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December 05, 2023

Navigating innovation

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The dual edged sword of divergent thinking in entrepreneurship

Exploring diverse ideas is fundamental in entrepreneurship. It not only helps identify new business opportunities and needs but also formulate strategies to tackle them and start your entrepreneurial journey. However, the question remains: does this skill retain its value during the operational phase of a business?

Small enterprises and start-ups often navigate situations demanding swift and adaptive actions, owing to limited financial resources and niche markets. Their innovative responses are heavily reliant on creative skills like ideation. While divergent thinkers, characterized by their ability to generate a plethora of solutions, are presumed efficient in these scenarios, there is a caveat. Occasionally, this thinking style can entangle entrepreneurs in paradoxes and contradictory viewpoints, impeding performance.

Our study, based on extensive survey data from German entrepreneurs, investigates whether divergent thinking has a positive influence on several outcomes related to business survival, growth, and innovation, 40 months after business foundation. In our analysis, we are able to account for several factors that might influence entrepreneurial outcomes, such as entrepreneurs’ personal and intergenerational characteristics, labor market history, personality traits, and cognition, as well as local macroeconomic conditions and business characteristics. Furthermore, we delve into the question of whether the relation of divergent thinking and entrepreneurial outcomes is mediated by the type of previous experience in the field.

Our research unveils significant insights. Divergent thinking, characterized by the generation of varied and abundant solutions, positively correlates with innovation and business growth over an extended period. However, its relationship with business survival, exploratory innovation, and job creation is nonlinear. Specifically, entrepreneurs with limited divergent thinking capabilities face increased business failure risks. In contrast, enhanced divergent thinking proves beneficial. Regarding innovation, the benefits of divergent thinking are unequivocal; increased capacities lead to amplified positive effects. When it comes to job creation, the influence of divergent thinking follows a so called “bell curve” — it’s beneficial up to a point, beyond which the impact plateaus. Interestingly, prior employment experience amplifies the positive effects of divergent thinking on innovation and business expansion, a trend not observed in entrepreneurs with a history of self-employment.

So, how can this information be applied? The insights offer a foundation for developing targeted training programs, refining entrepreneurial skill sets to balance innovative thinking and practical application. For investors, these findings act as a lens to identify and support businesses with robust growth and innovation trajectories. In essence, the art of entrepreneurship lies in mastering the delicate balance of innovative, “outside-the-box” thinking, anchored by experiential wisdom.

© Marco Caliendo and Daniel Rodriguez


Marco Caliendo is Professor of Empirical Economics at University of Potsdam and IZA Research Fellow

Daniel Rodriguez is Research Assistant at the Chair of Empirical Economics at University of Potsdam


Please note:
We recognize that IZA World of Labor articles may prompt discussion and possibly controversy. Opinion pieces, such as the one above, capture ideas and debates concisely, and anchor them with real-world examples. Opinions stated here do not necessarily reflect those of the IZA.

Related IZA World of Labor content:

Start-up subsidies for the unemployed: Opportunities and limitations by Marco Caliendo
Conditions for high-potential female entrepreneurship by Siri A. Terjesen
Financing high-potential entrepreneurship by Ramana Nanda
Entrepreneurs and their impact on jobs and economic growth by Alexander S. Kritikos

Photo by Riccardo Annendale on Unsplash