New business creation typically means more innovation, right? Not quite, according to researchers at the Institute for the Study of Labor in Bonn, Germany.
In their paper “To Be Born Is Not Enough: The Key Role of Innovative Startups,” Colombelli, Krafft and Vivarelli deliver sobering news for budding entrepreneurs and local policy-makers. They find that many startups only appear to be innovative and conducive to economic growth. To be sure, business creation, leadership, and innovation are important drivers of growth: renowned Austrian economist Joseph Schumpeter acknowledged the importance of new ventures replacing obsolete incumbents in what he called “creative destruction.” But the researchers, drawing on Schumpeter’s and others’ contributions, added four caveats to the conventional wisdom:
- “Churning,” or a revolving door economy of short-lived companies, is not the same thing as “creative destruction.” Within every industry, entry and exit rates are correlated.
- Every entrepreneur calls him- or herself an innovator, but few really are. Typically, within any industry there are a few true innovators followed by a “cluster of imitators,” some of whom play an important role in diffusing innovation but most of whom passively replicate a once-original idea. And even most innovations are simply novelties, “only slightly better ‘mousetraps.’”
- Starting a business doesn’t make someone a leader. Among business founders, leaders coexist not only with far larger numbers of followers, but also with “necessity entrepreneurs” who start businesses as a way to pivot from unemployment or underemployment.
- Innovation doesn’t always guarantee success. Process innovation translates to longevity more so than product innovation, which is riskier. New products might or might not catch on, regardless of whether they’re brilliant or misunderstood or just not that necessary, but a new and better process is a clear competitive advantage.
The researchers conclude that “only innovative startups (rather than startups in general)” end up transforming their industries and leading to increased productivity and jobs. Furthermore, while innovative products insure early success, product innovators should also develop innovative processes to ensure their businesses’ survival.
Read the full report here.
Contributed by Emily Lever.