The Impact of Financial and Product Market Innovation on the Nature of Entrepreneurship: A Historical Perspective

Abstract

It is well recognized that the nature of entrepreneurial activity varies by context and historical epoch. But are there systematic underlying factors that cause such significant differences in the entrepreneurial opportunity set? This paper presents a conceptualization of entrepreneurship based on the interaction of product market innovation and financial innovation. In line with traditional entrepreneurship theory, it argues that product market innovations create new entrepreneurial opportunities, adding that innovations within the financial system are also a source of entrepreneurial opportunity, potentially as creative, but which do not necessarily align themselves with developments in product markets. Through time, their state of parallel development, or misalignment, sets the context of entrepreneurial activity.

Entrepreneurship is conceptualized in terms of opportunity recognition (whether discovered or created) and mobilization of resources to exploit those opportunities arising from product or financial innovation, and the process of managing any misalignment that evolves between them. These interactions give rise to four cases based on possible permutations of radical innovation. Conceptualized thus, entrepreneurship is necessarily a historical phenomenon, in terms of context and process. The paper considers selected historical cases that illustrate these permutations.

Keywords: Entrepreneurship, innovation, finance, British industrial revolution, management buyouts, credit institutions, lending

JEL Classification: L26, G24, N13, N14, N23, N24, N63, N64, O14, O16, O3