Entrepreneurship, Innovation and Business Clusters

Panos G. Piperopoulos

• Publisher: Routledge
• Year: 2016
• eBook ISBN: 9781317142508
• Topic: Business
• Subtopic: Business General
• Index: Business

In Entrepreneurship, Innovation and Business Clusters, Panos Piperopoulos provides a comprehensive introduction to what entrepreneurship is all about, how and why entrepreneurs innovate and how innovation systems operate. Small and medium enterprises (SMEs) constitute the backbone of most economies, so the author examines their characteristics and the crucial role played by the owners and entrepreneurs who innovate to ensure the survival and continued growth of their firms. He also includes the particular phenomena that arise where the entrepreneurs are either female or from ethnic groups, or where the context is that of a developing region or country. The importance of co-operative strategic alliances and networks between firms is discussed, along with how these strengthen SMEs' competitiveness. The concept of open innovation has been proposed as a new paradigm for the management of innovation and the author presents a hypothetical model for enhancing the competitiveness and performance of SMEs by properly utilizing employees' creative potential, emotional intelligence, tacit knowledge and innovative ideas. The contemporary model of business clusters, involving partnerships with competitors, agents, universities, research centres and local, regional and national governments is discussed. The ways, means and methods through which SMEs' competitiveness and innovation can be enhanced within business clusters is illustrated by cases that identify four types of SMEs, that behave differently and play different roles in the networks and clusters of which they form a part, but all of whose performance and competitiveness is a function of their position and role in the wider scheme of things.

PART 1
The Concepts of Innovation, Entrepreneurship and Systems of Innovation

Prolegomena of Part 1

In the last few decades it has become universally accepted that innovations of any kind are important sources of productivity growth. They are considered as major means through which not only organizations, but also countries can gain and sustain competitive advantages in globally competitive marketplaces: at the beginning of the twenty-first century, for example, the European Council called for a challenging programme for building knowledge infrastructures, enhancing innovation and economic reform and for modernizing social welfare and education systems (European Communities 2000). The strategy to achieve this was mapped out at Lisbon in the March 2000 conference. An open method of co-ordination was already formulated with the economic convergence of the member states. Based on this foundation the European Council highlighted the importance of two key messages; namely research and innovation where the member states had to combine their efforts and devise policies for creating new skills and capacities.

The importance of innovation for an organization of any kind and for a country as a whole is undisputed in the management literature and the business world of the twenty-first century (Cefis and Marsili 2006, da Silveira 2001, Cullen 2000). And yet, despite the general consensus for the necessity to invest in innovative practices and processes that will assist companies and countries to be more competitive, innovation, however it is defined, turns out to be a very complex process (McDonough III et al. 2006, Muller and Zenker 2001). Innovation is dealt with in the literature from a variety of perspectives making it often very unclear for someone to grasp its fundamental nature and gain a clear understanding of what this concept entails.

When management practitioners turn to the literature for advice on how to be innovative in their organizations or when they try to understand the meaning of being innovative and pursue a strategy to promote innovation, they find a variety of sometimes contrasting or very vague prescriptions that are often too difficult to implement in reality. As Wolfe (1994) remarks in his work, ‘the most consistent theme found in the organizational innovation literature is that its research results have been inconsistent.’ The levels at which innovation is analyzed in the literature and in different research studies conducted all over the world cover the range of national and social systems, international and national economies, industries, organizations, groups and individuals. Authors like Lundvall (1995) and Nelson (1993), for example, deal with innovation as a national and social system affecting the whole economic and social structure of a country. Porter (1990), on the other hand, sees innovation as a determinant of industrial structures, a barrier to entrance and a competitive advantage. Drucker (1985) talks about innovation as a specific function of entrepreneurship at an individual level, while Rosenfeld and Servo (1991) look upon the issue of innovation at an organizational level.

It thus should be obvious that different writers and researchers look at the subject of innovation from a variety of perspectives. The aim of this part of the book is to investigate and present the major schools of thought on innovation, how entrepreneurship is linked to innovation and the differing definitions that can be encountered, while scanning the pertinent innovation literature and the concept of entrepreneurship. Furthermore, the aim of this section (Chapters 1 to 3) is to provide a picture, as clear as possible, of the major approaches to the concept of innovation systems.

Some authors are already characterizing the twenty-first century as the innovation century:

Thinkers like MIT’s Lester Thurow (1999) and Harvard’s David Moss (1996) claim we are now in a Third Industrial Revolution, characterised by rapid advances in robotics, computers, software, biotechnology, new materials and microelectronics … in the Third Revolution markets are global, rather than national. Nations grow wealthy by successfully competing in world markets … take for example Singapore. This small nation of only 3.3 million inhabitants, with a land area of a few hundred square miles, has soared from $1,060 per capita GNP in 1970 to $32,810 in 1997 – five doublings of living standards in a single generation (World Bank, 1999) … in the Third Industrial Revolution, small innovative countries flexible enough to reinvent their core activities in line with world demand can grow rich very quickly. In 1980, Singapore made no disk drives. In 1982, it was the world’s leading producer of them … Grupp and Maital (2001) argue that just as countries grow rich by innovation, so do companies. In the third industrial revolution, companies that excel in innovation have become phenomenal engines for generating wealth, income and jobs and bring examples of companies like Microsoft, Cisco Systems and General Electric … the authors go on to suggest that it is widely known that on average, fully one-quarter of all corporate profits come from only 10 per cent of companies’ products – the innovative 10 per cent. (Grupp and Maital, 2001: xiv–xv)

Drucker (1985), in his work Innovation and Entrepreneurship, argues that these two concepts, taken together, are the driving forces of revitalization in any entrepreneurial society. In his perspective (as well as those of other influential scholars) innovation is understood as a process of continuity and transformation development at the same time. As the author quotes in his work, Tomas Jefferson (1985) believes that, ‘every generation needs a new revolution’. For Drucker, innovation and entrepreneurship tend to be incremental (one product, one policy, one process and one step at a time). They focus upon an opportunity or a need that is temporary and will vanish if it is not realized on time or if it does not succeed. In other words, they are pragmatic and as such can maintain every society, economy, industry, public organization or private enterprise is flexible and self-revitalizing. They are the new notion of a revolution, which does not end in catastrophe since it is under control and has a positive target and direction.

1
The Concept of Innovation and Entrepreneurship

Definitions and Types of Innovations

In the decades following the Second World War, a lot of attention was given (in economic and management literature) to the reasons for the presence and intensity of innovation and creative activities in various enterprises, both in the manufacturing and service sectors. In the following pages we investigate and discuss the major schools of thought on innovation and look at how entrepreneurship is linked to innovation and we present the various definitions that appear in the relevant literature when one consults it in regards to the concepts of innovation and entrepreneurship.

A number of authors have suggested that creative competition renders innovation indispensable for every enterprise wishing to survive and grow. Nonaka and Kenney (1991) note that:

Increasingly, corporate competitive success is hinging upon the effective management of innovation … For us, innovation is a process by which new information emerges and is concretised in a product that meets human needs. The healthy firm is a negative-entropy system, which constantly creates new order and structure in its struggle to survive and grow … To remain competitive any firm must constantly be creating new strategies, new products, new ways of manufacturing, distributing, and selling.

Some argue that competition will not automatically lead to greater innovation potential or greater innovative orientation. Thus, the need arises for investigation of the broader framework that includes organizational and psychological factors within enterprises that will enable any company to innovate. As observed by Tom Peters (1994):

Microsoft’s only factory asset is the human imagination, observed the New York Times Magazine writer Fred Moody … After exposing an audience to the Microsoft quote, I ask a telling question: “Does anyone here know what it means to ‘manage’ the human imagination?” So far, not a single hand has gone up, including mine. I don’t know what it means to manage the human imagination either, but I do know that imagination is the main source of value in the new economy. And I know we better figure out the answer to my question-quick.

According to Robinson and Stern (1997: 11), ‘A company is creative when its employees do something new and potentially useful without being directly shown or taught … The tangible results of corporate creativity, so vital for long term survival and success, are improvements (changes to what is already done) and innovations (entirely new activities for the company).’

Strategists and managers want to be creative but often fail to understand creativity’s constituent ingredients. Creativity involves skills that can be learned and developed, which depend as much on the systematic application of formal tools as on the expenditure of management inspiration. Passive information systems rarely facilitate creativity. It is when organizations invest in active, self-organizing systems which establish asymmetric patterns that challenge orthodox thinking and responses that creativity begins to surface.

Knowledge diffusion and innovation constitute the process through which an innovation, in the course of time, is dispersed through certain channels to the members of a social system (Rogers 1995). According to the author innovation is an idea, a practice or an object, which is considered new by the subject or some other evaluating agent. It matters minimally in consideration to human behaviour if the idea is new from its conception. The way in which a person perceives the novelty of the idea determines their reaction to it. If the idea seems new to the person then it constitutes an innovation.

Innovation can be divided into two distinct activities in terms of when and where the innovation occurs. One type of innovation occurs in the development of a new product or process, and the second type occurs in improvements on the shop floor of a product or process. Long run competitiveness of a leading-edge company depends on its product line, while short run competitiveness depends on price and reliability. Both long run and short run innovation processes are critical to company performance, but their relative importance to the firm depends upon the company’s technology strategy.

The complexities involved with the concept of innovation and the ways in which it evolves from the various enterprises does not permit a singular view or the use of only one definition. The Oslo Manual (2005) presents a multitude of definitions for innovation emerging from research activities in OECD (Organization for Economic Co-operation) countries, commencing in 1990 and continuing to date, so that the processes of innovation may be better understood and the formation of policies by governments and other agents may be better aided.

According to the Oslo Manual (2005: 46), ‘an innovation is the implementation of a new or significantly improved product (good or service), or process, a new marketing method, or a new organizational method in business practices, workplace organization or external relations.’ The innovation must be at least new or significantly improved for the firm. Innovation activities are all scientific, technological, organizational, financial and commercial steps which actually, or are intended to, lead to the implementation of innovations. Innovation activities also include R&D (research and development) that is not directly related to the development of a specific innovation (Oslo Manual 2005: 47).

The Oslo Manual distinguishes between four types of innovation: product innovations, process innovations, marketing innovations and organizational innovations:

A product innovation is the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics. Product innovations can utilize new knowledge or technologies, or can be based on new uses or combinations of existing knowledge or technologies … A process innovation is the implementation of a new or significantly improved production or delivery method. This includes significant changes in techniques, equipment and/or software. Process innovations can be intended to decrease unit costs of production or delivery, to increase quality, or to produce or deliver new or significantly improved products … A marketing innovation is the implementation of a new marketing method involving significant changes in product design or packaging, product placement, product promotion or pricing. Marketing innovations are aimed at better addressing customer needs, opening up new markets, or newly positioning a firm’s product on the market, with the objective of increasing the firm’s sales … An organizational innovation is the implementation of a new organizational method in the firm’s business practices, workplace organization or external relations. Organizational innovations can be intended to increase a firm’s performance by reducing administrative costs or transaction costs, improving workplace satisfaction (and thus labour productivity), gaining access to non-tradable assets (such as non-codified external knowledge) or reducing costs of supplies. (Oslo Manual 2005: 48–51)

On the other hand, the following changes do not constitute innovations: ‘ceasing to use a process, a marketing method or an organization method, or to market a product; simple capital replacement or extension; changes resulting purely from changes in factor prices; customization; regular seasonal and other cyclical changes; and trading of new or significantly improved products’ (Oslo Manual 2005: 56–57).

Entrepreneurship and Innovation

CLASSICAL AND NEOCLASSICAL ECONOMIC THEORY

Classical economic theory or, as otherwise stated, classical growth theory deals with the functioning of the market as a resource allocation mechanism in which the demand functions interact with the supply functions in order to determine prices that balance and sustain the market equilibrium. Adam Smith, Thomas Robert Malthus and David Ricardo, the leading economists of the late eighteenth century and early nineteenth century, postulated this theory. The classical economic theory does not deal with the dynamics of growth; the economy is understood to function according to deterministic laws in which the future is a predictable repetition of the past. It proceeds in a regular manner according to the economic laws of supply and demand, the equivalent of natural laws. Hence, innovation is dealt as nothing more than an unexplained and unexpected shift in the supply function.

Within this system, people are conceived to be rational individuals in that they are thought to calculate and predict the economic consequences of every action, choosing those actions that will maximize their individual utilities: driven by profit and utility maximization, the market functions efficiently to optimize resource allocation. The classical economists of the eighteenth and nineteenth centuries believed that technological change and capital accumulation were the engines of growth. However, they also believed that no matter how successful people were in inventing technologies that were more productive and investing in new capital, they were destined to live at the subsistence level. These classical economists based their conclusion on a belief that productivity growth caused population growth, which in turn caused productivity to fall. They believed that whenever economic growth raised incomes above the subsistence level, the population would increase. In addition, they went on to reason that the resultant increase in population would bring diminishing returns that would lower productivity. As a result, incomes must always fall back to subsistence level. Only when incomes are at the subsistence level is population growth held in check. In such a system the notion of novelty, entrepreneurship and innovation are incompatible (Parkin et al. 1997).

The neoclassical development of the economic theory continues, according to Fonseca (2002), with the framework that innovation is a variable in the supply/production function of the market equilibrium. Neoclassical growth theory is a theory of economic growth that explains how saving, investment and economic growth respond to population growth and technological change. Robert Solow of MIT suggested this theory during the 1950s, for which he received the Nobel Prize for Economic Science.

In neoclassical theory, the rate of technological change influences the rate of economic growth, but economic growth does not influence the pace of technological change. Rather, technological change is determined by chance. When we are lucky, we have rapid technological change, and when bad luck strikes, the pace of technological advance slows down. Nevertheless, there is nothing we can do to influence its pace. According to Fonseca (2002), innovation is caused by independent variables (exogenous variables) and mechanisms and so rational calculating managers can control it, to a certain extent, but cannot influence its pace. Innovation caused most frequently by technological, and less by organizational, changes disturbs the market equilibrium, usually by changing the position and shape of the production function and replacing the labour factor of production with the capital factor. Consequently, market forces will react to produce a new equilibrium state. However, technological and organizational innovations are not, according to Fonseca, explained in the neoclassical economic theory, but are merely taken as causes embodied in capital assets or knowledge that are necessary to manage capital and labour resources.

This way of thinking led neoclassical economists to search for the specific variables and circumstances that trigger innovation to occur and thus help managers to control it. At the level of industry though, innovations are understood as a choice made by organizations on rational grounds in order for them to secure temporary monopoly positions that would maximize their profits. This was based on the thought that since innovations disturbed market equilibrium it could take some time before market mechanisms could react and re-establish the bala...

Table of contents

• Cover Page
• Half Title Page
• Dedication
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Preface
• Acknowledgments
• Chapter by Chapter Synopsis
• Part 1 The Concepts of Innovation, Entrepreneurship and Systems of Innovation
• Part 2 Small and Medium-Sized Enterprises and the Evolution of Competition
• Part 3 Business Clusters, Small and Medium-Sized Enterprises and Innovation
• Index