Entrepreneurship and Innovation: The Uncomfortable Truth

Entrepreneurship and innovation: popular belief

It is widely believed that entrepreneurs are the drivers of economic growth and innovation. They are, as we are told, the makers and shakers who create new industries, drive current leaders from their thrones and open new frontiers for all. Popular culture tirelessly propagates one success story after another – from Facebook’s Mark Zuckerberg, glorified in The Social Network, to Teslas Elon Musk, an immigrant who became a household name, to Google’s Sergey Brin, whose Internet search engine name has officially become a verb in English.

The presentation of entrepreneurial technological skill and success is so compelling that many countries – including developing countries that feel lagging behind – are developing comprehensive strategies to support and promote entrepreneurship and are even providing substantial funding for investment in start-ups through government venture capital programmes. But is this fascination and belief in entrepreneurs justified? How likely is it that entrepreneurs will cross technological boundaries and bring about the kind of change governments want? Entrepreneurship Professor Sergey Anokhin of Kent State University says the hard evidence is far less convincing than popular culture suggests.

The downside of entrepreneurship

In a study in 35 countries over a seven-year period, Professor Anokhin of Kent State and Professor Joakim Wincent of the Swedish Lulea University of Technology show that there is no generally positive correlation between entrepreneurship and innovation. While for the world’s leading economies such as the United States the positive relationship between start-up rates and innovation may be true, for developing countries the relationship is indeed negative. In such countries, innovation is more likely to be promoted by existing firms rather than by start-ups.

With a few exceptions, entrepreneurs there pursue other kinds of opportunities based on the imitation and diffusion of ideas by others that are unable to produce truly advanced “big” innovations. On average, start-ups are less efficient than existing companies. If local governments support entrepreneurship, economic effectiveness can suffer and the likelihood of innovation taking place is lower. In fact, successful technological development in emerging markets is often associated with aggressive entrepreneurial behaviour on the part of large companies rather than individual entrepreneurs. This is the case, for example, with South Korea and its chaebols.

The following graph shows the very different effects of start-up rates on innovation and technological development (measured by patent applications) in the individual countries. Only rich countries can expect more entrepreneurship to lead to more innovation, says Dr Anokhin. For the less developed countries, as the plot shows, an increase in start-up rates will only lead to less, not more, innovative activity.

The problem, says Sergei Anokhin, is that developing countries often look up to the leading economies when they try to shape their own policies. Moreover, of course, the textbooks used by students around the world are written by scientists from the world’s leading countries and do not take into account the context of developing countries. Taken together, they often prevent policy makers from adopting the relationship between entrepreneurship and innovation that will not exist in their respective parts of the world. Entrepreneur-friendly policies will not have the expected impact, and limited resources will be wasted in support of activities that are largely detrimental.

What all this means

It is time to recognise that the relationship between entrepreneurship and innovation varies from country to country, says Professor Anokhin. Therefore, the World Economic Forum’s Global Agenda Council for Fostering Entrepreneurship explicitly recognises that Silicon Valley’s success stories do not necessarily reach other parts of the world. Policy guidelines aimed at promoting entrepreneurship in order to strengthen countries’ innovative capacity may well be out of place. Instead, an emergency approach should be adopted that takes regional specificities into account.


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