional “big design up front” development. At
this moment, ventures are following its principles of failing fast and continually learning.
The Fallacy of the Perfect Business Plan:
The first thing every founder must do is create a business plan - a static document that describes the
size of an opportunity, the problem to be solved, and the solution that the new venture will provide. It
includes a five-year forecast for income, profits, and cash flow. It is written in advance before the
entrepreneur has even built the product.
, Often only after building and launching the product the venture gets feedback from customers, and too
often after months or years of development, the entrepreneurs learn the hard way what customers do
not need or want from the product’s features. We have now learnt three things:
1. Business plans rarely survive first contact with customers.
2. No one besides venture capitalists and the late Soviet Union requires five-year plans to
forecast complete unknowns.
3. Start-ups are not smaller versions of large companies.
One of the differences is that while existing companies execute a business model, start-ups look for
one. This distinction is at the heart of the lean start-up approach and shapes the definition of a lean
start-up: a temporary organization designed to search for a repeatable and scalable business model.
The lean methods has three key principles:
1. Rather than engaging in months of planning and research, entrepreneurs accept that all they
have on day one is a series of untested hypotheses. These hypotheses are summarized in the
business model canvas.
2. Lean start-ups use a “get of the building” approach called customer development to test their
hypotheses. They ask feedback about product features, pricing, distribution channels, and
affordable customer acquisition strategies. It is about nimbleness and speed: new ventures
assemble minimum viable products rapidly and immediately elicit customer feedback.
3. Lean start-ups practice something called agile development, which works hand-in-hand with
customer development. It eliminates wasted time and resources by developing the product
iteratively and incrementally. It’s the process by which start-ups create the minimum viable
products they test.
