Entrepreneurs and innovative organisations: How economic theory can model the process of organisational innovation.

This paper argues for the need for an economic model to explain the pockets of innovation reported within the re-structured UK public sector. Despite the introduction of quasi-markets, devolution of responsibility to provider units and the encouragement of competition, the savings expected by the policy architects have not been forthcoming. Orthodox economic analysis does not provide a sufficient explanation, nor solution to, the increase in transaction and agency costs reported in previous inductive research studies in the sector. The model is derived from a business economics base and Casson's (1991) general model of business leadership, providing an innovation model encompassing three levels of integrated activity: the stakeholder environment, the entrepreneurial leader and the organisational members. A pilot testing of the model within one part of the public sector, education, is described. The evidence allows a number of conclusions. These include support to the proposed theory that entrepreneurial success requires the existence of entrepreneurial leaders who seek to jointly satisfy two conditions: a strategic, firm/environment relationship and an agency relationship. The implications are that those organisations which are aware of this approach will seek to employ leaders to act strategically with respect to their environment and who possess qualities which engender optimum organisational behaviour. Finally, the paper provides an analysis of the entrepreneurial leader as an innovator evidenced by his ability to act strategically and in so doing, reduce both transaction and agency costs. A method of analysis, which if transferred back to the business sector could perhaps provide a greater understanding of the entrepreneurial firm than is currently available from the literature.