Keywords

1 Introduction

Entrepreneurship has long been considered as a way to spur innovation and technological progress. Until the unprecedented Covid-19 pandemic and the resultant global economic slowdown, innovation, as partly evidenced by R&D expenditures and patents, has been blossoming around the world. Both developed and developing economies are promoting innovation ecosystems to advance productivity, economic growth and new product development. Intellectual property (IP) reached record highs in 2017 and 2018. Global expenditure on R&D by governments and businesses has more than doubled between 1996 and 2016 (GII Report, 2019).

Innovation is taking place in all realms of the economy. Experts in medical, scientific, technological, industrial and other fields are joining hands together to develop new products, processes and technologies, and find new solutions to society’s emerging problems and needs. Universities and research institutions are offering entrepreneurship programmes that encourage learners to take on the self-employment route rather than wage-employment as a potential career (Burns, 2020). These institutions are also encouraging new knowledge generation through research spin-offs, incubation centres and technology transfers, in collaboration with industry and government (Robinson, 2018; Audretsch & Belitski, 2019).

In many countries, government is advancing innovation and entrepreneurship through the provision of funding, training and physical infrastructures such as business and science parks. At the corporate level, firms realise that unless they innovate fast, their competitive position might slip, endangering their very survival. To innovate, firms require investment in commercially oriented R&D (Parker, 2017). However, not all R&D expenditure projects result in successful patents or in new firm formations. The question is whether there is a link between innovation and entrepreneurship, and does entrepreneurship cause innovation or is it driven by innovation? Studies on entrepreneurship have mostly focused on the micro relationship of entrepreneurial attributes to venture creation, motivational influences to file for patents, and on finance as well as environmental factors that influence growth performance. Not much research has been done on the macro relationship between patents or intellectual property and entrepreneurship. This chapter seeks to address this gap.

Drawing on Schumpeterian economics, this chapter examines the fundamentals of innovation and entrepreneurship, from a theoretical and an empirical perspective. The first section focuses on the role of innovation and entrepreneurship, highlighting how through the process of purposeful change and creative destruction, entrepreneurs introduce innovation that advances economic and enterprise development. The institutional context of market structure and resource allocation for innovation is also briefly examined, as well as how opportunities for innovation can be identified and pursued. Innovation comes in many varieties and varies among different countries. Critical to innovation is investment in R&D and patent protections for new products that often lead to the emergence of new firms. Without the capacity to innovate, the competitive position of an economy will erode, while non-progressive firms may gradually fade away, as technology changes, competitors progress and customers’ need change (Koch & Lockwood, 2018; Penn & Fineman, 2019). The second section, thus, links innovation and patents to entrepreneurship.

The last section empirically looks at the relationship between entrepreneurship and innovation among a selected set of countries, using data covering the period 2006–2018. Entrepreneurship is proxied by new business registrations, and innovation is proxied by patents registered by residents. In examining this relationship, a Pearson correlation analysis and Granger causality tests are performed between the entrepreneurship and innovation variables. The chapter ends with some policy directions on innovation and entrepreneurship.

2 Why Innovation?

Innovation and entrepreneurship are critical factors influencing the growth and continuity of today’s most successful firms (Collins & Lazier, 2020). With technological change and competition on a global scale, product life cycle is becoming shorter, and unless firms embrace and adapt to change, they are unlikely to have a long-term existence. Indeed, Peter Drucker (2015) stressed that marketing and innovation are management’s only major tasks that produce results, while everything else is a cost. While marketing aims at satisfying customers today, innovation focuses on satisfying tomorrow’s customers, and this is closely associated with the practice of entrepreneurship. More entrepreneurial firms use innovation as a strategic weapon to beat their competitors, not so much on the basis of price, but by making their products appear stale and obsolete. This is done by developing new products and services that offer benefits which customers perceive as new and superior and that answer their needs in a faster and better way than other competitors (Doyle & Stein, 2006).

Changes in the environment create opportunities for innovation. Changes in demographics, living standards, political forces, technology, culture, lifestyle and fashion create new solutions to both current and new customer needs (Drucker, 2015). Vigorous entrepreneurship with a mindset of continuous innovation is perceived as the only way of sustaining above-average profitability and growth. As Steven Covey (2006) puts it, continuous improvement by sharpening the axe is critical for individual and enterprise success. This entails throwing out the ‘old’, unlearning, reimagining and relearning transformative ‘tools’ to better serve customers. Non-innovative businesses that use ancient ways of thinking for problem-solving are likely to come up with old solutions to new problems, and this may be incongruent to building resilience and sustainability in modern times.

The idea of anticipating change and adapting fast in business and other human endeavours is echoed by Spencer Johnson (1998) by making anecdotal reference to ‘Who Moved My Cheese?’ The quicker one lets go of old cheese and looks for something new, the faster one can taste new cheese. This entails overcoming fear, leaving the comfort zone, and exploring new areas on a continuous basis. The entrepreneurial scene thus becomes an infinite game, where entrepreneurs and firms, as players who have the strategy and resources to innovate, would continue playing in the game, while those without the relevant strategic practices and preparations for existential flexibility would drop out of the game (Sinek, 2019).

2.1 Schumpeter and Entrepreneurship

Innovation is a complex phenomenon linked to new ideas and opportunities (Shane, 2003). Schumpeter (1976) regards innovation as the soul of entrepreneurship, and this includes technological advances, updating the existing products, adding new ones, broadening the market, seeking new sources of supplies, and establishing new organisations. At the macro level, the Schumpeterian entrepreneur disturbs a stationary equilibrium situation, by changing the production function and introducing novel products, which in turn displace the ‘stale’ products of non-innovating firms. Through the Schumpeter’s process of creative destruction, there is a continual turnover of dynamic entrepreneurs, who bring in superior innovations into system, enabling the economy to move from a state of disequilibrium to a higher state of equilibrium. In the process, economic growth and development take place (Aghion & Howitt, 1992; Banerjee & Duflo, 2020).

While the reward for successful innovation in the Schumpeterian model is profits, the lead innovative entrepreneurs do not earn above-normal profits indefinitely. The entry of low-cost imitative entrepreneurs is subversive to the profits of the established entrepreneurs (Parker, 2017). However, the champion entrepreneur can safeguard his ‘monopoly’ profits by always being a step ahead, staying at cutting-edge, of his rivals with further innovation (Banerjee & Duflo, 2020).

At the institutional level, innovation often relates to the introduction of improved methods of administration and governance that add simplifying and superior value to customer needs, efficiency and profits (Koch & Lockwood, 2018). Leibenstein (1968, p. 75) adds that the entrepreneur in action ‘connects different markets… making-up for market deficiencies (gap-filling), he is an “input completer”, and he creates or expands time-binding, input-transforming entities (i.e. firms)’. Much of today’s innovation is being driven by new power relationships and technological forces, such as artificial intelligence, the gig economy and changing aspirations of dynamic enterprisers in different countries. Perceiving the rise of China as an emerging superpower, its government is calling for mass entrepreneurship and innovation (Collins & Lazier, 2020).

Innovation varies among firms in different market structures (Burstein, 2016). If one accepts Kalecki’s (1971) argument, the greater the degree of monopoly power, the higher the level of profits, and stronger the propensity to innovation. Lerner (1934) argued that the degree of monopoly power of the firm is based on its power to set price above marginal cost (MC) of production, and this depends on the elasticity of demand facing the firm or monopolist. The smaller the elasticity of demand for the product, the greater the power of the monopolist to set the price above MC, and hence to make high profits. But the elasticity of demand for the firm’s product depends largely on the extent to which the product can be differentiated. The greater the product differentiation, the less elastic the demand for the product, thereby enabling the innovating entrepreneur to earn monopoly profits with prices set above MC (Mankiw & Taylor, 2017).

Economic theory suggests that from a resource allocation perspective, perfect competition is better than monopoly. However, with regard to innovation, firms that have some form of monopoly power distinguish their products through product differentiation and exclusive brand names. If the marginal social benefit from the innovative activity, in terms of a reduction in average costs possibly due to scale economies in R&D, exceeds the marginal sacrifice in efficiency, then it is desirable to have large firms with some monopoly power that compete among themselves on a non-price, innovation basis. Large firms often gain competitive advantage through continuous innovation, differentiation and cost leadership, delivered through better use of intellectual and physical capital inputs, economies of scale, investment in technology and more effective advertising (Steinmetz, 2015; Porter & Heppelmann, 2017).

Product innovation is linked to creativity and the application of new ideas, which can be incremental or radical. Creativity by itself has no economic value until it is embodied in a product that can be traded (Howkins, 2013). While creativity is the process of generating ideas and conceiving something original, innovation is the outcome of this creative process – the tangible output of those new ideas (Goodman & Dingli, 2017). Any small improvement to a product or service, in terms of extra desirable characteristics, can be regarded as an incremental innovation. Radical innovations are associated with entirely new ways of doing things, as exemplified by Amazon that started off in 1994 under the leadership of Jeff Bozos, as an online retailer of exclusive books. But driven by its principle of focusing on customer satisfaction and continuous investment in R&D to uncover new opportunities, Amazon has radically innovated and moved from an e-commerce and a cloud computing company to an everything store (Lucas, 1978; Parker, 2017 Collins & Lazier, 2020).

2.2 Patent Motivation and Business Startup

Under perfect competition, entry of new firms increases supply, thereby depressing the market price. Accordingly, should abnormal profits exist, these would be reduced, eventually reaching the competitive level, where these tend to normal profit. Innovators can be disappointed if they cannot earn high profits and protect their intellectual property (Granstrand, 2018). Hence, some form of legal protection by the government is necessary to mitigate the consequences of uncertainty and infringements. Protection may be conferred when there are legal barriers that restrict rival firms from entering an industry or activity, through copyrights, patents and trademarks (Kotler et al., 2019). Copyright law covers the expression of an idea in a qualifying work rather than the product itself. A patent is a certification of novel and useful invention, which can be a signal for quality. A patent protects an invention, giving monopoly to the innovating firm for a certain number of years, enabling it to cover its expenditure on R&D and earn a return on its investment (Vo, 2019).

Research by Sichelman and Graham (2010) in USA found that large firms are primarily motivated to file for patents in order to prevent competitors from exploiting their invention and to earn supernormal profits. Consistent with the signalling theory, they also found that startups rely heavily on patents as signals to the market to improve their chances of raising finance, of being acquired, of establishing a dominant market position and of strengthening brand reputation. When patent protections are strong and act as a powerful deterrent to imitation, entrepreneurs are more likely to found firms to exploit business opportunities than when patents are weak (Shane & Venkataraman, 2000).

Examining over 1300 inventions patented by MIT between 1980 and 1996, Shane (2003) found that the more effective a patent scope (a measure of the breadth of intellectual property protection offered by patents) is, the greater is the likelihood that an invention would be exploited through a new firm formation. Moreover, a new firm is likely to exploit a patent and commercialise its invention if it follows a strong market segmentation strategy and is strongly endowed with marketing and distribution assets (Shane, 2003). Examining the effects of patents on venture growth among Canadian biotechnology firms, Baum et al. (2001) found that firms with more patents at the time of founding experienced faster rates of growth in revenue than other firms. However, not all patentable inventions are patented, partly because of the registration costs, difficulties in enforcing a patent and reluctance to disclose trade secrets information required for patenting (Sichelman & Graham, 2010; Wilton, 2011). Similarly, not all inventors launch a new business. Some are happy to file for patents to validate their new product ideas and then license them to third parties to earn royalties (Granstrand, 2018). In their study of a sample of 217 patent inventors from the US Patent and Trademark office, Markman et al. (2002) found that patent inventors who started a new venture (technological entrepreneurs) tended to have a significantly higher self-efficacy level than inventors who did not start a new business (technological non-entrepreneurs). However, these researchers also found that the level of regretful thinking between the two groups did not differ significantly; adding that while the non-entrepreneurs had stronger regrets about career and education decisions, the entrepreneurs had stronger regrets about business opportunities as market dynamics change.

As the market is constantly changing and competitors set new standards, the entrepreneurial sphere needs constant replenishment, with continuous waves of innovation that should have strong intellectual property protection (Penn & Fineman, 2019). Society thus needs more Schumpeterian enterprisers such as Jack Ma of Aliba, Robin Li of Baidu, Ratan Tata of India, Fred Smith of FedEx, Mark Zuckerberg of Facebook, Steve Jobs (co-founder) of Apple, Bill Gates of Microsoft, Elon Musk of Telsa, Jeff Bezos of Amazon, and Sir Richard Branson of Virgin Group to advance high-technology firms, job creation, economic growth and new thinking in business development (The Economist, 2016).

2.3 Organising for Innovation

In this perplexing business landscape, the pressures to innovate are greater than ever. Just as environmental change creates opportunities for innovation, it also creates threats by making existing products appear obsolete. Change seeks knowledge for better solutions and adaptations. Indeed, in this age of discontinuity, Drucker (2015) asserts that knowledge has become the resource, rather than a resource, and to advance innovation and entrepreneurship, society needs to connect creatively different knowledge disciplines. Romer (2012) adds that knowledge and ideas that drive innovation are an endogenous part of economic growth and not accidental or external. He regarded technological change as an improvement in the instructions for mixing together raw materials and added that information is a recipe for making something better in the physical or the digital world (Mason, 2016). Further, the fusion of customer ideas and integration of suppliers, as well as external knowledge sourcing, enhance a company’s innovativeness (Meadows, 2020).

Classically, as Tom Peters and Waterman (1982) put it, firms have to follow certain fundamental principles in their quest to innovate and sustain superior performance in the long haul. These include constant change, autonomy and entrepreneurship, lean staff, good communications, hands-on and value-driven leadership, taking ‘exceptional care of your customers’ and harnessing the ideas of divergent people involved in making a product or providing a service. They suggest that leadership at all levels must be obsessive about change and continuous learning and must have a bias for innovative action. In his book ‘Chaos’, Peters (1987) suggests that managers must create new worlds, then destroy them and then create again. This resonates with Covey’s idea of sharpening the axe or Schumpeterian ideas of creative destruction at the hands of innovative entrepreneurship, rather than reactive management.

An innovative firm is a learning organisation that connects people with ideas and knowledge (Howkins, 2013). As innovation is based on knowledge, businesses that win in innovating have people who know more than their competitors about what customers want. The successful innovators must have great absorptive capacity to assimilate new information and technological solutions and apply them to commercial ends (Koch & Lockwood 2018. Unless the business is investing in R&D and capacitating its people to keep them at the forefront of environmental change, knowledge creation and new technologies, it will lack core capabilities to innovate (Burns, 2020). Larger firms with greater resources are in a better position to bid for the scarce creative talents possessed by some individuals. Where firms do not have the specific human capital, they can invest in knowledge collaboration with external partners to access co-created knowledge, or outsource knowledge creation to collaborators, with potential intellectual property rights (Robinson, 2018; Belitski, 2019).

Staff also need incentives to innovate. Accordingly, contributions to innovation should be built into the firm’s incentive and evaluation system, with a tolerance for mistakes, which can be a means of learning. Google Inc, for instance, co-founded in 1998 by two PhD students at Stanford University (Sergey Brin and Larry Page), offers outsized rewards and stock options to members and achieving teams who come up with the best fresh ideas to new product development and technologies (Finkle, 2012). Ultimately, innovation requires intrapreneurship commitment and strong leadership throughout the firm. Larger companies become more innovative and intrapreneurial by giving managers the independence and incentives to create new products and new business units. These units often form a useful incubator for other future innovations (Goodman & Dingli, 2017).

At times, firms introduce new products based on an inventor’s fixated idea of technical novelty, without sufficient regard to customers’ benefit. These products often fail, as customers do not perceive any uniqueness in them. Research indicates that firms often fail in their new product development process due to their innovative development being too slow, poor diffusion or adoption, and lack of differential advantage. Other factors include poor planning, shortening of product life cycles, rising costs of developing new products, global competition, increasing environmental and consumer legislation, more new products, declining profitability of brand followers and lack of management enthusiasm (Kotler et al., 2019).

2.4 Entrepreneurship, Small Firms and Innovation

Entrepreneurship and innovation come from firms of different size and diverse cultures. Compared to large firms, small ventures face serious limitations, in relation to technology, information and resource availability. Nevertheless, being flexible and non-bureaucratic, they appear to make a significant contribution to job creation and innovation (Schmookler, 1962; Jewkes et al., 1969; US National Science Foundation, 1976; Birth, 1979; Baumol, 2007). Baumol (2007) argues that many famous radical innovations, such as the personal computer, FM radio and the zipper, originated from small rather than large firms. A study by the SBA office in the USA that examined patents granted during the 2005–2009 period found that small innovative firms are much more productive than large firms from a patents-per-employee perspective, producing 15 times as many patents per employee than large firms (Breitzman, 2013).

According to the OECD, up to 60% of new SMEs during the five-year period 2014–2018 were involved in innovation, creating new products that were never seen before, and employed unorthodox dynamic business structures (Peretti, 2018). Acs et al. (1994) add that knowledge spillovers from large firms and universities are more decisive in promoting innovative activity of small firms than of large institutions. While non-innovative businesspersons contribute little to industrial growth, the real innovative entrepreneurs, who convert breakthrough ideas into new products that reach the market, contribute significantly to economic growth (Baumol, 2013). The degree of innovation varies considerably among firms within the same country and between countries, and these differences can be related to individual attributes of the entrepreneurs and their location (Collins & Lazier, 2020). Entrepreneurs with higher levels of risk tolerance, alertness, education, previous business experience, operating in a geographical context of high economic freedom and security, tend to introduce more innovations to the market (Baumol, 2010; Fuentelsaz et al., 2018).

The small competitive firms tend to underinvest in R&D, as they are financially weak, unable to fully exploit returns to innovative activities and establish property rights (Arrow, 1962, Jones & Tilley, 2013). Therefore, as indicated above, well-protected property rights are necessary to promote innovation and entrepreneurship and prevent expropriation or infringement of the fruits of R&D. If there are no secure property rights, it would be difficult to prevent imitation that eats into the profits of innovators. A product innovation would then become a public good, thereby discouraging firms under perfect competition to invest on R&D and innovation. Hence, even the institutional school suggests that a more competitive market may lead to less rapid innovation and can be detrimental to aggregate welfare (Nelson & Winter, 1982). This reasoning supports Schumpeter’s contention that large firm size is necessary for innovative activity. Further, Demsetz (1991) adds that owing to the scale effect, the incentive to innovate is greater in a monopolistic industry than in a perfectly competitive industry. The neoclassical approach that assumes market participants have perfect knowledge is thus limited, as imperfect competition is the norm.

Romer’s research (2012) shows that the market mechanism for setting prices will drive the marginal cost of certain goods down over time towards zero, eroding profits in the process. Once firms are forbidden to set monopoly prices, the market becomes the transmitter of ‘zero marginal cost effect’. This would not encourage innovation in the digital age. A society that stifles its creative assets cannot prosper. However, if we encourage creativity and manage successful innovation with patent protection, innovating firms and society stand to benefit, through the agency of effective entrepreneurship (Howkins, 2013). Even the Nobel Prize economist Arrow (1962) argued that in a free market economy, the purpose of inventing things is to create intellectual property rights. As entrepreneurial activity increases, the innovative firms should reap gains from intellectual assets: ‘profits derive from entrepreneurship, not rent’ (Mason, 2016, p. 279).

2.5 R&D and Global Innovation

Having a patent, as a form of intellectual property, is an incentive to engage in innovation. Patents are often used to secure cross-licensing agreements, so that collaborating firms can continue to do business (Choi & Phan, 2006). Additionally, inventors often license out patents and technology to third parties in exchange for lump sums, periodic payments and ongoing royalties (Sichelman & Graham, 2010). In recent times, while both developed and emerging economies are spending considerable resources on R&D, as a proportion of their GDP, emerging economies, like China and India, are filing for more patents. This increasing intensity in R & D efforts perhaps reflect a catchup exercise by emerging economies, motivated to be initiators rather than imitators of other countries’ innovations. In the USA, foreign ownership has increased steadily over the past 20 years, and some of America’s biggest companies are now owned by Chinese, while their appetite is growing across a bewilderingly varied group of industries (The Economist, 2004; Peretti, 2018).

According to the 2019 Global Innovation Index (GII) report, published by the INSEAD, the World Intellectual Property Organisation (WIPO) and Cornell University, Switzerland is the world’s most innovative country, for the ninth year running, since 2011. Switzerland, Sweden and USA were the top most global innovators, with a global innovation index (GII) of 67.24 (out of 100), 63.65 and 61.73 respectively, out of 129 countries (GII Report, 2019). Though being an upper-middle income country, China was in the top 14 for the first time in 2019, with a score of 54.82, thanks to improvements in patents, publications and R&D expenditures (Table 4.1). China seems to be aggressively catching up fast with high-income developed economies in terms of both innovation and competitiveness.

Table 4.1 2019 global innovation index and competitiveness rankings of selected countries
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South Africa was the top innovator in Sub-Sahara Africa, though globally it was ranked at 63 (Table 4.1). As a proportion of GDP, South Africa spent just under 1% (0.83%) on R&D in 2017/2018, with the government providing the major source of funding (46.7%), the business sector contributing 43% and foreign funding sources being about 10%. In South East Asia and Oceania, Singapore was the foremost innovator. In Central and Southern Asia, India was the top innovator, though globally it was ranked in position 52 (GII Report, 2019).

Interestingly, according to the World Economic Forum’s 2019 Global Competitiveness report, Singapore was ranked first as the most competitive nation out of 141 countries, with an index of 84.8 (out of 100), while in innovation it occupied the eighth position, with a score of 58.37 (out of 100). South Africa was in the 60th position, with an overall competitiveness score of 62.4, but in 63rd position for innovation. For some of the high-income countries, there seems to be a strong correlation between their innovation rate and competitiveness (GII Report, 2019). Switzerland, for instance, was ranked first in innovation in 2019 (a position it held ever since 2011), while in global competitiveness, it is ranked fifth. The USA was ranked third in innovation, but second in competitiveness, while Sweden was ranked second in innovation, but eighth in competitiveness (Table 4.1).

Although some countries may get more innovation output from their investment inputs used, such as the level of expenditure on R&D, sophistication of technology and human capital, it must be stressed that innovativeness of a nation and its competitiveness and growth in per capita income tend to go together. Accordingly, there is also a close association between R&D expenditure growth and economic growth of nations, measured by GDP per capita, over the period 2000–2019 (Fig. 4.1).

Fig. 4.1
A three-line graph with peaks and troughs illustrates the percentage of business R and D growth, total R and D growth, and G D P growth over the years from 2000 to 2019.

R&D expenditure growth, 2000–2017. (Source: GII Report, 2019)

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Business R&D expenditure increased in step with economic growth during the periods 2002–2007, and 2016 and 2018; R&D expenditure reached almost 7%, while economic growth was about 3.5% in 2018. Global R&D expenditures have more than doubled between 2002 and 2016 (GII Report, 2019). Global expenditures on R&D are particularly on the rise among the middle-income countries. China was responsible for 2.6% of the global R&D expenditures in 1996; this figure increased to 24% in 2017, while that of the high-income countries decreased from 87% in 1996 to 64% in 2017 (GII Report, 2019), perhaps indicating that innovation intensity is likely to shift from West to East in years ahead.

With regard to international patents, as an indicator of innovation, the 2019 GII report indicates that European countries took seven of the top ten positions, while the other three remaining positions were taken by Israel, Japan and Republic of Korea. Among the middle-income countries, China and South Africa were in the top two positions on international patents, while India registered improvements in this regard. The European Patent Office (EPO) indicates that it received 4% more applications (181,000) in 2019 than in 2018. Patents in Europe contribute about 42% (5.7 trillion euros) to the European GDP. Further, 90% of European trade with the rest of the world originates from Intellectual Property rights-intensive industries, creating 82 million direct and indirect jobs in Europe (GII Report, 2019).

Human capital is critical to intellectual property and innovation development in an economy. Research at universities contributes to innovation through publications that result in the creation of codified knowledge for potential technological advancements by businesses. Consequently, countries invest considerable resources in academic research, doctoral education and knowledge transfer from these institutions to generate technological innovation. However, owing to capacity constraints, countries with low GDP often have to rely on external collaboration for advancing innovation and patent development (Raghupathi & Raghupathi, 2017).

Further, many universities in South Africa, USA, Europe and other countries offer Entrepreneurship courses as part of the curricula at the undergraduate and postgraduate levels. These courses encourage students to consider commercialising knowledge gained at the university and turn ideas into one’s own businesses, as an alternative to wage-employment (Burns, 2020). Active on promoting entrepreneurship, many universities have also created incubation hubs, where apprenticeship-seed ideas and new thoughts are generated, tested and converted into new products with financial support by a team of entrepreneurs, researchers, students and academics working together. The university aims to extract maximum value from intellectual property development and property rights. In South Africa, for example, government funding from National Research Fund (NRF) is generously available to support university research and innovation. But at times, institutions find it difficult to recruit the best research talents because of bureaucratic and environmental hurdles such as visa procedures, crime and xenophobic attacks. Each new publication or newly filed patent that comes up with novel solutions to consumer or societal problems can benefit the economy immensely, including employment creation. This is more so in Africa, where universities are churning out thousands of graduates each year, but the majority cannot find suitable employment, unless exposed to entrepreneurship (Umenaco, 2019).

Having set the background to innovation and entrepreneurship development, the next section looks at the relationship between innovation and entrepreneurship among a selected set of countries chosen on the basis of data availability. The paper examines the recent empirical trends, covering the period 2006–2018, in entrepreneurship and innovation. Consistent with the GEM Report (2020) and literature, entrepreneurship is viewed in the context of the formation of a new business (Parker, 2017). Based upon the preceding arguments, we hypothesise the following:

Hypothesis: There is a relationship between innovation and entrepreneurship.

3 Data and Statistical Analyses

All data, covering the 2006–2018 period, employed in this study were downloaded from the World Bank Database. EVIEWS 11 and SPSS were used for the data analysis. Entrepreneurship is proxied by new business registrations and innovation is proxied by the number of patents registered. A Pearson correlation analysis and Granger causality tests were performed between the entrepreneurship and innovation variables.

Results

The results are presented in three stages. First, a table (Table 4.2) of the correlation results between new business and patents registered is presented. Second, descriptive results of the trends relating to the number of registered patents (Fig. 4.2) and new business formations (Fig. 4.3) are given, over the period 2006–2018 by a selected group of countries, specifically Mena, Singapore and South Africa. Third, the direction of the causality between registered patents by domestic residents and new business registrations is discussed.

Table 4.2 Correlation between new businesses and patents registered, 2006–2018
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Fig. 4.2
A line graph illustrates the trend of the number of registered patents by residents in 6 specific countries over the years from 2006 to 2018. The registered patents in Singapore P plot an increasing trend.

Trends of patents and new businesses registered in selected countries, 2006–2018

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Fig. 4.3
A line graph depicts the results of the trends related to new business registrations in some countries from 2006 to 2018. The new business registrations in Singapore B plot an increasing trend.

Selected MENA compared to South Africa and Singapore- new businesses

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Correlation Results

Table 4.2 presents the results of the correlation between new businesses registered per 10,000 people aged 15–64 (indicator of entrepreneurship) and patents registered by residents (proxy for innovations), using the Pearson’s correlation test. The correlation coefficient ranges from 0.87 (Singapore) to – 0.001 (Jordan), and surprisingly the association is apparently negative and significant for some other countries. However, the correlation is positive and significant for most of the Mena and Asian regions, indicating a support for the hypothesis for these countries.

With regard to the MENA countries, Table 4.2 shows that for Saudi Arabia, Algeria, Tunisia and Israel, there is a positive and statistically significant correlation between new businesses registered per 10,000 people aged 15–64 (proxy for entrepreneurship) and patents registered by residents (proxy for innovation). Hence, one may deem these countries to be the most innovation-driven economies in that group.

Within the BRICS countries, India appears to be prominent in innovation. There is a positive and significant correlation between new business registered (entrepreneurship) and patents granted (innovation) for India (r = 0.63; p = 0.002). The relationship is positive for South Africa, though not significant. In the case of Brazil, the relationship is significant, but surprisingly in the negative mode.

The same pattern seems to exist for the OECD countries. However, in the South East Asian economies, there appears to be a consistently positive correlation between entrepreneurship and innovation patents. The correlation between new business formation and patent registration is highly significant for Singapore (r = 0.87) and Indonesia (r = 0.86). The economies of India, Singapore and Indonesia thus appear to also be innovation-driven. It is counterintuitive that the economies of Japan and Sweden have shown a negative association between innovation and the registration of new businesses, while in the global ranking both Japan and Sweden are among the top 15 innovating countries. It is plausible that in these developed economies, mainly established firms and resident multinational corporations were registering for patents, which were then added to their asset repositories for future commercialisation purposes, while simultaneously the net reduction in the overall number of formal businesses is higher than the new ones being created. Hence, this is registered in the analysis as a negative correlation. This is an area that needs further research.

3.1 Dr. Mahadea, Darma

Darma is an Associate Professor and Research Fellow in the School of Economics and Finance at the University of Kwazulu-Natal (UKZN), South Africa. He has extensive experience in teaching economics and entrepreneurship at both the under graduate and postgraduate levels. He was the Head of Economics Department, University of Walter Sisulu (SA), for eight years and Head of Economics School at UKZN, PMB Campus, for three years. His main areas of research are macroeco-nomics, development economics, SMME entrepreneurship and economics of hap piness. He has published extensively in local and international accredited journals and has co-authored several books on economics and mathematics. Darma has pre sented several papers at local and international forums. He has been a visiting Professor at the University of Lubumbashi (DRC) and Gavle University (Sweden) and a research associate at the University of London.

Qualifications: BA Hons (Econs), Lancs (UK), MBA, Brad (UK), PhD (SA)

Figure 4.2 compares the number of registered patents by residents (proxy for innovation) of Singapore with South Africa and those MENA countries that have shown statistically significant positive correlations between new businesses registered (indicator of entrepreneurship) and patents (see Table 4.1). Israel has consistently outperformed the other MENA countries in registering patents over the 2006–2018 period. However, Saudi Arabia has been making steady progress over this period, and in the last 6 years, it has reduced the gap with Israel. While Israel experienced a decline over the 2008–2014 period, it has made a significant recovery since then. In 2007, among the selected countries, Israel had almost 1600 patents registered by the residents, while in Singapore, the number of registered patents increased from about 600 in 2007 to 1600 in 2018. The registered patents seem to be on a declining trend for South Africa over the four years preceding 2018.

South Africa has outperformed Tunisia and Algeria throughout the study period while it outperformed Saudi Arabia up to 2015, and thereafter it was overtaken. The average gap between South Africa and Israel has more or less remained constant. Algeria and Tunisia have remained in the lower end of the band, with Tunisia marginally outperforming Algeria over the 2014–2017 period. Saudi Arabia’s phenomenal rise is worth noting and investigating. However, Singapore, world-renowned in recent years for its innovation-driven economy, was below both South Africa and Israel, but has grown phenomenally since 2009.

Figure 4.3 shows that Singapore, in registering new businesses, has behaved consistently with the rate of innovations its residents have produced, when compared to Fig. 4.2. Israel too has remained in step with the innovations it produced, while South Africa has registered businesses beyond its rate of innovation. Tunisia has registered more businesses compared to Saudi Arabia and Algeria. The rate of business registration for Algeria and Tunisia is similar to their innovation patterns. However, the rate of Saudi Arabia’s business registration appears to be below that of its rate of innovation activities, and this is in contrast to South Africa.

Granger Causality Narrative

The study conducted Granger causality tests for all those countries in Table 4.2 (Algeria, Tunisia, Israel, India, Singapore and Indonesia, excluding Saudi Arabia due to insufficient data) that demonstrated a statistically significant positive correlation between New business registrations and registered patents. The Granger causality results are presented in Table 4.3 and in the appendix.

Table 4.3 Granger causality between registered patent and new business registrations
Full size table

Table 4.3 indicates that only Algeria, Singapore and Indonesia have generated statistically significant unidirectional causality, reflecting that registered patents by domestic residents cause new businesses to be registered. This tends to suggest that entrepreneurship is driven by innovation. In regard to the other countries in the above table, there is no conclusive evidence of causality running in either direction. Moreover, it is to be noted that the statistical results for Algeria and Indonesia are based on 7 and 6 observations which seem too small compared to 11 for Singapore. Hence, in the light of possessing constrained datasets, it might be safer to argue that only Singapore provides conclusive evidence of innovations driving the formation of new businesses in their economy (Chi-square = 13.145; p = 0.001). Although the results for the remaining countries may not be conclusive, the significant Pearson’s correlation results indicate the promise and potential of the MENA countries, including Algeria, Tunisia, Saudi Arabia and Israel, and the Eastern economies of India, Singapore and Indonesia, being innovation-driven economies. As more data becomes available, this inclination will most likely become more evident.

4 Discussion

The results indicate that with regard to the MENA countries, Saudi Arabia, Algeria, Tunisia and Israel, there is a statistically significant correlation between new businesses registered per 10,000 people aged 15–64 (entrepreneurship) and patents registered by residents (innovation). Hence, these countries may be considered as the most innovation-driven economies in that group. Further, given a similar correlation, the Asian economies of India, Singapore and Indonesia also appear to be innovation-driven.

It appears that in the developed, high-income OECD economies, such as Sweden and Japan, more innovation is taking place among the more established firms where technology is a prime force. The more matured firms may be registering for patents and adding new products to their existing product portfolio, rather than creating new firms, as an intentional marketing strategy. Existing firms in OECD are innovating and expanding their product base, where new products become distinguishable through leveraging their existing brand strength. Instead of creating new businesses, an established company may be using the company brand umbrella to front a new patented product, to reduce buyers’ perceived risk and gain benefits of brand salience from the already recognised and sought-after brand names (Keller & Swaminathan, 2020). For example, when Apple first released AirPods in 2016, this new patented product was launched under the existing popular Apple brand, rather than through a new company. Moreover, there may be an opportunity for innovating companies in high-income countries to license out patents and exchange intellectual property with other existing firms rather than establish new firms (Wilton, 2011).

Contrastingly, in many of the developing countries, registered patents incentivise the entrepreneurs to start new businesses as a protection against imitation, enabling them to earn ‘monopoly’ profits from their R&D efforts, by commercialising their innovation and possibly licensing them. Indeed, the results show that for all these countries such as Algeria, Tunisia, Israel, India Singapore and Indonesia, a statistically significant positive correlation exists between new business registrations (entrepreneurship) and registered patents (innovation). Moreover, given the risks and costs associated with developing novel products, venture capitalists in emerging economies may be more interested in funding new innovative firms that have a patent protection than those without this cover (Vo, 2019).

Singapore, world renowned in recent years for its innovation, was below both South Africa and Israel for a few years before 2014, but has since grown phenomenally. The Granger causality test results show that only Algeria, Singapore and Indonesia have generated statistically significant unidirectional causality, indicating that registered patents cause new businesses to spring up there. Countries’ residents register for patents when, as a result of their innovation efforts, they come up with new products, and they seek a degree of protection against imitators and unauthorised users.

For the other examined countries, there is no conclusive evidence of causality running in either direction. Hence, one can argue that there is not a direct one-to-one relation between a new patent and a new business in a given country, though countries in different stages of development may have a policy of innovation, entrepreneurship and intellectual property development. After all, with successful innovations, many patents are registered in developed economies, but these are not all commercialised at the same time. Hence, while there is evidence of innovation, this does not necessarily translate into a new firm formation at all times, everywhere (Granstrand, 2018). This does not mean that the more developed economies are suffering from an entrepreneurship deficiency. Powerful companies, such as Microsoft, do not always create new ventures, but hold a well-stocked arsenal of patents, to strengthen their bargaining position in the market, as argued by Bill Gates, to take and exchange intellectual property with other companies (Sichelman & Graham, 2010). Irrespective of their level of development, countries compete with each other to catch up on economic growth and innovativeness through entrepreneurship. In this quest to become innovation-based economies, countries should safeguard their citizens’ innovation and intellectual property with patenting.

Overall, the results are to be treated with caution, because of limited data availability, and the findings may not necessarily apply to all countries. As the results seem different for the developed and developing economies, one should exercise caution in generalising the causality between patents and new business entrepreneurship. However, in the light of possessing constrained datasets, it might be safer to presume that only Singapore provides some conclusive evidence of innovations driving the formation of new businesses in their economy. Commercialisation of innovation requires protection. Hence, accepting the Singaporean case, one can cautiously argue that if more new businesses and entrepreneurship are to emerge in a developing society, and by extension in a developed economy, there is a justification for the government to support R & D investment institutions, as well as to protect the most innovating firms through the patent system.

In some of the mature economies in the developed Western World, there seems to be an uncommon association between innovation and registration of new businesses. This is an understandable phenomenon since these economies have sophisticated infrastructure and collaborations between state, tertiary education and the business sector to generate an extremely high patent output rate. Moreover, there is a gap between patent generation and registration of new businesses because the former is not significantly determined by business cycles, but the latter are likely to be so. Further, the vast majority of the data points in the current study lie post 2007/2008, where European economies experienced a tremendous downturn following the then-financial crisis, with a slow recovery since. Given the maturity status of some economies, such as France and Sweden, one might notice a statistically negative correlation between patents and new business registration. Accordingly, given the time gap, with downturns of business cycle and slow recoveries, one is likely to see a negative relationship in the context of the mentioned dataset.

Overall, this chapter can best be explained by Kalecki’s theory and by empirical evidence of emerging market countries. Kalecki (1971) argued that monopolistic firms are incentivised to innovate, which perhaps explains the experience of mature developed economies where their big corporations innovate for future commercialisation, while emerging market countries tend to innovate to start businesses that may become future MNCs in the long term similar their mature developed counterparts.

5 Conclusion

Innovation and progressive entrepreneurship have become the strategic force that drives enterprise development and economic growth of today’s many successful economies. Successful innovators introduce new products, which they often secure with protective patents, though they may not always set up new ventures. As considerable R&D resources and an adaptive institutional architecture, interfacing with the state, universities, collaborating firms and markets, are necessary for innovation, inventors’ and entrepreneurs’ risk-taking actions should be rewarded in profits, higher sales and new businesses. Their technological and innovative breakthroughs may benefit output, income and employment in certain segments of the society. As the pace of innovation is accelerating, there is a continuous turnover of new and imitating firms from both the developed and developing economies.

Patents and intellectual property should serve to incentivise entrepreneurs and researchers on their novelty path, so that the societal benefits therefrom do not taper away easily. While countries’ rankings in global innovation and competitiveness are changing with competition, China is catching up fast with the more developed economies to become an innovation champion rather than an imitator. Although a positive correlation exits between new business formation and innovation in some countries, the relationship between the patent system and entrepreneurial activity is complex and possibly context-dependent. In certain middle- and high-income countries, such as Singapore and Indonesia, registered patents influence startup behaviour and cause new businesses to be launched, suggesting that entrepreneurship is driven by innovation. Hence, every encouragement should be given to what Keynes called the ‘animal spirits’ of the innovators, though these may be non-linear and unpredictable! For a country to be truly innovative, filing patents and supporting research and development in universities, science and technology centres are necessary but not sufficient measures. A country should also nurture a networked, connected ecosystem that promotes creativity and entrepreneurship and reward individuals who are open-minded and introduce new and better ways of doing things that in turn enhance human life satisfaction and business formations.