Entrepreneur as innovator

The Roles of the Entrepreneur as an

innovator

Joseph Schumpeter (1883-1950), Austrian-

born professor, is famous for focusing on the
Successful entrepreneurs are usually modeled as entrepreneur as the central figure in advancing
combinations of innovators (with creative and the wealth of nations and creating dynamic
innovative flair) and managers (with strong disequilibrium in the global economy. In the
general management skills, business know-how, process of creative destruction (of the
and sufficient contacts). Over the years, market system), entrepreneurs plays a central
economists have, however, described more roles role by constantly assimilating knowledge not
of entrepreneurs. The following is a summary yet in current use and setting up new
of the economists' interesting discourse
that, production forms and functions to produce
aspiring entrepreneurs may, hopefully, find and market new products. He pointed out that
useful. knowledge underlying the innovation need not
be newly discovered and may be existing
Entrepreneur as risk-taker knowledge that has never been utilized in
Richard Cantillon (1680-1734) suggested that an production. Therefore, the entrepreneur need
entrepreneur is someone who has the foresight not be an inventor and vice versa. He is the
and willingness to assume risk and take the one who turns an invention into commercial
requisite action to make a profit (or loss). exploitation. For Schumpeter, successful
Cantillons entrepreneur is forward-looking, risk- innovation requires an act of will, not of
taking, alert though need not be innovative in the intellect. It therefore depends on economic
strict sense. leadership and not mere intelligence. He felt
that such a hazardous activity would not be
Two different kinds of risk were distinguished by undertaken by ordinary economic agents but
Frank Knight (1885-1972): one is capable of only by entrepreneurs with the vision, drive
being measured (i.e., objective probability that an and commitment to survive the uncertainty
event will happen) and shifted from the and turbulence involved. When he succeeds,
entrepreneur to another party by insurance; the the entrepreneur will realize exceptional (be it
other is un-measurable (i.e., no objective measure temporary monopoly) profits and he may be
of probability of gain or loss), e.g., the inability to able to fundamentally change existing or
predict consumer demand. According to Knight, introduce new market and industry structures.
the entrepreneur takes the latter risk: true Therefore, Schumpeters theory of creative
uncertainty found in situations, which do not destruction has sometimes also been known
repeat themselves with sufficient conformity to as heroic entrepreneurship.
make possible a computation of probability (what
we nowadays term as "unknown and While Schumpeter emphasizes technological
unknowable"). innovation and improvement, Ludwig von
Mises (1881-1973) declared that changes in
Entrepreneur as business manager consumer demand may require adjustments,
Frank Knight established a boundary between which have no reference at all to
management and entrepreneurship. He sees technological innovations and improvements.
entrepreneurs in the strict sense as producers; He thought that the business of the
while the great mass of population furnish them entrepreneur is not merely to experiment with
with productive services, placing their persons new technological methods, but to select
and property at the disposal of entrepreneurs who those, which are best, fit to supply the public
guarantee to them a fixed remuneration. in the cheapest way with the things they are
Entrepreneurial profit depends on whether an asking for most urgently. Whether a new
entrepreneur can make productive services yield technological procedure is or is not fit for this
more than the price fixed upon them by those who purpose is provisionally decided by the
furnish productive services think they can make entrepreneur and finally decided by the
them yield. Therefore, its magnitude is based on a conduct of the buying public. For Mises, the
margin of error in calculation by entrepreneurs activities of the entrepreneur consist in
and non-entrepreneurs who do not force the making decisions and while decisions
entrepreneurs to pay as much for productive regarding innovation and technological
services as they could be forced to pay. It is this improvement come under his purview, such
margin of error in judgment that constitutes true decisions alone do not constitute an
uncertainty that is borne by the true entrepreneur exhaustive set. This echoed the viewpoint of
and which results in his profit. In Knights view, American economist, F.W.Taussig (1859-
the function of manager thus does not itself imply 1940) that although innovation is one of the
entrepreneurship. activities performed by the entrepreneur, it is
 not the only one, and perhaps not even the
Entrepreneur as exceptional leader most important one.
Hans Karl Emil von Mangoldt (1824-1868)
developed the notion that entrepreneurial profit is Peter Drucker (1909-2005) notes that
the rent of ability. He divided entrepreneurial entrepreneurship can be defined as changing
income into three parts: (1) a premium on the yield of resources (seen in supply or
uninsured risks; (2) entrepreneur interest and production terms) or as changing the value
wages, including only payments for special forms and satisfaction obtained from resources by
of capital or productive effort that did not admit the consumer (defined in demand terms) and
of exploitation by anyone other than the owner; innovation to be the specific instrument of
and (3) entrepreneurial rents or payments for entrepreneurship. Like Taussig and Mises,
differential abilities or assets not held by anyone Drucker asserts that innovation does not have
else. The first part is a return on risk taking; the to be technical and are often social as well. He
second part from capital use and production argued that management (as a useful
effort, and the third part from ability or asset knowledge) is an innovation of the 20th
specificity. Alfred Marshall (1842-1924) carried century as it has made possible the emergence
forward Mangoldts notion of rent-of-ability by of the entrepreneurial economy in America
adding the element of leadership to and converted modern society into something
entrepreneurial responsibilities. Marshalls brand new: a society of organizations. He
entrepreneurs must be a natural leader of men therefore prescribed a systematic form of
who can choose assistants wisely but also exercise entrepreneurship management, based on
a general control over everything and preserve systematic innovation: Systematic innovation
order and unity in the main plan of business. In consists in the purposeful and organized
fulfilling this organizational function, the search for changes and in the systematic
entrepreneur must always be on the lookout for analysis of the opportunities such changes
methods that promise to be more effective in might offer for economic or social
proportion to their cost than methods currently in innovations
use. Marshall noted that not everyone had the
innate ability to perform this entrepreneurial role
as these abilities are so great that very few
persons can exhibit all of them in a very high
degree. Accordingly, he termed the
entrepreneurial rents specifically as a quasi-
rent, which is a return for exceptional natural
abilities, which are not made by human effort, and
enable the entrepreneur to obtain a surplus income
over what ordinary persons could expect for
similar exertions following similar investments of
capital and labour in their education and start in
life.

Entrepreneur as perceiver/restorer
John Bates Clark (1847-1938) noted that as static
conditions change over time: population grow,
wants change, and improved production
technologies are discovered and implemented, the
mobility of capital and labour is necessary to
restore new equilibrium. He sees the entrepreneur
as the human agent responsible for the
coordination that restores the economy to an
equilibrium position. For Israel Kirzner (1930- ),
knowledge is never complete or perfect in a
dynamic economy; markets are constantly in
states of disequilibrium and it is disequilibrium
that bars the return to equilibrium. Kirzner
focused on the discovery process by which
entrepreneurs discover error and new profitable
opportunities, and thus move the market toward
equilibrium. Therefore, the role of the
entrepreneur is to achieve the kind of adjustment
necessary to move economic markets toward the
equilibrium state. According to Kirzner, the
essence of entrepreneurship consists of the
alertness to profit opportunities. By stressing
alertness, Kirzner emphasizes the quality of
perception, perceiving an opportunity that is a
sure thing.

Entrepreneur plays a significant role in generation of employment

opportunities
As we all know, entrepreneurship is a purposeful activity indulged in initiating, promoting and
maintaining economic activities for production and distribution of goods and commodities, the
person behind these economic activities is, therefore, a critical factor as well as an integral
component of socio-economic transformation. The development strategy of our country
confronts two important problems-unemployment and poverty of the masses. These problems
can be effectively minimized by activating the latent human potentials through entrepreneurship.
This leads to the creation of self-employment avenues for large number of people. For reduction
of unemployment, entrepreneurship in small and tiny sector industries, both in manufacturing
and service sectors, is imperatively needed. Thus, the role of entrepreneur and its significance in
generation of employment opportunities can be depicted under the following heads.
1.Establishing tiny, micro and small scale enterprises: Role of entrepreneur in establishment
the above types of enterprises is perceived as a powerful medium to address several socio-
economic issues and the chief among them is generation of employment opportunities for
millions. In a developing economy like India, where population pressure is quite high and job
employment is limited, the role of entrepreneur is very much significant. Entrepreneurial
development gives rise to economic independence through self-employment. Creation of tiny,
micro and small enterprises by the entrepreneurs can lead to creation of both self- employment
and wage- employment opportunities, thereby solving the problem of unemployment in the
economy.
2. Giving emphasis upon village and cottage industries Upliftment of economically backward
sections of the society can be possible if self- employment opportunities can be provided at the
grass root level. To enable these people in backward regions of the state to set up village and
cottage industries, government has implemented several antipoverty programmes like PMRY,
TRYSEM, SGSY, REGP etc, and the importance of entrepreneurs in cottage and village
industries sector has been clearly acknowledged by Mahatma Gandhi by his policy priorities in
village upliftment including khadi and village industries in his famous constructive programme
in 1922. Prior to independence, cottage industries and handicraft production located in rural
areas had occupied a distinct place in Indian economy because of their high potential in
employment generation and income creation especially in rural and backward areas. As such,
entrepreneur can play a significant role in setting up and reviving the cottage and village
industries, thereby creating employment opportunities to a large number of people living in rural
and backward pockets of the country.
3. Utilizing the surplus labour force in industrial activities: India is a primary producing
country. This characteristics feature is further accentuated by seasonality feature of the
agriculture. Therefore, for a large part of the year, people remain, more unemployed. Disguised
unemployment is a chronic phenomenon in agriculture where in more people work in a field than
actually required. So the surplus labour force is transferred and utilized by the entrepreneur in
non-farm sector activities like small tiny, cottage and village industries which are labour
intensive in nature.

Role of an entrepreneur as complimenting and supplementing economic

growth
Entrepreneur supplement and compliment economic growth of the economic in the following
ways:

1. Mobilization of Capital. Entrepreneurs efforts to mobilize the capital results in motivating

the investors to divert their ideal savings in the industrial enterprises. Investment of public saving
in industrial sector helps the country to use financial resources for productive purposes. The
growth rate of capital formation will be increased which is highly essential for rapid economic
development of a country. It is in the sense that entrepreneurs grenade capital at a rapid rate and
capital formation increases which is vital for the industrial development.

2. Generation of Employment. Entrepreneurs become self-employed and self-sufficient. They

do not depend on the government jobs or private jobs and directly employ themselves by starting
their own enterprises. In fact, they also privet jobs to many unemployed by setting up large and
small scale industrial. Thus, entrepreneurs play an important role to reduce the unemployment
problem in the country and pave the way for economic development.

3. Backward and Forward Linkages. It is the entrepreneur who initiatives change and this to
maximize his profits by innovations. Setting up of an enterprise in accordance with the changing
technology has several backward and forward linkages. For example, the establishment of a
textile unit generates several ancillary units and expands demand for cotton, chemicals, dyes, etc.

Schumpeter postulates that the rate of economic progress of a country depends largely upon its
rate of innovation, which in turn, depends upon the entrepreneurial talents. According to
Schumpeter, technological development cannot alone bring about economic growth unless they
are put to practical use by the entrepreneurs. Similarly, Peter Drucker has also emphasized that
this is the age of entrepreneurial society. Economic development and growth of a country
depends to a great extent upon effective entrepreneurship. In his opinion, entrepreneur plays a
crucial role for the creation of new small enterprises that energize the economic structure.
Through constant creativity, new businessmen/entrepreneurs assure a strong economy and rising
national income. Thus, the role of entrepreneur is important, as it is not only complements but
also supplements the economic growth of the country.

Role of an entrepreneur in Social Stability and Balanced Regional

Development of Industries
Entrepreneur plays a crucial role in bringing about social stability and balanced regional
development. In each and every country, entrepreneurs are considered as a valuable human
resource. The responsibility of social stability lies on his shoulders. Entrepreneurs help in
alleviating poverty by reducing unemployment through creation of large number of jobs by ways
of setting of small and tiny units. Thus social stability is maintained. Entrepreneurs facilitates
economic development and social stability through creation of social infrastructures like,
schools, colleges, health care centers, vocational institutions, banking and insurance facilities,
roads and buildings etc. consequent upon establishment of industries.
The role of entrepreneur is also of paramount importance in bringing about balanced regional
development. Establishing industries in rural and backward regions and availing concessional
finance, investment subsidy, transport subsidy and the like are provided by the government to
reduce regional disparity.

Role of Export Promotion and Import Substitution

In recent years, liberalization, privatization and globalization have opened up a vista of export
opportunities for entrepreneurs in India. They have evinced their interest in setting up industries
which are export oriented in nature. They also find it more lucrative to establish industrial units
which produce import substitutes thereby making India self-reliant. As such, the role of
entrepreneur is of fundamental importance as far as export promotion and import substitution are
concerned. Entrepreneurs are interested in manufacturing consumer goods as well as capital
goods in the country in order to minimize dependence on foreign countries. Establishment of
small industries for FMCG (fast moving consumer goods) as well as consumer durables makes
the country self-sufficient and thus, they help in accelerating economic development.

Export promotion policies reflect the interest of national governments to stimulate exports.
Subsidies, tax exceptions, and special credit lines are the main instruments used to promote
exports. The regulatory aspects of export promotion changed significantly in the late twentieth
century. In the past export promotion activities were not substantially regulated, but increasingly
since the creation of the World Trade Organization (WTO) in 1995 some export promotion
activities have been identified as tradedistorting practices. The WTO has devised rules that
allow countries that have been affected by the export promotion practices of their trading
partners to use the WTOs disputesettlement procedure and in some cases retaliate.

Export promotion is sometimes seen as a complementary development strategy to import

protection. While import protection usually allows infant industry to develop, export promotion
allows access to external markets. Foreign demand is often required by the limited size of
domestic markets and the need to achieve economies of scale, essential in many productive
activities. In a 1984 article Paul Krugman argued that, under increasing returns to scale, import
protection may act as a form of export promotion, because in this case protection would allow
considerable gains in terms of productivity that would enhance the possibilities of exporting.
However, in policy circles export promotion or export oriented industrialization (EOI) is seen
more often as an alternative development strategy to import substitution industrialization (ISI).

Import substitution is the process in which an economy replaces imported goods with domestic
goods. In doing so, it creates a stronger and more diverse domestic economy. Entrepreneurship
can play an important role in this process. Entrepreneurs can become the driving force behind
the new domestic industries. They can identify industries that they think will succeed. Having
done that, they take the risk (which is a major aspect of entrepreneurship) of devoting resources
to this new industry. Their efforts and their willingness to accept risk can help to create a variety
of new industries in a country that is trying to adopt an import substitution strategy.

Entrepreneurs play a major role in the achievement of self sufficiency, and import substitution
becomes a central way to achieve this goal. Import substitution involves the decrease of an
economys imports and instead focuses on incubating and developing its internal industries
driven by entrepreneurship. The purpose is to allow room for the entrepreneurs to establish
themselves enough, in order to compete with the imports, which eventually reduces an
economys reliance on external products.

The import substitution policy is achieved by imposing high tariffs and stringent quotas on
imports. This discrimination would in turn force businesses to source products locally and fuel
entrepreneurship, which is geared towards providing the required products. This theory then
places the entrepreneur at a vantage point, because it is the entrepreneurs activities that are
expected to improve the competitive standards of a countrys economy in the global marketplace.

Role of entrepreneur in Foreign Exchange Earnings and Meeting Local

Demand
The earnings of small scale sector have been increasing at a faster rate and so also the FOREX
earnings. Increase in exports brings about increase in foreign exchange earnings and thereby
helping to achieve a favorable balance of payment. It is known that expansion of exports is
kingpin of any policy of solving the problem of deficit and increase of foreign exchange
earnings. The entrepreneurs of small scale units, therefore, play a great role in augmenting
exports and thereby leading to earnings of foreign exchange reserve which is much needed for
the development of a country like ours.

Foreign trade acts as an engine of growth for the underdeveloped countries. Nowadays
entrepreneurs of developing countries are no longer exporters of primary products and importers
of manufactured goods. According to GATT (General Agreement on Tariffs and Trade) they
import only one-third of their total consumption of manufactured articles and even this
proportion is on the decline. They produce the remaining two-third at their home
Conclusion

The Indian economy provides a revealing contrast between how individuals react under a
government-controlled environment and how they respond to a market-based environment. The
evidence presented here suggests that recent market reforms encouraging individual enterprise
have led to higher economic growth in that country. The reasoning here is not new, although it is
refreshing to discover that this tried-and-true reasoning applies to developing as well as to
developed nations. Specifically, reliance upon a free market, with its emphasis upon individual
self-interest in survival and wealth accumulation, can yield a wide range of economic benefits. In
India those benefits have included, among other things, increased economic growth, reduced
inflation, a smaller fiscal deficit, and higher inflows of the foreign capital needed for investment.
We further conclude that India can generate additional economic growth by fostering
entrepreneurial activities within its borders, particularly within its burgeoning middle class. Not
only has entrepreneurship been found to yield significant economic benefits in a wide variety of
nations, but India specifically has reached a point in its development where it can achieve similar
results through entrepreneurial efforts. Among other things, India is poised to generate new
business startups in the high technology area that can help it become a major competitor in the
world economy. For example, it has a strong education base suited to entrepreneurial activities,
increased inflows of foreign capital aimed at its growing information technology services sector,
and a host of successful new business startups. To pursue further the entrepreneurial approach to
economic growth, India must now provide opportunities for (1) education directed specifically
at developing entrepreneurial skills, (2) financing of entrepreneurial efforts, and (3) networking
among potential entrepreneurs and their experienced counterparts.
Obviously, the government can play a substantial role in helping to provide these types of
opportunities. It can also provide the appropriate tax and regulatory policies and help the citizens
of India to understand the link between entrepreneurial efforts and economic prosperity.
However, its role overall must be minimized so that the influence of the free market and
individual self-interest can be fully realized. Only time will tell if increased entrepreneurial
activities in India will actually yield the economic benefits found in so many other nations of the
world. Should India decide to pursue that avenue of economic development, then future research
needs to examine the results of Indias entrepreneurial programme. Perhaps more important, that
research also needs to determine how Indias success in entrepreneurial efforts might differ from
those pursued in developed nations.