The Effect of Human Capital and Competition on Entrepreneurial Innovation

This study examines how innovation is affected by competition levels and human capital. It expands on previous literature by focussing on early-stage entrepreneurs. The relationship between competition and innovation has been a key issue of discussion in economics and ambiguity exists regarding this relationship both in terms of theoretical reasoning and empirical results (i.e. Arrow’s (1962) positive effect, Schumpeter’s (1934) negative effect and Aghion el al.’s (2005) inverted-u relationship between competition on innovation), whereas the relationship between human capital and innovation has rather explicit results (i.e. a positive effect of human capital on innovation (Dakhli and De Clercq, 2004; Marvel and Lumpkin, 2007)). The results of this paper expand on this discussion. In the analyses, a distinction is made between product and process innovation. The analyses are performed on a sample of 2,432 early-stage entrepreneurs in the United Kingdom between 2003 and 2005. Empirical support is found for positive relations between education and previous business ownership on the product innovativeness of early-stage entrepreneurs. The mark-up – which captures the economic rents on the industry – measures the competition level on industrial level. Support is found for a positive relation on entrepreneurial product innovation, which is in accordance to Arrow’s (1962) replacement effect and Kirzner’s (1997) logical deduction. However, none of these relations are supported concerning entrepreneurial process innovation, which is probably due to the measure itself. Yet, in order to stimulate product innovation among early-stage entrepreneurs, policy makers should focus on increasing competition, enhancing education and allow for easy exit barriers, as individuals can gain business ownership experience.