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.
