This publication has been prepared under the leadership of Pier Carlo Padoan (Deputy Secretary- General and Chief Economist, OECD) and the management of Sergio Arzeni (Director, Centre for Entrepreneurship, SMEs and Local Development, OECD), with support from Jonathan Potter (Senior Economist at the Centre) and Mariarosa Lunati (Senior Economist at the Centre, currently responsible for Entrepreneurship Indicators and Business Statistics in the Statistics Directorate, OECD).

The combined forces of globalisation, technological progress and growing market demand have created a new type of innovation: one that is widespread across many agents and sectors and open. New firms, small and medium-sized enterprises (SMEs) and entrepreneurs are key players in this type of innovation. They are key precisely because they are now bringing new ideas to the market. That contribution to the economy is reflected in the rapid growth of some of these firms, the “gazelles” of the enterprise ecoystem. Governments are seeking ways to help them emerge and carry with them innovations that will go toward meeting our economic and social challenges. But for economic growth and adaptation, it is vital to have incremental innovation from the broader bulk of SMEs as well, and this is often lacking.

Innovation is one of the most fundamental processes underpinning economic growth, the driver of growth in output per unit of labour and capital invested, and an important basis for developing solutions to economic and social challenges such as climate change, ageing societies and poverty.

The introduction examines what is new about innovation in the 21st century and the role played by SMEs and entrepreneurship. An important shift has occurred from the “managed” to the “entrepreneurial” economy, associated with a fall in the importance of economies of scale in production, management, finance and R&D. It is characterised by a series of trends encompassing the emergence of the knowledge economy, open innovation, global connections, non-technological innovation, the “Silicon Valley Business Model” and social entrepreneurship and social innovation. SMEs and new business ventures are important players in this new environment. They have a key role in processes of creative destruction, knowledge exploitation, breakthrough and incremental innovation, and interactive learning. Ensuring they reach their full potential requires a new innovation policy approach that facilitates entrepreneurship and SME innovation. Priorities include inserting new and small firms in knowledge transfer networks, strengthening entrepreneurship skills, and improving institutional environments for social entrepreneurship.

Knowledge affects the market entry, market success and innovation potential of a firm. The contribution of knowledge to entrepreneurship is best understood through a systemic approach to innovation, which differs from the linear approach by taking innovation as a process that does not occur solely within corporate boundaries, but instead requires a web of relationships among firms, research organisations and governments. Knowledge flows are the quintessence of an innovation system, strengthening the performance of local SMEs and underpinning the overall efficiency and vitality of the system. A vast empirical literature shows that knowledge spillovers decay with distance and therefore lie behind the process of localised industrial agglomeration in knowledge- and technology-intensive sectors. However, in a time of globalisation, local innovation systems should not be insulated from global sources of knowledge. Cross-border alliances, FDI embedding and attraction of overseas skilled workers are three of the main channels through which global knowledge flows can revitalise local innovation systems.

This chapter describes the role of entrepreneurship skills in driving successful new venture creation and putting innovative initiatives into action in SMEs. Also discussed are the roles of tertiary and school education, vocational training and the use of knowledge-intensive service activities and small business support in the provision of entrepreneurship skills. Policy recommendations are provided.

The chapter outlines social entrepreneurship and social innovation before going on to provide concrete examples. While it may be argued that these fields require better exploration and articulation, that does not mean that their role should be underestimated. They have already proved to be effective tools to meet social challenges and needs and contribute to sustainable development. Policy makers and investors are looking with growing interest at these areas, and have an important role to play in the provision of tailored support to aid their development.