The relationship between innovation and economic development lies in the manner in which innovation can be applied to the economic development of a country. One of the links between innovation and economic development is the fact that innovation creates new entrepreneurial opportunities with the attendant avenues for economic development. The most direct link between innovation and economic development is the leveraging of the knowledge or human capital required for higher incidence of innovation to the benefit of the economy.
An analysis of the connection between innovation and economic development will lead to the conclusion that a country blessed with a significant number of innovators will reflect the benefits from such a wealth through the development of the economy. Innovation requires the application of knowledge toward the creation of opportunities, which may not be apparent to those who lack the same quality of human capital. In this sense, there is a link between innovation and education. Countries with well-developed educational systems usually have a higher number of people with the human capital necessary for high levels of innovation in comparison to those countries that do not. The economic benefit to the country can be seen in the way in which the citizens of the country use their knowledge to develop the economy.
Entrepreneurship is a direct offshoot of innovation due to the fact that most of the new ideas need some sort of business structure to implement them. For instance, an innovative entrepreneur who decides to apply his or her ideas to a business venture will need to hire employees, rent a place of business, and generally make other types of property and human capital investments, including the payment of taxes to the government. Where the idea is a solid one, the business will grow, leading to the establishment of other subsidiaries, partnerships with foreign investors, reduction of unemployment, and other avenues for the development of the economy.
Some countries with fewer natural resources, especially Asia, rely to a large extent on their abundance of human capital as a means to achieving economic development. The innovative spirit of the citizens of such nations can be seen in their achievements in many areas, including science and technology. An application of this innovation combined with entrepreneurial opportunities is a formula that has led to the great economic achievements evident in the perception of such countries as some of the economic powerhouses in the world.