Innovation, entrepreneurship and economic development (Boris Mrkajic) - YouTube

In this lesson we will define and explain a key output of entrepreneurial activity: innovation.

We will talk about how they are mutually related, and why they matter for economic development

at the individual level, as well as at large.

Let's start from the definition of innovation and its relevance.

The main distinction that we should understand at the very beginning is the one between what

we call invention, and what we call innovation.

On the one hand, an invention is the artifact or technology, that materializes an intuition

of how to solve a problem. It is commonly enabled by scientific knowledge of certain nature.

A good example is a telephone device, which is based on the following principle: sound

waves are transformed through mechanical vibrations of membranes to electric current that travels

along the string or wire from one membrane to the other.

This invention enables sound transfer on large distances.

On the other hand, innovation is a commercial implementation and exploitation of an invention.

Drawing on the previous example, telecommunications are an innovation that commercially exploits

the invention of telephone devices.

I should remark that it is not always easy to understand what an invention is useful for.

In other words, it is not easy to understand how to transform an invention into an innovation.

What is clear though, is how innovation can influence the life of every one of us, and ideally, make it better.

Innovation is also a key for startups to achieve competitive advantage and distinguish themselves

from the other businesses by providing original solutions to the existing problems.

Innovation is a key mechanism for startups to grow.

Now that we understand the difference, it is reasonable to ask who are the agents capable

to make this transition from invention to innovation?

Let's consider large firms first. Large firms have the accumulated knowledge

to deal with complex technology, as well as resources to invest in innovative activities.

However, large firms usually have a rather fixed hierarchy, well-defined routines and

practices, and rigid functional organization that do not allow a lot of room for creativity of the employees.

On the contrary, small entrepreneurial firms do not have these barriers by definition.

Actually, according to Joseph Schumpeter, a famous economist who introduced the definition

of entrepreneurship that we use today, entrepreneurs are the ones who are capable to introduce

the most valuable types of innovation.

Entrepreneurs are able to bring about the so-called creative destruction, which is able

to drastically change the routines by which things are done.

That is, creative description can revolutionize the existing economic structure and improve the reality.

Most importantly, these types of innovation created by entrepreneurs have been shown to

be the main engine of economic growth in the last century.

According to the recent studies, young growth-oriented companies contribute significantly

to the net employment growth and help enhance competitiveness and productivity by introducing new products,

developing novel business models and opening new markets. This is true all across the Globe.

A very well-know and recent example are the smartphones and how they have changed the

way we communicate on distance and how we reach new information.

There are different types of innovation.

The two main types that we should single out are product and process innovation.

First, product innovation is an activity that leads to the introduction of a new, redesigned

or significally improved good or service.

Product innovations mainly benefit the customers or consumers, who have access to improved

or complete new products, or enhanced or completely novel services, or both.

The company can have advantages too, by leveraging the new products to increase its

market share and gain a competitive advantage with respect to its competition.

A good example is again the evolution of a telephone from wired phones, to cable-free phones, to smartphones.

These innovations were taking advantage of various inventions such as wireless technology,

internet technology and infrastructure, touch screen technology, integrated circuits, etc.

The value of the innovation for the customers is obvious, as smartphones have effectively

changed life all across the Globe.

On the other hand, companies that have introduced these innovations, like Apple or Samsung,

are among the most valuable companies nowadays.

Now, let's move to the second type of innovation: process innovation.

Process innovation is an activity that leads to a new or substantially improved production process.

It mainly benefits the company itself, typically by facilitating reduction in costs.

The upgraded efficiency may play a key strategic role for the company, as the innovation may

again lead to competitive advantage with respect to the competition.

Potentially, even customers or consumers could benefit from it, by having access to cheaper

products that come out of these innovated processes.

A representative example is the delivery process of courier companies.

The use of barcodes, scanners and the Internet primarily allows companies to more efficiently

allocate their resource and organize the delivery process.

At the same time, customers can use the technology to track parcels in real time as couriers

are transporting them. The presented typology of innovation is just one of many.

The others are important as well, particularly in certain contexts, such as developing countries.

We will talk about these in more detail in the other lessons.

So, to stress, the type of entrepreneur we should have in mind is an entrepreneur that is an innovator!

An entrepreneur that is willing to change the status quo and improve the daily practices

of his local and even global environment.

And do not think that the innovative entrepreneurs are limited to advance economies only.

In fact, innovative entrepreneurs exist and might be even more important in developing

contexts, where the potential margin for positive change is greater.

In these environments, opportunities for new innovative businesses are even higher, and

we will talk about their peculiarities in more detail in the upcoming lessons.