Innovation and the entrepreneurial function

Abstract

At the beginning of the 21. century the Icelandic economy was characterized by openness, highly educated workforce, diverse international connections, and abundant access to foreign capital. Less than ten years later its banking system has collapsed and many of the country‘s largest firms are facing bankruptcy. In this paper we use theories of entrepreneurship put forward by Schumpeter, Kirzner and Baumol to analyze how improved innovation capacity, opening of foreign markets, and privatization connects a prosperous micro-state to the international economy with unforeseen consequences. We ask if the favorable conditions at the beginning of the century can be restored and the evolution of the economy directed to a path that is more favorable for the country. We argue that this is possible by attending to the specialized innovation companies that have survived the crisis and focusing on the development of an innovation-driven economy. Changes to the institutional set-up and avoidance of a factor-driven industry policy are pertinent to such development.