Innovative Enterprise and Economic Development

In this chapter I provide the basic outlines of the theory of innovative enterprise with a particular focus on why and how it provides the essential analytical link between entrepreneurship and development. In the theory of the innovating firm, the dynamic interaction of strategy organization and finance will determine whether the transformation of the firm’s productive activities eventually results in ‘innovation’, defined as the generation of higher quality and/or lower cost products than were previously available at prevailing factor prices. This definition of innovation, I argue, is essential for taking us beyond the notion of innovation as a ‘new idea’, which in and of itself has no economic meaning or even a failed ‘new product’, which may count as ‘entrepreneurship’ but not as ‘innovation’. Thus defined, innovation provides the foundation for economic development because, adjusted for the quality of services, it makes it possible to get more output from a given amount of input.