Description
With this data related to entrepreneurship, innovation and economic growth.
WO R K I N G P A P E R
2 0 1 0 : 0 2
Entrepreneurship, Innovation and
Economic Growth
Past experiences, current knowledge and policy implications
Pontus Braunerhjelm
Working Papers Series from
Swedish Entrepreneurship Forum
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1
INDEX
1 .lnLroducLlon 3
2. LnLrepreneurshlp -ueflnlLlon, measure and orlgln 7
3. LnLrepreneurshlp, opporLunlLles and lnnovaLlon 19
4. LnLrepreneurshlp and growLh 27
3. 1he geography of enLrepreneurshlp, lnnovaLlon and growLh 34
6. lmpllcaLlons for economlc pollcles 39
7. Concluslon 44
wotkloq lopet 2010.02
2
Entrepreneurship, Innovation and
Economic Growth
PAST EXPERI ENCES, CURRENT KNOWLEDGE AND POLI CY I MPLI CATI ONS
1
lebruary 2010
Þontus 8raunerh[e|m
Swedlsh LnLrepreneurshlp lorum and Lhe 8oyal lnsLlLuLe of 1echnology
2
Abstract
Conslderable advances, even breakLhroughs, have been made durlng Lhe lasL decades ln our undersLandlng
of Lhe relaLlonshlp beLween knowledge and growLh on one hand, and enLrepreneurshlp and growLh on Lhe
oLher. Slmllarly, more profound lnslghLs have also been galned as Lo how enLrepreneurshlp, lnnovaLlon and
knowledge are lnLerrelaLed. ?eL, a comprehenslve undersLandlng ls sLlll lacklng concernlng Lhe lnLerface of
all of Lhose varlables: knowledge, lnnovaLlon, enLrepreneurshlp and growLh. 1he llnk beLween Lhe mlcro-
economlc orlgln of growLh and Lhe macro-economlc ouLcome ls sLlll Loo rudlmenLary modeled Lo grasp Lhe
full wldLh of Lhese complex and lnLersecLlng forces. 1he maln ob[ecLlve of Lhls paper ls hence Lo shed llghL
on recenL advances ln our undersLandlng of Lhe forces LhaL underpln Lhe creaLlon of knowledge, lLs dlffuslon
and commerclallzaLlon Lhrough lnnovaLlon, and Lhe role of Lhe enLrepreneur ln Lhe growLh process. 1he
pollcy lmpllcaLlons of recenL research flndlngs conclude Lhls survey. ÞarLlcularly lmporLanL pollcy lmpllcaLlons
refer Lo Lhe deslgn of regulaLlon lnfluenclng knowledge producLlon, ownershlp, enLry barrlers, labor moblllLy
and (lnefflclenL) flnanclal markeLs. 1hey all have lmpllcaLlon for Lhe efflclenL dlffuslon of knowledge Lhrough
enLry. knowledge creaLlon has Lo be maLched by lncenLlves LhaL lnduce mechanlsms Lo converL knowledge
lnLo socleLal and useful needs.
keywords: LnLrepreneurs, knowledge, lnnovaLlon, growLh, pollcy
1
Swedlsh LnLreprenurshlp lorum, Södra kungsLorneL, kungsgaLan 33, 111 36 SLockholm ,
[email protected], and ueparLmenL of 1ransporL and Lconomlcs, 8oyal lnsLlLuLe of 1echnology, 100 44
SLockholm, SWLuLn, [email protected]. 1hls paper parLly draws on Lhe survey ln 8raunerh[elm (2008).
wotkloq lopet 2010.02
3
´1be qteotest Jooqet fot most of os ls oot tbot oot olm ls too blqb ooJ we mlss lt bot tbot lt ls too low
ooJ we teocb lt ´ (Mlchelangelo)
1 .Introduction
Conslderable advances, even breakLhroughs, have undoubLedly been made durlng Lhe lasL decades ln our
undersLandlng of Lhe relaLlonshlp beLween knowledge and growLh on one hand, and enLrepreneurshlp and
growLh on Lhe oLher. Slmllarly, more profound lnslghLs have also been galned as Lo how enLrepreneurshlp,
lnnovaLlon and knowledge are lnLerrelaLed. ?eL, a comprehenslve undersLandlng ls sLlll lacklng concernlng
Lhe lnLerface of all of Lhose varlables: knowledge, lnnovaLlon, enLrepreneurshlp and growLh. 1he knowledge-
lnnovaLlon-enLrepreneurshlp-growLh nexus ls lnLrlcaLe and lnfluenced by forces LhaL are llkely Lo
slmulLaneously affecL all varlables, aL leasL parLlally, whlle oLhers can be expecLed Lo have a unldlrecLlonal
lmpacL or affecL only a few of Lhese varlables. 1he llnk beLween Lhe mlcro-economlc orlgln of growLh and Lhe
macro-economlc ouLcome ls sLlll Loo rudlmenLary modelled Lo grasp Lhe full wldLh of Lhese complex and
lnLersecLlng forces.
CrowLh can baslcally be aLLrlbuLed Lhe followlng fundamenLal forces: an lncrease ln facLors of producLlon,
lmprovemenLs ln Lhe efflclency of allocaLlon across economlc acLlvlLles, knowledge and Lhe raLe of
lnnovaLlon. Clven full employmenL and efflclenL allocaLlon, growLh ls Lhus drlven by knowledge accumulaLlon
and lnnovaLlon. 1he process of lnnovaLlon ls Lyplcally modeled as a funcLlon of Lhe lncenLlve sLrucLure, l.e.
lnsLlLuLlons, assumed access Lo exlsLlng knowledge, and a more sysLemlc parL. lnnovaLlon also lmplles LhaL
Lhe sLock of (economlcally) useful knowledge lncreases. ln oLher words, lnnovaLlon ls one vehlcle LhaL
dlffuses and upgrades already exlsLlng knowledge, Lhereby servlng as a condulL for reallzlng knowledge
splllovers. 1he process of lnnovaLlon ls consequenLly consldered Lo be one of Lhe crlLlcal lssues ln
comprehendlng growLh.
lrrespecLlve of Lhe advances made ln Lhls veln of economlcs, a number of baslc quesLlons relaLed Lo Lhe
dynamlcs of Lhe growLh process, and Lhe ensulng normaLlve concluslons, are only fragmenLally undersLood
and [usL parLlally explored. Lven qulLe baslc lssues, as Lhe deflnlLlon of Lhe concepL lnnovaLlon are clearly noL
seLLled, noL Lo menLlon how Lhey come abouL and by whom, l.e. Lhe connecLlon Lo enLrepreneurlal acLlvlLles.
Moreover, ln preclsely whaL way does lnnovaLlon conLrlbuLe Lo new knowledge (Lhrough sclenLlflc/Lechnlcal
dlscoverles or Lhrough a much broader vlew on lnnovaLlon?) and whlch knowledge bases and cognlLlve
ablllLles are crlLlcally lmporLanL for lnnovaLlon Lo Lake place? LxacLly how does lnnovaLlon subsLanLlaLe lnLo
growLh and how are Lhe effecLs spaLlally dlffused? And whlch pollcy measures should be Laken ln order Lo
boosL Lhe probablllLy of susLalned knowledge based growLh? 1hose are Lhe quesLlons LhaL wlll be focussed
on ln Lhls paper Lhrough a selecLed survey of Lhe llLeraLure.
1he lack of deLalled lnslghL lnLo Lhese lssues lmplles LhaL our knowledge concernlng Lhe mlcroeconomlc
foundaLlons of growLh ls aL besL parLlal, buL could poLenLlally also be qulLe flawed. WlLhouL accuraLe
mlcroeconomlc speclflcaLlon of Lhe growLh model Lhere ls also an obvlous rlsk LhaL Lhe derlved pollcy
lmpllcaLlons are lncorrecL. 1he reclpes for growLh are llkely Lo be lnconslsLenL over Llme and also vary over
dlfferenL sLages of economlc developmenL. 1oday's developlng counLrles may learn from pollcles prevlously
wotkloq lopet 2010.02
4
pursued by Lhe developed counLrles, whlle developed counLrles Lhemselves confronL a more dlfflculL Lask ln
carvlng ouL growLh pollcles for Lhe fuLure. Pence, Lhe relaLlonshlp beLween Lhe level of developmenL,
enLrepreneurshlp, lnnovaLlon and growLh wlll also be consldered.
8ockqtoooJ
uesplLe Lhe enhanced undersLandlng of Lhe bulldlng blocks of dynamlc processes, economlcs-based Lheorles
and models largely fall shorL of addresslng Lhe lnfluence of Lhe lndependenL lnnovaLor or enLrepreneur Lo
lmporLanL economlc ouLcomes. 1he accumulaLlon of facLors of producLlon, l.e., knowledge, human and/or
physlcal caplLal, cannoL alone explaln economlc developmenL. lnnovaLlon and enLrepreneurshlp are needed
Lo Lransform Lhese lnpuLs ln proflLable ways, an lnslghL forwarded already by Adam SmlLh (Andersson and
1olllson 1982).
AL Lhe same Llme Lhere seem Lo be preconcelved percepLlons aL pollcy level concernlng Lhe effecLs of
acLlvlLles by enLrepreneurs and enLrepreneurlal flrms. lor lnsLance, lL ls more or less Laken for granLed LhaL
seLLlng up a new company, or Lhe performance of new venLures, auLomaLlcally LranslaLe lnLo socleLal
beneflLs. Powever, Lhls ls an overslmpllflcaLlon, enLrepreneurshlp may under cerLaln condlLlons reduce
raLher Lhan enhance economlc progress. 1hls would be Lhe case for lllegal enLerprlslng, buL also when
enLrepreneurlal LalenL ls spenL on renL seeklng acLlvlLles such as llLlgaLlon, or whenever Lhe Coaslan
LransacLlon cosLs argumenLs for lnLernallzlng economlc acLlvlLles are vlolaLed Lhrough pollcy lnduced
lncenLlves. ln oLher words, lL ls fully concelvable for successful new enLerprlse aL Lhe mlcro level Lo LranslaLe
lnLo economlc regress aL Lhe socleLal level and for a falled enLrepreneurshlp aL Lhe mlcro level Lo conLrlbuLe
Lo economlc developmenL. 1he socleLal lmpllcaLlons of Lhe acLlons of lndlvldual enLrepreneurs, l.e. how LhaL
LranslaLes lnLo growLh and prosperlLy, ls Lhus noL fully consldered.
ln connecLlng knowledge, lnnovaLlon and enLrepreneurshlp, lL ls essenLlal Lo emphaslze Lhe non-rouLlne
processes LhaL are consplcuous phenomena of Lhe dynamlcs of economlc developmenL. knowledge drlvlng
lnnovaLlon ls frequenLly LhoughL of as a llnear process, belng an ouLcome of acLlvlLles labeled 8&u.
Cbvlously a seL of oLher processes, such as learnlng-by dolng, cognlLlve ablllLles, neLworklng, comblnaLorlal
lnslghLs, eLc., also fuse socleLal knowledge. uncerLalnLy, search and experlmenLs are cruclal parLs of Lhe
lnnovaLlve process. 1he knowledge generaLlng acLlvlLles of enLrepreneurs and small flrms have been shown
Lo be spread across a number of dlfferenL funcLlonal areas. ulsregardlng Lhese aspecLs means LhaL several
sLudles neglecL a subsLanLlal share of Lhe knowledge creaLlon relevanL Lo lnnovaLlon and economlc growLh.
ConsequenLly, desplLe maklng small lnvesLmenLs ln 8&u and oLher formal knowledge generaLlng acLlvlLles,
enLrepreneurs and small flrms may sLlll subsLanLlally conLrlbuLe Lo aggregaLe lnnovaLlon, Lhanks Lo Lhelr
enLrepreneurlal ablllLles. SLlll, Lhere ls no guaranLee LhaL new knowledge wlLh commerclal poLenLlal ls
lmmedlaLely Lransformed lnLo enLrepreneurlal lnlLlaLlves, Lhese effecLs could fall Lo show up aL all, or appear
wlLh a Llme lag.
8ecause enLrepreneurshlp enLalls Lhe acLlons and acLlvlLles of lndlvlduals worklng wlLhln flrms or for
Lhemselves, lncenLlves LhaL encourage Lhe rlsky endeavor of enLrepreneurlal acLlvlLy seems essenLlal, as ls
Lhe lnfrasLrucLure allowlng Lhe Lransfer of knowledge from knowledge generaLlng acLors Lo knowledge
explolLlng enLrepreneurs. ln addlLlon, flrms and enLrepreneurs have Lo develop sLraLegles Lo balance slow
knowledge developmenL processes wlLh fleeLlng wlndows of opporLunlLy and flnd ways of speedlng up
wotkloq lopet 2010.02
3
knowledge generaLlon and explolLaLlon. Pere Lhe flnanclal sysLem, by evaluaLlng prospecLlve enLrepreneurs,
moblllzlng and channellng savlngs Lo flnance Lhe mosL producLlvlLy-enhanclng acLlvlLles, dlverslfylng rlsks,
eLc., play a vlLal role. 1hus, Lhe deslgn of flnanclal sysLems lnfluences growLh by lncreaslng Lhe probablllLles
of successful lnnovaLlon (klng and Levlne 1993). 1he quesLlon ls how LhaL ls accounLed for ln sLandard
knowledge drlven growLh models.
1he vlew LhaL enLrepreneurshlp could play an lmporLanL role ln a knowledge-based economy seems Lo
conLrasL much of Lhe convenLlonal wlsdom. Accordlng Lo for lnsLance CallbralLh (1967), Wllllamson (1968)
and Chandler (1977), lL seemed lnevlLable LhaL explolLaLlon of economles of scale by large corporaLlons
would become Lhe maln englne of lnnovaLlon and Lechnlcal change. 8uL also Lhe ºlaLe" !oseph SchumpeLer
(1942) shared Lhese vlews, albelL wlLh conslderably more skepLlclsm abouL Lhe beneflclal ouLcome Lhan hls
colleagues. 8aLher, SchumpeLer feared LhaL Lhe replacemenL of small and medlum slzed enLerprlse by large
flrms would negaLlvely lnfluence enLrepreneurlal values, lnnovaLlon and Lechnologlcal change. uesplLe Lhese
early prophecles of promlnenL scholar, Lhere ls ample emplrlcal evldence LhaL Lhe developmenL has acLually
reversed slnce Lhe early 1970s for mosL lndusLrlallzed counLrles. 1he Llde has Lurned, Lhe rlsk prone
enLrepreneur has experlenced a vlrLual renalssance and ls lncreaslngly seen as lndlspensable Lo economlc
developmenL.
1heoreLlcal advances and emplrlcal research seem Lo supporL Lhe vlew LhaL knowledge generaLlon,
lnnovaLlon and enLrepreneurshlp processes are locallzed processes. lrrespecLlve of knowledge flows largely
belng bounded ln space, lL ls however also posslble Lo observe how knowledge, lnnovaLlons and
enLrepreneurlal lnlLlaLlves flow beLween funcLlonal urban reglons and even counLrles. 1hus, even Lhough
reglons are characLerlzed by Lhelr varylng lnLernal economlc and lnfrasLrucLure neLworks, Lhey are also
connecLed by a mulLlLude of such neLworks. lL ls obvlous LhaL Lhere ls an lmporLanL lnLerplay beLween
locallzed processes of knowledge generaLlon, lnnovaLlon and enLrepreneurshlp, buL currenL lnslghLs are
baslcally lacklng concernlng Lhe relaLlve lmporLance of lnLerreglonal and lnLernaLlonal neLworks. An
lncreaslngly global knowledge base serve Lo enhance and dlverslfy Lhe local knowledge base, l.e. whaL has
been colned ºlocal buzz and global plpellnes".
ln Lerms of pollcy, lL ls a well-esLabllshed resulL LhaL markeL economles normally do noL generaLe a soclally
opLlmal volume of knowledge creaLlon, lnnovaLlon and enLrepreneurshlp. Powever, Lhere ls no consensus
concernlng whaL lnsLlLuLlonal frameworks and pollcy measures LhaL mlghL generaLe such a soclal opLlmum
glven Lhe lmperfecLlons of boLh Lhe economlc and Lhe pollLlcal markeLs. 1hls has noL sLopped pollcy-makers
from launchlng a large number of lnsLlLuLlonal changes and pollcy measures Lo sLlmulaLe knowledge
creaLlon, lnnovaLlon and enLrepreneurshlp. neverLheless, Lhe number of carefully carrled Lhrough pollcy
evaluaLlons ls raLher llmlLed, whlch lmplles LhaL Lhere ls a huge knowledge gap concernlng whlch pollcles
acLually work and wheLher Lhey are worLh Lhelr cosLs.
1he maln ob[ecLlve of Lhls paper ls hence Lo shed llghL on recenL advances ln our undersLandlng of Lhe forces
LhaL underpln Lhe creaLlon of knowledge, lLs dlffuslon and commerclallzaLlon Lhrough lnnovaLlon, and Lhe
role of Lhe enLrepreneur ln Lhe growLh process. 1he followlng secLlon 2 dlscusses Lhe deflnlLlon, orlgln and
measuremenL of enLrepreneurshlp, and how lL relaLes Lo knowledge producLlon, whlle secLlon 3 ls devoLed
Lo lnnovaLlon and Lhe lnnovaLlon process. SecLlon 4 presenLs how Lhese componenLs have been lnLegraLed
lnLo a growLh conLexL, and dlscusses Lhe weak llnks ln currenL models of growLh. ln Lhe subsequenL secLlon 3
wotkloq lopet 2010.02
6
Lhe reglonal aspecLs of enLrepreneurshlp, knowledge exLracLlon and growLh are hlghllghLed. 1he paper ls
concluded by a pollcy dlscusslon (secLlon 6), and a summary of Lhe maln flndlngs, LogeLher wlLh suggesLlons
for fuLure research (secLlon 7).
wotkloq lopet 2010.02
7
2. Entrepreneurship –Definition, measure and origin
Why do lndlvlduals engage ln enLrepreneurlal venLures wlLh uncerLaln and rlsky ouLcomes?
1he earller enLrepreneurshlp llLeraLure suggesLs a pleLhora of dlfferenL reasons as Lo why lndlvlduals become
enLrepreneurs, albelL lnsLlLuLlons are always aL Lhe hearL of Lhe maLLer when Lhe exLenL of enLrepreneurlal
acLlvlLles ls explalned. 1he alleged explanaLlons of enLrepreneurshlp comprlse a mlx of clear-cuL economlc
explanaLlons, speclflc aLLrlbuLes LhaL are clalmed Lo characLerlze enLrepreneurs, as well as forces relaLed Lo
culLure and paLh-dependency. SomeLlmes Lhey are classlfled accordlng Lo Lhe level of aggregaLlon, sLarLlng aL
Lhe macro-level and worklng Lhelr way down Lo lndusLry-relaLed facLors, mlcro-economlc lncenLlve
sLrucLures and cognlLlve ablllLles of lndlvlduals. AlLernaLlvely, slmllar forces Lrlggerlng enLrepreneurshlp ls
presenLed ln a supply and demand Laxonomy. ln Lhls secLlon l wlll brlefly survey Lhe mosL frequenL
explanaLlons Lo enLrepreneurlal acLlvlLles, zerolng ln aL Lhe emplrlcal flndlngs concernlng Lhe role of
lnsLlLuLlons and access Lo knowledge. 1he ldlosyncrasles perLalnlng Lo Lhe deflnlLlon and producLlon of
knowledge are llkewlse addressed.
1
1he Austr|an her|tage
WlLhln Lhe lasL decades we have wlLnessed an AusLrlan renalssance ln economlcs - puLLlng Lhe enLrepreneur,
sLrucLural change and creaLlve desLrucLlon ln Lhe forefronL - boLh from an academlc polnL of vlew as well as
ln pollcymaklng. MosL conLemporary Lheorles of enLrepreneurshlp, and Lhe lmpllcaLlons of
enLrepreneurshlp, Lhus bulld on Lhe semlnal conLrlbuLlons by parLlcularly SchumpeLer (1911/1934). Pe
sLressed Lhe lmporLance of lnnovaLlve enLrepreneurs as Lhe maln vehlcle Lo move an economy forward from
sLaLlc equlllbrlum, based on Lhe comblnaLorlal capablllLles of enLrepreneurlal lndlvlduals.
2
ln hls own words:
ºWhaLever Lhe Lype, everyone ls an enLrepreneur only when he acLually carrles ouL new comblnaLlons and
loses LhaL characLer as soon as he has bullL up hls buslness, when he seLLles down Lo runnlng lL as oLher
people run Lhelr buslness" (SchumpeLer 1911/1934, p78).
ºAnd whaL have Lhey done: Lhey have noL accumulaLed any klnd of goods, Lhey have creaLed no orlglnal
means of producLlon, buL have employed means of producLlon dlfferenLly, more advanLageously. 1hey have
carrled ouL new comblnaLlons! 1hey are Lhe enLrepreneurs. And Lhelr proflL, Lhe surplus Lo whlch no llablllLy
corresponds, ls Lhe enLrepreneurlal proflL." (SchumpeLer 1911/1934, p. 132).
SchumpeLer vlewed Lhe creaLlon of Lechnologlcal opporLunlLy as belng baslcally ouLslde Lhe domaln of Lhe
enLrepreneur. 8aLher, Lhe ldenLlflcaLlon and explolLaLlon of such opporLunlLles ls whaL dlsLlngulshes
1
1he followlng secLlon lncludes a brlef and parLlal presenLaLlon of some of Lhe mosL lnfluenLlal LhoughLs as regards enLrepreneurs.
lor a more Lhorough survey, see SexLon and LandsLröm (2000), Acs and AudresLch (2003) and 8raunerh[elm (2008).
2
Clsson (2000) and Clsson and lrey (2002) presenLs a LheoreLlcal model of enLrepreneurs as underLakers of new comblnaLlons of
ldeas.
wotkloq lopet 2010.02
8
enLrepreneurs, l.e. lnnovaLlon. Also ln Lhls respecL SchumpeLer's orlglnal LhoughLs on enLrepreneurlal
opporLunlLy has had a conslderable lnfluence on Lhe succeedlng generaLlon of enLrepreneurshlp researchers.
nor dld SchumpeLer vlew enLrepreneurs as rlsk-Lakers, even Lhough he dld noL compleLely dlsmlss Lhe ldea,
and was aware LhaL lnnovaLlon conLalns elemenLs of rlsk also for Lhe enLrepreneur. 8uL baslcally LhaL Lask
was aLLrlbuLed Lhe caplLallsLs who flnanced enLrepreneurlal venLures.
A decade laLer, knlghL (1921) proposed Lhe role of Lhe enLrepreneur as someone who Lransforms
uncerLalnLy lnLo a calculable rlsk. SchumpeLer's model was Lhereby complemenLed by Lhe expllclL
lnLroducLlon of cognlLlve ablllLles as an explanaLlon of enLrepreneurlal acLlvlLy. SomewhaL laLer, Lhe
deflnlLlon of Lhe enLrepreneur as someone who moved Lhe economy Lowards equlllbrlum (parLly conLrasLlng
SchumpeLer), by Laklng advanLage of arblLrage posslblllLles, was forwarded by klrzner's (1973, 1996, 1997).
1he AusLrlan herlLage can be Lraced even furLher back. Menger (1871) sLressed Lhe uncerLalnLles and
sub[ecLlvlLles LhaL he clalmed musL be lnherenL phenomena ln economles characLerlzed by exLenslvely
dlsLrlbuLed and fragmenLed economlc acLlvlLles.
1
1hese ldeas were furLher elaboraLed by von Payek (1943).
1hus, Lhere seems Lo be a raLher clear connecLlon beLween Menger's vlew on Lhe sub[ecLlve economy, von
Payek's ldeas abouL Lhe dlsLrlbuLlon of knowledge, and klrzner's arblLraglng enLrepreneur, whlch ln Lurn
baslcally llnks well wlLh SchumpeLer's deflnlLlon of Lhe enLrepreneur's lnnovaLlve capaclLy, lncludlng Lhe
deLecLlon of new markeLs.
2
More recenLly, Lhe research fleld of enLrepreneurshlp has been deflned as analyses of ºhow, by whom and
wlLh whaL consequences opporLunlLles Lo produce fuLure goods and servlces are dlscovered, evaluaLed and
explolLed" (Shane and venkaLaraman 2000). As regards by ºwhom", an eclecLlc deflnlLlon of Lhe
enLrepreneur, LhaL has become lncreaslngly accepLed, ls suggesLed by Wennekers and 1hurlk (1999). 1he
enLrepreneur: l) ls lnnovaLlve, l.e. percelves and creaLes new opporLunlLles, ll) operaLes under uncerLalnLy
and lnLroduces producLs Lo Lhe markeL, decldes on locaLlon, and Lhe form and use of resources, and lll)
manages hls buslness and compeLes wlLh oLhers for a share of Lhe markeL. ApparenLly, Lhls deflnlLlon can be
llnked Lo all Lhree conLrlbuLlons referred Lo above. noLe LhaL lnvenLlon ls noL expllclLly menLloned (albelL
creaLlon of opporLunlLy ls) ln Lhls deflnlLlon, nor excluded from Lhe lnLerpreLaLlon of enLrepreneurshlp. A
summary of dlfferenL deflnlLlons of enLrepreneurs over Llme ls presenLed ln 1able 1.
1
Menger dld however noL deflne or lnclude Lhe enLrepreneur ln hls work. von Mlses (1949) dld, Lhough much laLer, deflne
enLrepreneurs ln Lerms of unevenly dlsLrlbuLed LalenL.
2
SchumpeLer deflned flve dlfferenL Lypes of lnnovaLlon: Lhe recognlLlon of a new good/quallLy, a new meLhod/process, a new
markeL, a new source of supply or a new way of organlzlng Lhe flrm/producLlon.
wotkloq lopet 2010.02
9
1ab|e 1. Some def|n|t|ons and character|st|cs of entrepreneursh|p, 17SS to 2001.
1
8. CanLlllon (1733) - LnLrepreneurs ls deflned as self-employed
- Self-employed deals wlLh addlLlonal uncerLalnLy
-LnLrepreneurs should balance Lhelr acLlvlLles Lo markeL demand
!.8. Say (1803) - LnLrepreneurs shlfLs economlc resources from low Lo hlgh
producLlvlLy areas wlLh hlgher yleld
- LnLrepreneurshlp lmplles many obsLacles and uncerLalnLles
A.Marshall (1890) - LnLrepreneurs and managers have dlfferenL buL complemenLlng
characLerlsLlcs
!. SchumpeLer (1911) - LnLrepreneurshlp are Lhe maln vehlcle Lo move an
economy forward from sLaLlc equlllbrlum, based on Lhe
comblnaLorlal capablllLles of enLrepreneurlal lndlvlduals
- ComblnaLorlal capablllLles resulLs ln recognlLlon of a new
good/quallLy, a new meLhod/process, a new markeL, a new source of
supply or a new way of organlzlng Lhe flrm/producLlon
- LnLrepreneurs' role ls dlsLlncLly separaLed from Lhe role of
lnvenLors
l. knlghL (1921) - LnLrepreneurs are a speclal soclal class who dlrecL economlc
acLlvlLy
- uncerLalnLy ls Lhe prlmary aspecL of enLrepreneurshlp
L. Þenrose (1930) - LnLrepreneurlal and managerlal ablllLles should be dlsLlngulshed
- ueLecLlng and explolLlng opporLunlLles for smaller flrms ls Lhe baslc
aspecL of enLrepreneurshlp
P. LlebensLeln (1968) - LnLrepreneurlal acLlvlLy malnly lmplles decreaslng organlzaLlonal
lnefflclencles and reverslng organlzaLlonal enLropy
- 1here are Lwo Lypes of enLrepreneurs: a managerlal who allocaLes
lnpuLs lnLo Lhe producLlon process ln an effecLlve manner, and a
1
Table 1 partly builds on Salgado-Banda (2005).
wotkloq lopet 2010.02
10
SchumpeLerlan who fllls obserbed markeL gaps by lnLroduclng new
producLs or processes
l.klrzner (1973, 1997) - LnLrepreneurlal acLlvlLy moves Lhe markeL Lowards equlllbrlum as
enLrepreneurs dlscover proflLable arblLrage posslblllLles.
M. Casson (1982) - LnLrepreneurs speclallze ln Laklng [udgmenLal declslons abouL Lhe
coordlnaLlon of scarce resources
W. CarLner (1983), P. Aldrlch
and C. Zlmmer (1986)
- LnLrepreneurshlp ls Lhe ouLcome of acLlons of lndlvlduals LhaL acL
ln and are lnfluenced by Lhe organlzaLlonal and reglonal
envlronmenL ln whlch Lhey llve and work.
W. 8aumol (1990) - LnLrepreneurlal acLlvlLy cruclal for (radlcal) lnnovaLlon and growLh.
- lnsLlLuLlons declde Lhe allocaLlon of enLrepreneurlal acLlvlLy
beLween producLlve (lnnovaLlon) and unproducLlve acLlvlLles (renL
seeklng, organlzed crlme, eLc.).
8. Polcombe (1998) - LnLrepreneurs promoLe a more producLlve economy due Lo more
efflclenL and lnnovaLlve ways of producLlon, lL ls Lhe foundaLlon for
economlc growLh
CLCu (1998) - LnLrepreneurs represenLs Lhe ablllLy Lo marshal resources Lo selze
new buslness opporLunlLles, deflned broadly Lhey are cenLral Lo
economlc growLh
S. Wennekers and 8. 1hurlk
(1999)
- LnLrepreneurs have mulLl-Lask ablllLles.
- LnLrepreneurs percelve and creaLes new opporLunlLles, operaLe
under uncerLalnLy and lnLroduce producLs Lo Lhe markeL, declde on
locaLlon and Lhe form and use of resources, and, flnally manage Lhelr
buslness and compeLe wlLh oLhers for a share of Lhe markeL.
P. Aldrlch and M.MarLlnez
(2001)
- LnLrepreneurlal acLlvlLy noL necessarlly synonoumos wlLh
lnnovaLlon slnce enLrepreneurlal acLlvlLles also lnvolve lmlLaLlon.
- SupporL Lhe dlsLlncLlon beLween lnnovaLlon and reproducLlon ln
enLrepreneurlal acLlvlLles.
wotkloq lopet 2010.02
11
Mooy exploootloos bot few tbeotles
1he above brlef and, of course, lncompleLe presenLaLlon Lheorlze and descrlbe Lhe percelved characLerlsLlcs
belleved belng possessed by Lhe enLrepreneur. Lven Lhough explanaLlons as Lo why enLrepreneurlal
acLlvlLles are embarked upon can be lnferred from Lhose enLrepreneurlal characLerlsLlcs, Lhls ls far from
presenLlng a rlgorous LheoreLlcal model of enLrepreneurshlp. 1here exlsLs, few, lf any compelllng LheoreLlcal
model of enLrepreneurlal behavlor, whlch sLems from Lhe heLerogenelLy and sLochasLlc elemenLs LhaL seems
Lo be an undlspuLable parL of enLrepreneurshlp. 1he closesL conLemporary aLLempL Lo model on
enLrepreneurshlp ls probably Lhe occupaLlonal cholce models (Lvans and LelghLon 1989, 8aner[ee and
newman 1993, van Þraag and Cramer 2001). SLlll, Lhe dlsLlncLlon beLween Lhese and oLher models of proflL
maxlmlzlng agenLs based on perfecL lnformaLlon ls Lhln. lnsLead enLrepreneurshlp models are based on
processes drlven by sLochasLlcally dlsLrlbuLed ablllLles and learnlng capaclLles.
1
lor lnsLance, ln !ovanovlc's (1982) model new flrms, or enLrepreneurs, face cosLs LhaL are noL only random
buL also dlffer across heLerogeneous flrms. A cenLral feaLure of Lhe model ls LhaL new flrms do noL know
Lhelr cosL funcLlons, LhaL ls, Lhelr relaLlve efflclency, whlch ls dlscovered Lhrough Lhe process of learnlng from
lLs acLual posL-enLry performance once Lhe buslness ls esLabllshed. Pence, enLry per se ls noL lmporLanL and
dynamlcs ls characLerlzed by a nolsy selecLlon process where performance ls parLly exogenous. !ovanlc and
Lach (1989), presenL a modlfled verslon of Lhe 1982 model whlch also bullds on learnlng by dolng, and
generaLes a S-shaped dlffuslon paLLern of lnnovaLlon (and enLry) over Llme.
nelLher of Lhese approaches ls parLlcularly saLlsfacLory and wheLher Lhey can offer lnslghLs more valuable
Lhan an eclecLlc approach based on emplrlcal observaLlons ls quesLlonable. We Lherefore resLrlcL Lhe
remalnlng presenLaLlon Lo an overvlew of Lhe mosL common emplrlcal regularlLles as Lo why
enLrepreneurshlp occurs.
Lmp|r|ca| exp|anat|ons of entrepreneursh|p
Accordlng Lo Lhe llLeraLure Lhe fundamenLal source of economlc developmenL, dynamlsm and changes can
be ascrlbed Lhe lnsLlLuLlonal seLLlng ln whlch agenLs operaLe. Lven Lhough needs may drlve lndlvldual
acLlons, Lhe way Lhose needs are fulfllled and Lhe efflclency ln accompllshlng Lhem, depends on lnsLlLuLlons.
Pence, aL an overarchlng level, Lhe exLenL and Lype of enLrepreneurshlp can always be aLLrlbuLed
lnsLlLuLlons, formal and lnformal (de SoLo 1989, 2000, 8aumol 1990, norLh 1990, 1994, Penrekson 2003).
2
lnsLlLuLlons also appear aL all levels of economlc acLlvlLles: Lhe macroeconomlc framework, lndusLrlal
pollcles, knowledge creaLlon, aLLlLudes and lndlvldual lncenLlves.
ln Lhe followlng we wlll classlfy Lhe emplrlcal explanaLlons Lo enLrepreneurshlp on Lhe dlfferenL facLors and
levels of aggregaLlons LhaL have been presenLed ln Lhe llLeraLure. 1hese wlll also be brlefly relaLed Lo oLher
1
See Shane (2003)
2
8aumol (1990) emphaslze Lhe role of lnsLlLuLlons for Lhe allocaLlon beLween producLlve (lnnovaLlon) and unproducLlve acLlvlLles
(renL seeklng, organlzed crlme, eLc).
wotkloq lopet 2010.02
12
conLexLual concepLs, such as push and pull facLors, and Lhe demand and supply of enLrepreneurs. 1he
secLlon ls concluded wlLh some observaLlon as regards Lhe deflnlLlon, role and producLlon of knowledge.
Powever, before excavaLlng lnLo Lhe observed emplrlcal regularlLles ln explalnlng enLrepreneurshlp, Lhe
measuremenL problems relaLed Lo enLrepreneurshlp wlll be consldered.
Meosotloq eottepteoeotsblp
8aLher Lhan belng synonymous wlLh sLarLlng a new venLure, enLrepreneurshlp refers Lo a seL of ablllLles
embodled wlLhln an lndlvldual. AdequaLely capLurlng such ablllLles ln daLa LhaL are comparable over
lndlvlduals, noL Lo menLlon comparlsons across reglons or naLlons are slmply noL posslble. 1hus, Lhe
measures of enLrepreneurshlp wlll always be parLly erroneous and sub[ecL Lo crlLlclsm slnce emplrlcal sLudles
have Lo rely on proxles whlch (hopefully) are correlaLed wlLh enLrepreneurshlp.
A conslderable share of sLudles on enLrepreneurshlp relles on self-employmenL daLa. Cne obvlous reason ls
LhaL Lhose were slmply avallable for a large number of reglons and counLrles (Lvans and LelghLon 1989,
8lanchflower and Cswald 1998, Ceorgells eL al 2000, CLCu 2000, AudreLsch and 1hurlk 2001, 8lanchflower
eL al 2001, 8ruce and PolLz-Lakln 2001, lonseca eL al 2001). ?eL, as noLed by 8lanchlower (2000) and Larle
and Sakova (2000), self-employed conslsLs of a very heLerogeneous group more or less lnvolved ln
producLlve enLrepreneurlal acLlvlLles, lL could [usL as well represenL employmenL push facLors.
AlLernaLlve buL relaLed measures of enLrepreneurshlp are Lhe number of esLabllshmenLs (8eck and Levlne
2001), denslLy of flrms (klapper eL al 2008), or buslness ownershlp (Carre, van SLel and 1hurlk 2002). As
polnLed ouL above, self-employed less llkely Lo capLure producLlve enLrepreneurshlp, lL could [usL as well
represenL enLrepreneurlal pull as unemploymenL push. neL blrLh raLe (enLry less exlLs) has also been
suggesLed as an lndlcaLor of enLrepreneurshlp, ln addlLlon Lo Lraclng sLrucLural lndusLrlal changes (ue[ardln
2008). llrm demography ls however qulLe dlfferenL beLween lndusLrles lmplylng LhaL secLorally ad[usLed
lndlcaLors are needed Lo capLure sLrucLural changes uslng neL blrLh raLes (Ceroskl 1993, Caves 1998). 8uL
also Lurbulence (enLry plus exlLs) have been advocaLed as an approxlmaLlon of enLrepreneurshlp (lrlLsch
1996).
A relaLlvely new seL of daLa has been complled by Lhe Clobal LnLrepreneurshlp MonlLor (CLM). 1hese daLa
are based on quesLlonnalres deslgned Lo capLure boLh poLenLlal enLrepreneurs and oLher respondenLs. 1he
daLa also conLaln addlLlonal lnformaLlon, such as moLlves for embarklng on enLrepreneurlal acLlvlLy, eLc.
Comparlson wlLh oLher daLaseLs, for lnsLance Lhose collecLed by LurosLaL (llash LurobaromeLer) and Lhe
World 8ank, reveal a hlgh degree of correlaLlon (8eynolds eL al 2003). 1haL Lhey caLch abouL Lhe same
phenomena does noL however mean LhaL Lhey are good lndlcaLors of enLrepreneurlal acLlvlLy.
LnLrepreneurshlp ls ofLen caLegorlzed as opporLunlLy- or necesslLy-based venLures. 1he former represenLs a
proflLable opporLunlLy as percelved by an lndlvldual, whlle Lhe laLLer ls assoclaLed wlLh enLrepreneurshlp as a
lasL resorL, l.e., due Lo lmposslblllLy of flndlng oLher sources of lncome. 1he dlsLlncLlon beLween opporLunlLy
wotkloq lopet 2010.02
13
and necesslLy based enLrepreneurs could also be lnLerpreLed as Lhe separaLlon beLween self-employed and
hlgh-growLh enLrepreneurshlp (Claeser and kerr 2009).
1
Mocto-level exploootloos of eottepteoeotsblp
1he mosL commonly deflned deLermlnanLs of enLrepreneurshlp aL Lhe macro-level ln Lhe llLeraLure are Lhe
level and growLh of CuÞ, LogeLher wlLh (un)employmenL, lnvesLmenLs, cosL levels, lnflaLlon and Lhe lnLeresL
raLe level (Plghfleld and Smlley 1987, 8osma eL al 2003, Wang 2006). Also facLors llke governmenL spendlng
on educaLlon, lnfrasLrucLure and healLh seem Lo be poslLlvely correlaLed wlLh sLarLups (8eynolds and SLorey
1993).
Some of Lhese facLors relaLe Lo Lhe buslness cycle - l.e. Lhere may be a cycllcal componenL ln
enLrepreneurshlp acLlvlLy - whlle oLher, albelL less explalned, can be assoclaLed wlLh long waves lnfluenclng
economlc acLlvlLy, lnnovaLlon and enLrepreneurshlp (SchumpeLer 1939).
2
See also lrlLsch (1996) who shows
LhaL enLry and exlL varles durlng Lhe producL cycle, l.e. lL ls parLlcularly hlgh ln Lhe earller sLages.
keqloos, loJostty ooJ fltm level foctots
Cne sLrand of enLrepreneurlal economlcs looks aL how dlfferences ln reglonal characLerlsLlcs and
precondlLlons lnfluence enLrepreneurshlp. Low LransporLaLlon cosLs, concenLraLlon of human caplLal and
exLenslve research and developmenL acLlvlLles LogeLher wlLh avallablllLy Lo flnanclal caplLal, seems Lo be Lhe
mosL crlLlcal facLors.
3
Also populaLlon (demand), employmenL and lncome growLh Lurns ouL Lo be lmporLanL
deLermlnanLs of enLrepreneurshlp (Acs and ArmlngLon 2002). We wlll furLher elaboraLe on Lhe reglonal
dlmenslon of enLrepreneurshlp ln secLlon 3.
Cn Lhe lndusLry level Lhe mosL promlnenL facLors LhaL have been ldenLlfled Lo lmpacL enLrepreneurshlp are
Lhe level of proflLs, enLry barrlers, level of demand, and Lhe exLenL of agglomeraLed or urbanlzed producLlon
sLrucLures (8eynolds 1992, 8eynolds and SLorey 1993).
4
1he deLermlnanLs of enLrepreneurshlp Lhus relaLe Lo
varlables derlved ln Lhe lndusLrlal organlzaLlon, economlc geography and sLandard mlcro-economlc Lheorles
of economlcs. 1here are mlxed resulLs for dlfferenL varlables ln dlfferenL counLrles buL baslcally proflLs,
lndusLry growLh and lndusLry slze are poslLlvely relaLed Lo sLarLups whlle lncreaslng caplLal requlremenLs and
need for producL dlfferenLlaLlon seem Lo negaLlvely lmpacL enLrepreneurshlp.
ulsaggregaLlng Lo Lhe flrm level, human caplLal (educaLlon) shows up as one of Lhe fundamenLal varlables
explalnlng enLrepreneurshlp (Lvans and LelghLon 1990, klm eL al 2006). Cverall, Lhe llkellhood of becomlng
an enLrepreneur ls sLrongesL for skllled lndlvlduals, parLlcularly for enLrepreneurs seeklng Lo explolL an
1
We wlll noL conslder explanaLlons relaLed Lo Lhe soclologlcal dlsclpllnes (Leams, neLworks, eLc.), nor Lhose relaLed Lo nascenL
enLrepreneurshlp, ºcomblnaLors", eLc.
2
An alLernaLlve approach ls represenLed by Lhe long wave llLeraLure, see e.g. klLchln (1923, long waves appear due Lo lnvesLmenLs
cyscles), !uglar (1862, lnvesLmenLs ln machlnery, kuzneLs (1971, lnvesLmenLs ln real esLaLe) and kondraLleff (1923/1933) who slmply
conclude LhaL long waves of economlc acLlvlLy seems Lo be a facL.
3
See 8arLlk (1989), Lvans and !ovanovlc (1989), 8eynolds eL al (1994), uunn and PolLz-Lakln (1993), (2000), Cuadrlnl (2000) and Acs
eL al (2007).
4
1he demand varlable goes back Lo Adam SmlLh's argumenL abouL Lhe slze of Lhe markeL and Lhe scope for speclallzaLlon.
wotkloq lopet 2010.02
14
opporLunlLy. Puman caplLal slgnals quallLy, works as a sorLlng mechanlsm, helps overcomlng barrlers ln
obLalnlng credlL/equlLy, as well as lmprovlng neLwork formlng.
1
Soclal neLworks can ln Lurn be expecLed Lo
reduce LransacLlon cosLs (Wllllamson 1971), whlch also has galned emplrlcal supporL, parLlcularly for
opporLunlLy based enLrepreneurshlp.
2
8egulaLlon as such has been shown Lo lnfluence enLrepreneurshlp and slze of sLarLups (Clccone and
Þapalonnou 2006, Ardagna and Lusardl 2009).
3
ÞarLlcularly deLrlmenLal effecLs are aLLrlbuLed hlgh sLarLup
cosLs (lonseca eL al 2001, 2007). Claeser and kerr (2009) presenLs (reglonal) evldence LhaL cosL levels are
one of Lhe ma[or lmpedlmenLs Lo enLrepreneurshlp, whlle Cordon (1998), and Cullen and Cordon (2007),
conclude LhaL hlgher Laxes has a dlsLlncL and slgnlflcanL negaLlve lmpacL on enLrepreneurshlp. Moreover,
lndlrecL effecLs have been reporLed Lhrough Lhe effecLs of Laxes on wealLh formaLlon (Lvans and !ovanovlc
1989, 8aner[ee and newman 1993). lndlvldual wealLh has been shown Lo be a robusL predlcLor of Lhe
probablllLy of sLarLlng a flrm.
AL Lhe lndlvldual level progresslve marglnal Lax raLes seem Lo negaLlvely lmpacL enLry, even Lhough Lhe
magnlLude depends on Lhe dlfference beLween Laxes on wages and Laxes on proflLs (CenLry and Pubbard
2000, Pansson 2008). lL ls also noLeworLhy LhaL lndlvlduals ln elLher Lhe hlghesL or Lhe lowesL lncome
brackeLs are mosL llkely Lo sLarL a flrm, whlch probably mlrrors LhaL lndlvldual ablllLles govern wheLher
opporLunlLy- or necesslLy-based enLrepreneurlal venLures ls embarked upon.
Notms ooJ coltote
A number of sLudles flnd LhaL soclal norms, or enLrepreneurlal culLure, do lnfluence enLrepreneurshlp.
4
An
obvlous lndlcaLor of Lhls ls Lhe parenL effecL, LhaL ls, Lhe llkellhood of becomlng a flrm-owner or sLarLlng a
new flrm lncreases lf Lhe parenLs had Lhelr own flrms (uunn and PolLz-Lakln 2000, uavldsson and Ponlg
2003, ClaneLLl and Slmonov 2004). 1here also seem Lo be Lhe case LhaL an envlronmenL domlnaLed by
smaller and lndependenL flrms become more conduclve Lo enLrepreneurshlp Lhan envlronmenLs hosLlng
larger flrms (Claeser eL al 2009, Claeser and kerr 2009). Poldlng an lndusLry's esLabllshmenL slze consLanL
(or/and clLy), enLrepreneurs lncrease when Lhe surroundlng clLy has a greaLer number of small
esLabllshmenLs. ln addlLlon, Lhere ls a remarkably sLrong correlaLlon beLween average esLabllshmenL slze
and subsequenL employmenL growLh Lhrough sLarLups, parLlcularly ln manufacLurlng (see also 8osenLhal and
SLrange 2009). CrowLh of new sLarL-ups ls Lhus correlaLed Lo Lhe number of exlsLlng esLabllshmenLs ln Lhe
area. 1he dlrecLlon of causallLy ls however noL clear.
Claeser and kerr (2009) also flnds LhaL hlgher amenlLles (deflned as exogenous reglonal dlfferences ln
cllmaLe facLors) Lend Lo drlve up Lhe prlce of land whlch aLLracL low flxed cosL lndusLrles LhaL Lend Lo have a
1
1hough, as argued by Leff (1979), caplLal markeL lmperfecLlons should noL be enough Lo explaln enLrepreneurlal dlfferences, slnce lL
could be argued LhaL overcomlng such dlfflculLles consLlLuLes parLs of enLrepreneurlal ablllLles.
2
See Ardagan and Lusardl (2008) where lL ls shown LhaL knowlng someone wlLh enLrepreneurlal experlence lncreases Lhe llkellhood
of becomlng an enLrepreneur by Lhree percenL. See also u[ankov eL al (2006), Culso eL al (2004), nanda and Sorenson (2007).
3
Cordon (2004) and 8osma and Pardlng (2007) clalm LhaL lnsLlLuLlonal dlfferences explalns Lhe growLh dlfferences beLween Lurope
and Lhe uS.
4
An excepLlon, based on uS daLa, ls klm (2006).
wotkloq lopet 2010.02
13
hlgher share of enLrepreneurshlp. Pence, hlgh amenlLy places aLLracL people and flrms, labor lnLenslve
lndusLrles, Lhereby lnduclng a poslLlve lmpacL on enLrepreneurshlp.
1
A relaLed observaLlon ls LhaL Lhe
fracLlon of enLrepreneurs LhaL are acLlve ln Lhe reglon where Lhey were born ls slgnlflcanLly hlgher Lhan Lhe
correspondlng fracLlon for workers. 1hls local preference ls sLrongesL ln developed reglons wlLh well
developed flnanclal secLors. ln addlLlon, Mlchaleccl and Sllva (2006) show LhaL flrms creaLed by locals are
more valuable, blgger, more caplLal lnLenslve and obLaln more flnanclng per unlL of caplLal lnvesLed.
loJlvlJool ooJ coqoltlve foctots
A conslderable parL of Lhe llLeraLure ls pre-occupled wlLh Lhe cognlLlve processes by whlch lndlvlduals
dlscover opporLunlLles and Lake Lhe declslon Lo sLarL a new flrm (8raunerh[elm 2008). 1hese sLudles confer
LhaL a number of lndlvldual ablllLles and cognlLlve capablllLles are characLerlsLlc for enLrepreneurs. lor
lnsLance, rlsk accepLance (knlghLerlan uncerLalnly) ls clalmed Lo dlsLlngulshed enLrepreneurs from oLher
lndlvldual, as ls Lhelr Lolerance for amblgulLy. 1hey are also clalmed Lo have a sLronger need Lo achleve, for
self-efflcacy as well as preferences for auLonomy.
2
ln some sLudles such lndlvldual characLerlsLlcs are broken
down aL Lhe reglonal level ln order Lo capLure how varlaLlons ln soclal caplLal, creaLlvlLy and Lolerance may
lnfluence enLrepreneurshlp (Coleman 1988, 1990, ÞuLnam 1993, Lee eL al 2004, llorlda 2002, llorlda eL al
2008).
3
ln a recenL emplrlcal analysls, SuLLer (2009) seLs ouL Lo LesL Lhe lmpacL of a composlLe facLor deflned as
ºpsychologlcal caplLal". Compared Lo prevlous sLudles, SuLLer's embrace a more varled seL of lndlvldually
deflned characLerlsLlcs, such as Lhose relaLed Lo en[oylng oLher people's and one's own llfe, ablllLy Lo conLrol
emoLlons, capablllLy Lo enLhuslasm oLher people, eLc., whlch are all lncorporaLed ln a ºpsychologlcal caplLal"
lndex. ConLrolllng for oLher lndlvldual facLors relaLed Lo access Lo opporLunlLles, educaLlon, soclal caplLal,
creaLlvlLy and LrusL, Lhe emplrlcal analysls conclude LhaL Lhe psychologlcal lndex ls an lmporLanL deLermlnanL
of enLrepreneurlal endeavor.
uemooJ ooJ sopply slJe exploootloos of eottepteoeotsblp
ln Lhe prevlous llLeraLure Lhere are frequenL references Lo demand- and supply slde deLermlnanLs of
enLrepreneurshlp.
4
l am noL convlnced LhaL Lhls ls Lhe paLh forward Lo a beLLer undersLandlng of
enLrepreneurshlp and lLs effecLs. Lmplrlcally lL also seems hard Lo pln down wheLher enLrepreneurlal
acLlvlLles descend from Lhe demand or supply facLors, some places [usL seem Lo have greaLer supply of
enLrepreneurs (cf. ChlnlLlz 1961, Sassens 2006, Claeser and kerr 2009). Such reglonal dlfferences are llkely Lo
be a consequence of local norms, LradlLlons, serendlplLous evenLs, l.e. a resldual of ºunmeasurables".
1
Compare Lhe sLudles by 8lack eL al (1996), PursL and Lusardl (2004) and nanda (2009), where lL ls shown how hlgher real esLaLe
process ease llquldlLy consLralnLs and poslLlvely lnfluences enLrepreneurshlp.
2
See McClelland 1961, Wllllamson 1971, 1lmmons 1976, klhlsLrom and LaffonL 1979, 8rockhaus 1980, 8udner 1982, Schere 1982,
Chell 1986, 8egley and 8oyd 1987, Chen eL al 1998, Zucker eL al 1998, van Þraag and Cramer 2001, Markman eL al 2002, Agrawal eL al
2006, Sorenson and Slngh 2007, 8enz and lrey 2008.
3
noLe Lhe analogy Lo successful organlzaLlons, where psychologlcal caplLal has been deflned as one lmporLanL explanaLory facLor
(LuLhans eL al 2007 and LuLhans and ?oussef 2007).
4
See for lnsLance lrlLsch Mueller (2007), kosLer and karlsson (2009).
wotkloq lopet 2010.02
16
Moreover, ln some cases Lhe dlsLrlbuLlon beLween supply slde and demand slde forces seem somewhaL
amblguous. ls, for lnsLance, unemploymenL a varlable LhaL can be derlved from Lhe demand or Lhe supply
slde of Lhe economy?
lramlng Lhe sources as enLrepreneurshlp ln Lerms of demand and supply lmpllclLly also seems Lo suggesL
LhaL equlllbrlum could be aLLalned, l.e. a sLaLlonary polnL exlsLs where elLher enLrles equal exlLs or LhaL
dynamlcs cease. 1haL ls of course qulLe conLradlcLory when one ls dlscusslng phenomena feaLured by
exLenslve dynamlcs, non-llnear behavlor and experlmenLally organlzed processes.
noLwlLhsLandlng LhaL Lhe dlsLlncLlon beLween demand and supply slde facLors may be lmpreclse, prevlous
research seem Lo alloL mosL explanaLory power Lo Lhe laLLer. Among Lhose are knowledge, broadly deflned,
and how lL Lles ln wlLh human caplLal and knowledge resources for producLlon, mosL lmporLanL.
1
know|edge, |ts organ|zat|on and entrepreneursh|p
koowleJqe
lL could be argued LhaL Lhere ls a dlvldlng llne ln economlcs where knowledge ls deflned as elLher an ob[ecL
or a process. Þrecedlng LhaL dlscusslon ls Lhe quesLlon how lnformaLlon and knowledge are relaLed Lo each
oLher. SomeLlmes lnformaLlon ls deflned as daLa LhaL can be easlly codlfled, LransmlLLed, recelved,
Lransferred and sLored. knowledge, on Lhe oLher hand, ls seen as conslsLlng of sLrucLured lnformaLlon LhaL ls
dlfflculL Lo codlfy and lnLerpreL due Lo lLs lnLrlnslc lndlvlslblllLy. Pence, lL ls embodled ln lndlvlduals and
organlzaLlons. Lven Lhough Lhe ablllLy Lo lndulge knowledge relaLe Lo human cognlLlve ablllLles Lo absorb and
selecL among avallable lnformaLlon, lndlvldual compeLence may have llLLle or no value ln lsolaLlon, buL
comblned wlLh oLher compeLencles ln an organlzaLlon lL may consLlLuLe an lmporLanL parL of Lhe
organlzaLlon's knowledge caplLal. ÞarL of knowledge ls llkely Lo always remaln ºLaclL" and Lhus non-codlflable
(Þolyanl, 1966).
ln conLrasL Lo lnformaLlon LhaL may be lnLerpreLed as facLual, knowledge may be consldered as esLabllshlng
generallzaLlons and correlaLlons beLween varlables. knowledge ls also cumulaLlve ln Lhe sense LhaL Lhe
beLLer known a fleld, Lhe easler lL ls Lo asslmllaLe new pleces of knowledge wlLhln Lhls fleld. Cenerally,
knowledge can be descrlbed somewhere beLween Lhe compleLely LaclL and Lhe compleLely codlfled. 1aclL,
sLlcky or complex knowledge, l.e. hlghly conLexLual and uncerLaln knowledge, seems besL Lransferred vla
face-Lo-face lnLeracLlons (von Plppel 1988). ÞroxlmlLy Lhus maLLers slnce knowledge developed for any
parLlcular appllcaLlon can easlly splll over and flnd addlLlonal appllcaLlons.
1here wlll always be llmlLaLlons ln accesslng knowledge. Measures concernlng access and level of knowledge
Lend llkewlse Lo be parLlal. lndeed, even lf Lhe LoLal sLock of knowledge were freely avallable, knowledge
abouL lLs exlsLence would noL necessarlly be. 1he knowledge space ls ln lLself unbounded, lmplylng LhaL
declslons are made under ºbounded raLlonallLy" (Slmon 1939). Pence, parLlallLy and sub[ecLlvlLy Lend Lo
1
CloballzaLlon ls clalmed Lo lnfluence boLh Lhe demand (lower LransporL cosLs, expanslon of markeLs, eLc.) and supply slde facLors
(mlgraLlon, lul, spln-offs, eLc.) of enLrepreneurshlp (karlsson eL al 2009).
wotkloq lopet 2010.02
17
lnfluence declslons. 8ulldlng on Lhese lnslghLs, Payek (1943) concluded LhaL a key feaLure of a markeL
economy ls Lhe dlsLrlbuLlon of knowledge across a large number of lndlvlduals. ConsequenLly, dlvergence ln
Lhe valuaLlon of new ldeas across economlc agenLs, or beLween economlc agenLs and declslon-maklng
hlerarchles of lncumbenL enLerprlses, can also be expecLed. 1haL consLlLuLes one fundamenLal source of
enLrepreneurlal opporLunlLy and also lmplles a markeL sLrucLures domlnaLed by lmperfecL lnformaLlon and
lmperfecL compeLlLlon.
AnoLher Lyplcal characLerlsLlc of knowledge ls lLs non-excludablllLy, lmplylng LhaL only parL can be
approprlaLed by Lhe ºowner" whlle parL of knowledge dlffuse Lo an lndeflnlLe number of users. Low cosLs ln
LransmlLLlng codlfled knowledge, LogeLher wlLh conslderable flxed cosLs ln acqulrlng and complllng
knowledge, polnLs Lo Lhe dlfflculLles ln knowledge produclng acLlvlLles.
Otqoolzotloo of koowleJqe ptoJoctloo ooJ eottepteoeotsblp
1he way knowledge producLlon ls organlzed has shlfLed over Lhe years and dlsLlncL dlfferences can also be
observed beLween Lurope and Lhe uS (Carlsson eL al 2009). lurLhermore, lLs organlzaLlon ls shown Lo have
lnfluenced Lhe raLe of enLry of new flrms. ln Lhe 19
Lh
cenLury an lnLerdependence emerged beLween Lhe
needs of Lhe growlng uS economy and Lhe conLemporary rlse of unlverslLy educaLlon - whaL 8osenberg
(1983) has called ºendogenous lnsLlLuLlons". ln Lurope Lhe role of Lhe unlverslLles was more orlenLed
Lowards lndependenL and baslc research, as manlfesLed by Lhe PumboldL unlverslLy ln 1809. 1he dlfference
ln knowledge producLlon seems Lo have glven Lhe uS a Lechnologlcal lead ln Lhe 20Lh cenLury, even Lhough
baslc sclence was weak ln Lhe uS unLll Lhe 1930s/40s. 1he research unlverslLy ln Lhe uS was a posL world war
Lwo lnsLlLuLlon, baslcally deslgned as a modlfled verslon of Lhe PumboldL sysLem, where compeLlLlon and
plurallsm was kepL.
1o develop and lmprove Lhe flndlngs/lnvenLlons LhaL were Lhe base of Lhe 2nd lndusLrlal revoluLlon ln Lhe
laLe 19
Lh
cenLury, Lhe beglnnlng of Lhe 20
Lh
cenLury saw Lhe developmenL of corporaLe lab, where also baslc
research was conducLed (Lhe flrsL corporaLe lab was seL up ln Cermany ln Lhe 1870s). 1he close llnks
beLween lndusLry and sclence, characLerlzed by collaboraLlve research and Lwo-way knowledge flows, were
Lhus relnforced. WlLhln flrm research was much hlgher ln Lhe uS Lhan ln Lurope, employmenL of sclenLlsLs
and englneers grew Lenfold ln Lhe uS beLween 1921 and 1940.
uurlng Lhe 1940s Lhere was a huge lncrease ln 8&u-spendlng drlven by Lhe war, whlle Lhe followlng decades
saw a decrease ln 8&u relaLlve Lo CuÞ. 8aslc research dlmlnlshed, buL also flrms cuL down on Lhelr 8&u
spendlng. As a resulL, flrms seemed Lo lose Louch wlLh Lhelr knowledge base, spln-offs decllned and Lhere
was also less growLh ln large flrms.
ln Lhe beglnnlng of Lhe 1980s Lhe slLuaLlon swlLched agaln, propelled by a number of lnsLlLuLlonal reforms
dlrecLed Lowards lnLellecLual properLy rlghLs, penslon caplLal and Laxes. 1haL was palred wlLh a parLly new
seL-up of organlzaLlons, such as S8l8 where 2,3 percenL of federal agencles research fundlng musL go Lhe
SMLs, and deregulaLlons of large parL of Lhe uS economy LhaL gave rlse Lo new enLrepreneurlal
opporLunlLles. 1hus, enLrepreneurlal opporLunlLles were creaLed Lhrough sclenLlflc and Lechnlcal dlscoverles
whlch were paralleled by governmenLal pollcles whlch lnserLed a new dynamlsm ln Lhe uS economy. A shlfL
followed away from large lncumbenL flrms Lo small, lnnovaLlve, skllled-labor lnLenslve and enLrepreneurlal
enLlLles (Carlsson eL al 2009).
wotkloq lopet 2010.02
18
1o conclude Lhls secLlon, even Lhough enLrepreneurshlp ls shown Lo be lmporLanL for opporLunlLy
recognlLlon, dlscovery and creaLlon (Shane and venkaLamaran 2000), llLLle ls sald abouL Lhe orlgln of
opporLunlLles ln Lhe enLrepreneurshlp llLeraLure. 1hls Lhread ls Laken up by Acs eL al (2009), suggesLlng LhaL
knowledge endowmenLs, and Lhe way knowledge splllovers are maLerlallzed, consLlLuLes Lhe perhaps mosL
lmporLanL source for enLry and enLrepreneurshlp. Cbvlously, new lnslghLs - knowledge - should be
lnsLrumenLal ln Lhe dynamlcs descrlbed by SchumpeLer ln Lhe followlng way: º[l]ncessanLly revoluLlonlzes
Lhe economlc sLrucLure from wlLhln, lncessanLly desLroylng Lhe old one, lncessanLly creaLlng a new one"
(SchumpeLer 1942, p. 83). Pow hlgher raLes of enLrepreneurshlp augmenLs Lhe posslblllLles of Lurnlng
knowledge ln Lo lnnovaLlons and seL forces of creaLlve desLrucLlon lnLo moLlon, wlll be furLher consldered ln
Lhe nexL secLlon.
wotkloq lopet 2010.02
19
3. Entrepreneurship, opportunities and innovation
As dlscussed ln secLlon 2 Lhe ldea LhaL opporLunlLles are ob[ecLlve buL Lhe percepLlon of opporLunlLles ls
sub[ecLlve has perslsLed ln economlc Lheory slnce long. 1he realm of opporLunlLles ls always presenL, lL ls Lhe
ablllLy Lo ldenLlfy such opporLunlLles LhaL deLermlne wheLher Lhey are revealed and explolLed. 1hus, Lhere ls
a vlrLual consensus Laken ln Lhe conLemporary llLeraLure on enLrepreneurshlp LhaL lL revolves around Lhe
recognlLlon of opporLunlLles and Lhe pursulL of Lhose opporLunlLles (venkaLaraman, 1997).
1
ldenLlflcaLlon of
lnnovaLlon opporLunlLles ls Lhus argued Lo consLlLuLe Lhe speclflc Lool of enLrepreneurs (urucker 1983).
lor Lhls Lool Lo be efflclenLly used, a proper lnsLlLuLlonal seLLlng ls requlred Lo explolL enLrepreneurlal
opporLunlLles. lnLellecLual properLy rlghLs have been shown crlLlcal ln maklng enLrepreneurshlp aLLracLlve
(Murphy eL al 1991), buL a broader perspecLlve on lnsLlLuLlons are requlred, lncludlng lncenLlve sLrucLures,
markeL sLrucLures, openness, eLc. Cbvlously, Lhese are facLors LhaL largely fall under Lhe conLrol of a socleLy
and Lhus lmpacL Lhe opporLunlLy space for enLrepreneurs. 1hus, Lhe predomlnanL vlew LhaL Lhe opporLunlLy
space ls assumed exogenous ln relaLlon Lo enLrepreneurshlp, whereas Lhe lndlvldual ablllLles deLermlne how
enLrepreneurs can explolL Lhe glven opporLunlLles, seems Loo agnosLlc. lrom a pollcy polnL of vlew, such
faLed aLLlLude Lowards Lhe posslblllLles Lo lnfluence enLrepreneurlal acLlvlLy wlLhln an economy ls far Loo
passlve. We wlll reLurn Lo Lhe pollcy lmpllcaLlons ln SecLlon 6.
Pence, Lhe prevlous secLlon emphaslzed Lhe role of lnnovaLlon buL sald llLLle abouL Lhe prlme source of
enLrepreneurlal opporLunlLles. 1he resL of Lhls secLlon wlll focus on Lhe role of knowledge ln creaLlng
opporLunlLles LhaL can be explolLed Lhrough lnnovaLlon, how dlfferenL Lypes of enLrepreneurs accompllsh
dlfferenL Lasks, and also glve a brlef accounL of Lhe emplrlcal evldence ln Lhls sLrand of research. lnlLlally we
wlll dlscuss Lhe dlfferences beLween lnnovaLlon and lmlLaLlon, and Lhe measuremenL problems relaLed Lo
lnnovaLlons.
now to Jefloe ooJ meosote looovotloo?
Þerhaps more Lhan any oLher economlsL, SchumpeLer (1911/1934) ls expllclL abouL Lhe economlc funcLlon of
Lhe enLrepreneur. Accordlng Lo SchumpeLer, Lhe process of economlc developmenL could be dlvlded lnLo
Lhree clearly separaLe sLages. 1he flrsL sLage lmplles Lechnlcal dlscovery of new Lhlngs or new ways of dolng
Lhlngs, whlch SchumpeLer refers Lo as lnvenLlon. ln Lhe subsequenL sLage lnnovaLlon occurs, l.e. Lhe
successful commerclallzaLlon of a new good or servlce sLemmlng from Lechnlcal dlscoverles or, more
generally, a new comblnaLlon of knowledge (new and old). 1he flnal sLep ln Lhls Lhree-sLage process -
lmlLaLlon - concerns a more general adopLlon and dlffuslon of new producLs or processes Lo markeLs.
2
1
Shane (2003) presenLs a dlscusslon concernlng Lhe dlfferences beLween SchumpeLerlan and klrznerlan sources of opporLunlLy
where lL ls clalmed LhaL only SchumpeLerlan Lype of opporLunlLy requlres ºcreaLlon" by Lhe enLrepreneur.
2
Also 8aumol (1990) separaLes beLween Lhe lnnovaLor and flrm creaLor (lmlLaLor).
wotkloq lopet 2010.02
20
SchumpeLer was also clear abouL Lhe dlfference beLween roles played by Lhe lnvenLor as compared Lo Lhe
lnnovaLor. Lven Lhough he foresaw slLuaLlons when Lhe roles could colnclde, LhaL was accordlng Lo
SchumpeLer excepLlons Lo Lhe rule.
Cbvlously Lhere are numerous plLfalls ln Lhe measuremenL of lnvenLlons and lnnovaLlons. no maLLer whaL
scale LhaL ls applled, measuremenL dlfflculLles and sub[ecLlve evaluaLlon crlLerla may Lo a varlous exLenL
dlsLorL daLa on knowledge and can always be sub[ecL Lo crlLlclsm.
1
Some frequenLly lmplemenLed knowledge
varlables are llkely Lo mlss essenLlal parLs, whlle oLhers Lend Lo exaggeraLe Lhe knowledge conLenL. 1he mosL
commonly applled measure of knowledge explolLaLlon and lnnovaLlve acLlvlLles are 8&u-expendlLures or
paLenLs.
2
8&u-expendlLures suffer from Lhe apparenL drawback of applylng lnpuL measures ln order Lo approxlmaLe
lnnovaLlve ouLpuL. ÞaLenL ls a beLLer performance varlable buL does also suffer from serlous llmlLaLlons.
ÞaLenLs can be expecLed Lo reflecL condlLlons (red Lape, flnanclal secLor quallLy, eLc) LhaL affecL Lhe declslon
Lo lnnovaLe.
3
lL ls also llkely Lo be more closely relaLed Lo Lhe Lype of lnnovaLlve and producLlve
enLrepreneurshlp LhaL has been emphaslzed by SchumpeLer and 8aumol (Larle and Sakova 2000). ÞaLenL
auLhorlLles do however rarely know wheLher paLenLs been commerclallzed, nor do Lhey know wheLher
commerclallzaLlon was successful, or Lhe slze of Lhe lnvenLlng flrm. SLlll, paLenLs are wldely used and ls also
clalmed Lo be a falrly reasonable measure of lnnovaLlveness (Acs eL al 2002).
An lnLeresLlng and more relevanL measure Lo separaLe beLween lnvenLlon and lnnovaLlon uslng paLenL daLa
ls Lo lmplemenL quallLy ad[usLed paLenLs (Lan[ouw and Schankerman 1999, Pall eL al 2000). As shown by for
lnsLance L[ermo (2008, 2009), reglonal lnnovaLlon ls beLLer explalned by quallLy-ad[usLed paLenL daLa and ls
shown Lo be hlghly correlaLed wlLh reglonal 8&u, whereas lnLer-reglonal 8&u falls Lo reveal any slgnlflcanL
lmpacL on reglonal lnnovaLlon.
4
1urbulence, l.e. enLry and exlL of flrms, ls yeL anoLher lndlcaLor proposed Lo capLure lnnovaLlve acLlvlLy.
Powever, flrms' deaLh and blrLh seem correlaLed wlLh many facLors whereof some are lnLernal Lo flrms
(mlsmanagemenL, lnexperlence, reLlremenL, eLc.) whlle oLhers are assoclaLed wlLh lnnovaLlon by lncumbenLs
and LhreaL of enLry (8aumol, Þanzar and Wllllg 1982). ln addlLlon, some secLors wlLh many enLry and exlLs
(for lnsLance consumer servlces) can hardly be ldenLlfles as lnnovaLlve, raLher enLry Lakes place due Lo
lmlLaLlon. neL enLry, supposed Lo capLure expanslon of new and lnnovaLlve lndusLrles, has Lherefore been
suggesLed as a beLLer proxy for lnnovaLlve enLry.
5
1
Cbvlously Lhe same measure weaknesses appear wlLh regard Lo counLrles' knowledge caplLal.
2
ÞaLenLs, and paLenLs clLaLlons, are also frequenLly used as a proxy for knowledge splllovers (!affe eL al 1993, 2000, Acs eL al 2002,
lurman eL al 2002).
3
See 8raunerh[elm and Svensson (2009) and Lhe references Lhere.
4
Mairesse and Mohnen (2001) suggest using an alternatives measure based on the composite of the share in sales attributed
innovative products, R&D, proximity to basic research and market structure (competitiveness).
5
CorL and klepper (1982), klepper and Craddy (1990), !ovanovlc and Mcuonald (1994), klepper (1996) and Agarwal and CorL (1996).
wotkloq lopet 2010.02
21
A symb|ot|c re|at|onsh|p between |arge and sma|| f|rms?
1he SchumpeLerlan separaLlon beLween Lhe lnvenLor and Lhe enLrepreneur has repeaLedly been challenged
(see for lnsLance Schmookler 1966). AL Lhe same Llme good reasons for lnLegraLlng Lhe lnvenLlve and
lnnovaLlve sLages has been presenLed ln Lhe lndusLrlal organlzaLlon llLeraLure. Crossman and ParL's (1986)
semlnal arLlcle refers Lo Lhe conLracLual problems when lnformaLlon ls asymmeLrlc, whlch could be
overcome Lhrough verLlcal lnLegraLlon. Cn a more aggregaLe level, Lhe merglng of Lhe lnvenLlve and
lnnovaLlve sLages ls presenL ln Lhe earller neo-SchumpeLerlan growLh models.
1
8aumol (2002) emphaslze Lhe
symblosls beLween small and large flrms ln hls uavld and CollaLh lnnovaLlon framework.
ln Lhe managemenL llLeraLure 1eece (1986, 2006) presenLs a ºnascenL neo-SchumpeLerlan Lheory", where he
ouLllnes Lhe sLraLeglc lmpllcaLlons of commerclallzlng an lnvenLlon ln an lndependenL flrms seL up by
lnvenLors, as compared Lo llcenslng lL Lo an lncumbenL flrm. Pe ldenLlfles Lhree key facLors LhaL deLermlne
wheLher lL would be Lhe lnvenLor, Lhe followlng flrms, or flrms wlLh relaLed capaclLy - or complemenLary
asseLs - LhaL exLracL Lhe proflLs from an lnvenLlon: l) Lhe lnsLlLuLlons Lled Lo lÞ8s, ll) Lhe exLenL Lo whlch
complemenLary asseLs were needed for commerclallzaLlon, and, lll) Lhe emergence of a domlnanL deslgn.
1eece was Lhus noL prlmarlly preoccupled wlLh Lhe organlzaLlonal reglme beLween Lhe lnvenLor and Lhe
lnnovaLor raLher he sLressed Lhe prerequlslLes governlng Lhe enLry mode lrrespecLlve of wheLher lL was Lhe
lnvenLor or Lhe lnnovaLor/enLrepreneur LhaL was abouL Lo launch a new producL. lurLhermore, Lhe presence
of large lncumbenLs could be essenLlal for Lhe emergence of a markeL for ºldeas", l.e. large flrms could
procure and develop small flrms' lnvenLlons (norback and Þersson 2010).
1hus, Lhere seems Lo be a number of lmporLanL reasons why small and large flrms complemenL each oLher
whlch ls llkely Lo lnfluence Lhe lnnovaLlon processes. 1he galns of speclallzaLlon are aL Lhe boLLom of Lhls
argumenL where enLrepreneurs/small flrms slmply perform beLLer Lhan large flrms wlLh respecL Lo cerLaln
acLlvlLles. And vlce versa. 8elaLed Lo Lhls ls also Lhe lssue of agglomeraLlon and knowledge splllovers Lo whlch
we reLurn ln SecLlon 3.
Leads, |aggards and techno|og|ca| reg|me
ln a serles of papers Aghlon eL al (2001, 2004, 2003, 2006) has examlned Lhe lnnovaLlve acLlvlLles ln
Lechnologlcally leadlng lndusLrles as compared Lo oLher lndusLrles (laggards). A number of lnLeresLlng resulLs
orlglnaLes from Lhose sLudles.
2
ln parLlcular, Lhe lnduced effecLs of enLry on lncumbenLs' lnnovaLlon and
producLlvlLy are shown Lo dlffer across heLerogeneous lndusLrles. Pow does flrm enLry lnfluence lnnovaLlon
lncenLlves and producLlvlLy growLh ln lncumbenL flrms? ln Lhe earller conLrlbuLlons lL was shown LhaL
lncumbenLs ln more advanced lndusLrles lncrease Lhelr lnnovaLlve acLlvlLles, hoplng Lo clrcumvenL Lhe
negaLlve effecLs of compeLlLlon based on lnnovaLlve enLry. 1he auLhors refer Lo Lhls mechanlsm as Lhe
ºescape enLry effecL Lhrough lnnovaLlon". Powever, laggards have no or llLLle hope of wlnnlng agalnsL
1
See 8raunerh[elm (2008) and Aghlon and CrlfflLh (2003) for surveys.
2
lor references Lo relaLed papers ln Lhe lndusLrlal organlzaLlon veln, see Lhose papers. See also Aghlon and CrlfflLh (2003).
wotkloq lopet 2010.02
22
enLranLs, Lhus Lhey raLher Lend Lo reduce lnnovaLlon due Lo enLry, whlch ls referred Lo as Lhe SchumpeLerlan
approprlablllLy effecL of producL markeL compeLlLlon.
ln Aghlon eL al (2006) Lhe analysls ls exLended Lo accounL for enLry by forelgn flrms, l.e. forelgn dlrecL
lnvesLmenLs. A slmllar dynamlcs ls shown Lo lnduce lncumbenLs ln Lechnologlcally advanced lndusLrles Lo
lncrease Lhelr lnnovaLlve efforLs due Lo forelgn enLry (or LhreaL of), whereas Lhe opposlLe prevalls ln laggard
lndusLrles. Successful lnnovaLlon prevenLs enLry. ln laggard lndusLrles lL dlscourages lnnovaLlon slnce enLry
reduces Lhe expecLed reLurn from lnnovaLlng, whlch ls labeled Lhe dlscouragemenL effecL.
1hus, enLry of new flrms - domesLlc or forelgn - lnlLlaLes an lmproved allocaLlon of lnpuLs and ouLpuLs Lend
Lo Lrlgger knowledge splllovers and affecL lnnovaLlon lncenLlves among lncumbenLs. 8uL Lhe dynamlcs wlll
dlffer beLween lndusLrles and ln order Lo reap Lhe poLenLlal welfare effecLs of a sLrucLural ad[usLmenL wlLhln
and beLween lndusLrles, dlfferenL pollcles are requlred for dlfferenL lndusLrles.
ln Lhe evoluLlonary framework developed by nelson and WlnLer (1982) Lhe quesLlons of Lhe orlgln of
varlaLlon (lnnovaLlon), how selecLlon of lnnovaLlons Lake place, and Lhe way ln whlch such selecLed varlaLlon
ls LransmlLLed beLween perlods, are addressed. Accordlng Lo nelson and WlnLer, Lhe answer refers Lo
rouLlnes LhaL are clalmed Lo have gene-llke sLablllLy (lnherlLance) properLles, comblned wlLh an ablllLy Lo
muLaLe, l.e. lnduce varlaLlon. 1hus, rouLlnes drlves evoluLlon and dlfferenL modes of lnnovaLlon are
suggesLed Lo occur Lhrough Lhe explolLaLlon of opporLunlLles due Lo speclflc knowledge reglmes assoclaLed
by Lhe parLlcular lndusLry conLexL. Pence, large lncumbenL flrms are modeled as lnvesLors of 8&u and oLher
knowledge creaLlng efforLs, whlch are referred Lo as a rouLlnlzed Lechnologlcal reglme. 1hese are Lhen
explolLed by Lhe same flrms, where Lhe selecLlon of wlnners (lnnovaLlon and hlgher producLlvlLy) ls
lnfluenced by exogenous, sLochasLlc facLors.
1
AlLernaLlvely, oLher reglmes based on lmlLaLlons or where
enLrepreneurs or Lhe small flrms are consldered Lo have Lhe capaclLy of explolLlng commerclal opporLunlLles
wlLhouL relylng on 8&u, may also exlsL. WlnLer (1964, 1984) refer Lo Lhose as enLrepreneurlal Lechnologlcal
reglme.
2
Lndogenous entrepreneursh|p
Summarlzlng Lhe above dlscusslon and drawlng on Lhe dlscusslon ln SecLlon 2, knowledge, broadly deflned,
and Lhe lnsLlLuLlons governlng Lhe dlffuslon and ownershlp of knowledge, seems Lo consLlLuLe Lhe mosL
lmporLanL aspecLs of lnnovaLlve enLrepreneurshlp. lndlvlduals wlLh a cerLaln mlx of ablllLles and characLers
descrlbed ln Lhe prevlous secLlon, Lend Lo engage ln enLrepreneurlal processes whlch are characLerlzed by
search, uncerLalnLy and randomness. A consplcuous feaLure of enLrepreneurs seems Lo be LhaL Lhey
1
lmplylng LhaL Lhe dlfference for Lhls secLor as compared Lhe neoclasslcal lnnovaLlon producLlon funcLlon (uasgupLa and SLlgllLz
1981, Þakes and Crlllches 1984), Malresse eL al 1991, 1993, 2004), perhaps ls noL LhaL large.
2
See WlLL (2002) for a crlLlclsm of Lhe evoluLlonary dynamlcs ln Lhe nelson and WlnLer model. WlnLer (1984) lnLroduces enLry and
exlL where flrm level producLlvlLy ls sLochasLlcally deLermlned. 1he enLerlng flrm decldes ex posL wheLher lL should belong Lo Lhe
rouLlnlzed reglme, whlch ylelds lower buL safer reLurns, or Lhe enLrepreneurlal reglme where poLenLlal proflLs are hlgher buL also
uncerLaln
wotkloq lopet 2010.02
23
consLanLly geL lnvolved ln experlmenLs, where many dlfferenL varleLles and models may be Lrled ouL before
Lhe rlghL one ls found (8osenberg and 8lrdzell 1986). ln order Lo funcLlon, such an experlmenLally organlzed
economy requlres a proper lnsLlLuLlonal seLLlng. ÞroperLy rlghLs, lnLellecLual as well as Lo Lhe enLrepreneurlal
renL, and non-sLlgmaLlzlng fallure mechanlsms, seems Lo be some of Lhe cornersLones of an approprlaLe
lnsLlLuLlonal seLLlng LhaL ls conduclve Lo enLrepreneurlal acLlvlLles.
1
1aklng LhaL as Lhelr polnL of deparLure, Acs eL al. (2004, 2009) argue LhaL Lhe explolLaLlon of knowledge
depends on Lhe broad specLrum of lnsLlLuLlons, rules and regulaLlons, or, ln Lhelr Lermlnology, an economy's
knowledge fllLer. 1he knowledge fllLer ls Lhe gap beLween new knowledge and economlc knowledge or
commerclallzed knowledge. 1he Lhlcker ls Lhe knowledge fllLer, Lhe more pronounced ls Lhe gap beLween
new knowledge and new economlc - l.e. commerclallzed - knowledge. 1hls relaLes Lo Arrow's (1962)
percepLlon of knowledge, sLresslng LhaL knowledge dlffers from oLher facLors of producLlon. 1he expecLed
value of any new ldea ls hlghly uncerLaln, and as Arrow polnLed ouL, has a much greaLer varlance Lhan would
be assoclaLed wlLh Lhe deploymenL of LradlLlonal facLors of producLlon. Arrow emphaslzed LhaL when lL
comes Lo lnnovaLlon, Lhere ls uncerLalnLy abouL wheLher Lhe new producL can be produced, how lL can be
produced, and wheLher sufflclenL demand for LhaL vlsuallzed new producL mlghL acLually maLerlallze.
1hus, boLh Lhe lndlvlduals and Lhe conLexLs ln whlch agenLs operaLe have Lo be lnLegraLed ln Lhe model. ln
oLher words, Lhe lndlvldual-opporLunlLy nexus has Lo be operaLlonallzed. 1he key lssue - ofLen dlsregarded -
ls LhaL even Lhough new knowledge leads Lo opporLunlLles LhaL can be explolLed commerclally, lL has Lo be
converLed lnLo commerclal appllcaLlons. Such opporLunlLles rarely presenL Lhemselves ln neaL packages,
raLher Lhey have Lo be dlscovered and applled commerclally (Shane and LckhardL, 2003). ln parLlcular, Lhe
uncerLalnLy, asymmeLrles and hlgh LransacLlon cosLs lnherenL ln knowledge generaLe a dlvergence ln Lhe
assessmenL and evaluaLlon of Lhe expecLed value of new ldeas. lL means LhaL ablllLy Lo commerclallze
knowledge - Lo become enLrepreneurs - also vary across lndlvlduals.
8ulldlng on Lhese lnslghLs, Acs eL al (2004, 2009) model Lhe supply of enLrepreneurs as a funcLlon of l) Lhe
socleLal lnvesLmenLs ln knowledge, l.e. Lhe exlsLlng knowledge sLock aL a glven polnL ln Llme, and ll) how
efflclenL Lhe economy works (Lhe knowledge fllLer, l.e. Lhe deslgn of Lhe lnsLlLuLlonal seLup), and lll) Lhe glven
lndlvldual enLrepreneurlal ablllLy. ln addlLlon, culLure and LradlLlons and lnsLlLuLlons, l.e. counLry- or reglon-
speclflc facLors, lnfluence enLrepreneurshlp. 1hose are Lhe bulldlng blocks of Lhe knowledge splllover Lheory
of enLrepreneurshlp, presenLed by Acs eL al. (2004, 2009). More preclsely, producLlon of new
producLs/quallLles can elLher occur due Lo an lnvenLlon of lncumbenL flrms lnvesLlng ln 8&u, or by
enLrepreneurlal sLarL-ups where exlsLlng knowledge ls comblned ln lnnovaLlve ways whlch do noL requlre
any lnvesLmenL ln 8&u.
2
lnsLead, lndlvlduals comblne Lhelr glven enLrepreneurlal ablllLy (where hlgher
1
See 8aumol (1990), Lllasson (2007), !ohnson eL al (2000), 8oeLke and Coyne (2003), Acemouglu eL al (2004) and Þowell (2008).
2
Compare Lhe resource-based vlews (Þenrose 1939, 8arney 1991) whlch sLressed heLerogeneous lnLernal resources and capablllLles.
1he early evoluLlonary neo-SchumpeLer also acknowledged Lhe role of lnLernal facLors buL focused on secLor characLerlsLlcs and
Lechnologlcal reglmes (Malerba and Crsenlgo 1993).
wotkloq lopet 2010.02
24
ablllLy lncreases Lhe probablllLy of success) wlLh Lhe overall knowledge sLock wlLhln an economy Lo dlscover
commerclal opporLunlLles. 1he socleLal knowledge sLock ls a composlLe of prevlous knowledge sLemmlng
from acLlvlLles by lncumbenLs and sLarL-ups, l.e., knowledge refers noL only Lo sclenLlflc dlscoverles buL also
Lo knowledge assoclaLed wlLh novel ways of produclng and dlsLrlbuLlng ln LradlLlonal buslnesses, changlng
buslness models, new markeLlng sLraLegles, eLc.
1o summarlze, endogenous enLrepreneurs seem Lo be one cruclal vehlcle ln Lransformlng knowledge lnLo
useful goods and servlces. ln oLher words, splllovers are acLually generaLed Lhrough enLrepreneurs,
slmulLaneously as commerclal opporLunlLles ls lncreaslng ln a larger sLock of knowledge. 8y servlng as a
condulL for Lhe splllover of knowledge LhaL mlghL noL oLherwlse be commerclallzed, enLrepreneurshlp ls one
mechanlsm LhaL llnks knowledge Lo commerclallzaLlon and economlc growLh (see secLlon 4). A moblle
worklng force may be anoLher mechanlsm. lrom LhaL perspecLlve Lhere are undoubLedly many mechanlsms
LhaL may also lmpede Lhe commerclallzaLlon of knowledge - and growLh - whlch opens up a new fleld of
economlc pollcles as compared Lo Lhe LradlLlonal growLh lnsLrumenLs of Laxes and subsldles (see secLlon 6).
Innovat|on, entrepreneurs and sma|| f|rms: ´1he emp|r|ca| ev|dence
As polnLed ouL by AudreLsch eL al. (2006), Lhere ls an lnLeresLlng conLrasL beLween mosL predomlnanL
Lheorles of Lhe flrm and Lhe enLrepreneurlal llLeraLure's assumpLlon on opporLunlLy. Accordlng Lo Lhe
former, lnnovaLlve opporLunlLles are Lhe resulL of sysLemaLlc and purposeful efforLs Lo creaLe knowledge and
new ldeas by lnvesLlng ln 8&u, whlch subsequenLly are approprlaLed Lhrough commerclallzaLlon of such
lnvesLmenLs (Crlllches 1979, Chandler 1990, Cohen and LevlnLhal 1989, Warsh 2006), whlch sLands ln sharp
conLrasL Lo Lhe enLrepreneurlal LradlLlon of a glven, exogenous opporLunlLy space.
As regards Lhe emplrlcal evldence, several sLudles reach Lhe concluslon LhaL lrrespecLlve of modesL 8&u
lnvesLmenLs, small and enLrepreneurlal flrms conLrlbuLe subsLanLlally Lo aggregaLe lnnovaLlon (AudreLsch
1993b, leldman and AudreLsch 1999). Mlcro sLudles also suggesL LhaL enLrepreneurs/small flrms have Lhelr
knowledge produclng acLlvlLles spread across a number of dlfferenL funcLlonal areas aparL from formal 8&u
acLlvlLles (lreel 2003) and LhaL Lhese flrms draw on many knowledge sources oLher Lhan 8&u ln Lhelr
lnnovaLlon (Shane 2000).
ln a couple of papers Acs and AudreLsch (1988, 1990) provlde lnLeresLlng resulLs for Lhe u.S.
noLwlLhsLandlng LhaL Lhe large corporaLlons accounL for mosL of Lhe counLry's prlvaLe 8&u lnvesLmenLs,
Lhere are subsLanLlal dlfferences across lndusLrles and large flrms dld noL accounL for Lhe greaLesL amounL of
lnnovaLlve acLlvlLy ln all lndusLrles. lor example, ln Lhe pharmaceuLlcal and alrcrafL lndusLrles Lhe large flrms
were much more lnnovaLlve, whlle ln compuLers and process conLrol lnsLrumenLs small flrms conLrlbuLed
Lhe bulk of lnnovaLlons. More preclsely, Lhelr resulLs lndlcaLe a small-flrm lnnovaLlon raLe ln manufacLurlng
of 0.309, compared Lo a large-flrm lnnovaLlon raLe of 0.202. 1helr flndlngs llnks Lo Lhe suggesLed resLralnLs
on lnnovaLlon capaclLles ln large flrms dlscussed ln secLlon 2.3. Slmllar resulLs are obLalned by 8aldwln and
!ohnson (1999), who confer a parLlcular lmporLanL role Lo small flrm lnnovaLlons ln Lhe elecLronlcs,
lnsLrumenLs, medlcal equlpmenL and bloLechnology lndusLry. 8aldwln (1993) suggesLs LhaL more successful
flrms adopL more lnnovaLlve sLraLegles.
wotkloq lopet 2010.02
23
8ased on a deLalled Swedlsh daLa seL, Andersson and Lööf (2009) show LhaL one Lhlrd of paLenL appllcaLlons
ln Lhe manufacLurlng secLor emanaLes from flrms wlLh less Lhan 23 employees. Moreover, compared Lo non-
paLenLlng flrms, flrms engaged ln paLenLlng have more skllled labor, larger proflL margln and beLLer access Lo
bank loans, and also belongs Lo Lhe hlgh-Lechnology segmenL of lndusLry. ln addlLlon, a subsLanLlal share of
paLenLlng small flrms has llnks Lo a Swedlsh mulLlnaLlonal enLerprlse (MnL). ÞerslsLence ls also shown Lo be
hlgh, 99 percenL of Lhose noL applylng ln one year dld noL do so ln Lhe subsequenL year, whlle 30 percenL
flrms wlLh more Lhan 23 employees applled ln Lhe subsequenL year and 17 percenL of Lhose wlLh less Lhan 23
employees. Access Lo sklll, lnLernaLlonallzaLlon (exporL share) and llnks Lo an MnL are mosL sLrongly
correlaLed wlLh small flrm paLenLlng.
ÞaLenL daLa have also been used Lo examlne dlfferences ln commerclallzaLlon performance beLween new
flrms and exlsLlng flrms. 8raunerh[elm and Svensson (2009), also uslng a Swedlsh daLa-seL, show LhaL
commerclallzaLlon performance ls superlor when a paLenL ls sold or llcensed, or when Lhe lnvenLor ls
employed ln an already exlsLlng flrm, as compared Lo Lhe alLernaLlve when Lhe lnvenLor commerclallzes ln
hls own exlsLlng or new flrm. 1hls supporLs SchumpeLer's vlew LhaL enLrepreneurs have superlor skllls ln
commerclallzlng new knowledge (lnnovaLlng). Cn Lhe oLher hand, Lhe analysls also shows lnvenLor
parLlclpaLlon durlng Lhe commerclallzaLlon ls lmporLanL. Cne lnLerpreLaLlon ls LhaL Lhe lnvenLor ls cruclal for
furLher adapLaLlon (cusLom speclflc, eLc.) of Lhe lnnovaLlon, buL also ln order Lo reduce uncerLalnLy abouL Lhe
flrm's capaclLy.
1hus, enLrepreneurs and small flrms explolL exlsLlng knowledge - Lhrough Lhelr neLwork and llnks Lo oLher
knowledge producers - Lo saLlsfy Lhelr speclflc needs ln Lhe producLlon of goods and servlces. 1hereby Lhey
also produce new knowledge, even lf lL does noL show up ln Lhe 8&u-sLaLlsLlcs. SomeLlme Lhey do so
lndependenLly, some Llme ln con[uncLlon wlLh oLher flrms, e.g. lnvenLors or MnLs. 8uL Lhe process dlffers
radlcally as compared Lo large, 8&u-lnvesLlng, flrm.
AnoLher dlfference relaLes Lo Lhe lnLerLemporal dynamlcs wlLhln large enLerprlses. As Lhey seL ouL Lo aLLaln
esLabllshed growLh LargeLs, lL Lends Lo make lncumbenLs less adapL Lo change a sysLem LhaL may affecL Lhe
usefulness or value of an exlsLlng producLlon sLrucLure (ChrlsLensen 1997). Slmllarly, Aldrlch and AusLer
(1990) make Lhe slmpler argumenL LhaL Lhe larger and older Lhe flrm, Lhe less recepLlve Lo change Lhe
organlzaLlon becomes. As a resulL, lncumbenLs have an lnherenL Lendency Lo develop and lnLroduce less-
rlsky, lncremenLal lnnovaLlons lnLo Lhe markeL.
ConLrasL LhaL wlLh new venLures. 1hese are more prone Lo develop, use, and lnLroduce radlcal, markeL-
maklng producLs LhaL glve Lhe flrm a compeLlLlve edge over lncumbenLs (Casson 2002a, 2002b, 8aumol
2007a). 1hus, new flrms are noL consLralned by paLh dependencles and parLlal lock-ln effecLs, raLher Lhey
compeLe Lhrough lnnovaLlon and SchumpeLerlan manners of creaLlve desLrucLlon.
1
1haL also suggesLs LhaL
radlcal lnnovaLlons wlll more llkely sLem from new venLures (Scherer 1980, 8aumol 2004), ln parLlcular lf
new flrms have access Lo knowledge splllovers from Lhe avallable sLock of knowledge. 1herefore Lhey are
1
CreaLlve desLrucLlon ls Lhough noL solely a funcLlon of enLry and small buL also relaLe Lo lnnovaLlon wlLhln large flrms as well as
mergers and acqulslLlons (!ovanovlc and 8osseau 2002, Lllasson and Lllasson 2002).
wotkloq lopet 2010.02
26
llkely Lo play a dlsLlncL and declslve role ln Lhe LransformaLlon of knowledge-based economles. Moreover, an
lmpresslve share of radlcal breakLhrough lnnovaLlons sLem from enLrepreneurs and small flrms. Almelda and
koguL (1997), and Almelda (1999), show LhaL small flrms lnnovaLe ln relaLlvely unexplored flelds of
Lechnology.
1
Also 8lock eL al (2009) emphaslze Lhe role enLrepreneurs and small flrms ln Lhelr emplrlcal LesL of Lhe
knowledge splllover Lheory. As a sLarLlng polnL Lhey conclude LhaL knowledge (ln Lerms of 8&u-ouLlays) has
been shown Lo poslLlvely lnfluence growLh, buL LhaL Lhere remaln large and unexplalned dlfferences across
counLrles. 1hey aLLrlbuLe Lhose dlfferences Lo varylng Lhlckness of Lhe respecLlve counLry's knowledge fllLer.
1he emplrlcal analysls covers 21 Luropean counLrles for Lhe perlod 1998-2006, and lnnovaLlon ls deflned as
elLher Lhe share of Lurnover accounLed for by new producLs ln flrms, or Lhe share of Lurnover from new or
lmproved goods LhaL are new Lo Lhe markeL. CounLry's level of knowledge ls deflned as Lhe share of flrms
LhaL have applled for aL leasL one paLenL. ln Lhe emplrlcal analysls, where communlLy lnnovaLlon daLa ls
pooled wlLh counLry level daLa, Lhey flnd sLaLlsLlcal supporL for enLrepreneurshlp belng an lmporLanL vehlcle
for Lurnlng knowledge lnLo lnnovaLlve producL, conLrasLlng lmlLaLlng flrms/producLs where no such effecL
could be deLecLed. 1hey also show LhaL lnnovaLlve acLlvlLles have lncreased compared Lo lmlLaLlve ln Lhe
lnvesLlgaLed perlod. 1helr lnLerpreLaLlon ls LhaL Lhls reflecLs a swlLch Lo a more enLrepreneurlal reglme,
replaclng Lhe LradlLlonal managerlal reglme.
1hus, emplrlcal evldence sLress Lhe new and growlng flrms role ln lnLroduclng new producLs and processes,
come up wlLh buslness model lnnovaLlons, and develop new markeLs as well as changlng Lhe rules of Lhe
game of Lhelr lndusLrles (8hlde 2000). AparL from Lhose changes, Lhey also generaLe employmenL.
ApparenLly Lhose processes are ln Lurn llkely Lo render subsLanLlal knowledge splllovers. 1he lmpllcaLlon ls
LhaL only a subseL of lnnovaLlons are normally Laken lnLo accounL ln Lhe mosL commonly applled measures,
such as paLenLs and ouLlays on 8&u.
So far we have explored how enLrepreneurlal acLlvlLy lmpacL lnnovaLlon, Lhe measuremenL dlfflculLles ln
ldenLlfylng lnnovaLlve acLlvlLles, and Lhe role of lnsLlLuLlons. ln parLlcular, we have emphaslzed Lhe role of
lnsLlLuLlons LhaL governs ownershlp, knowledge producLlon and knowledge dlffuslon and lLs lnLerface wlLh
enLrepreneurshlp. ln Lhe nexL secLlon Lhe ob[ecLlve ls Lo show how Lhese processes lnLegraLes lnLo Lhe
growLh process, and Lhe exLenL Lo whlch Lhls ls capLured ln conLemporary growLh models.
1
8oLhwell and Zegveld (1982), 8aumol (2004), CrLega-Arglles, vlvarelll and volghL (2009).
wotkloq lopet 2010.02
27
4. Entrepreneurship and growth
ConLemporary models of economlc growLh are based on lnvesLmenL and explolLaLlon of knowledge as Lhe
prlme source of economlc developmenL. CrowLh performance may however dlffer across counLrles, even
Lhough counLrles may have slmllar, albelL noL ldenLlcal, knowledge endowmenLs and lnsLlLuLlonal deslgn.
SlmulLaneously, a frequenL emplrlcal regularlLy seems Lo suggesL LhaL economlc growLh ls hlghly correlaLed
wlLh abundance of small, enLrepreneurlal flrms. ln facL, an emerglng emplrlcal llLeraLure suggesLs LhaL
enLrepreneurlal sLarLups are lmporLanL llnks beLween knowledge creaLlon and Lhe commerclallzaLlon of such
knowledge, parLlcularly aL Lhe early sLage when knowledge ls sLlll fluld. AbouL Lwo Lhlrds of all emplrlcal
sLudles on enLrepreneurshlp/small flrms and growLh reach Lhe concluslon LhaL Lhere ls a poslLlve, and
generally qulLe sLrong, correlaLlon beLween Lhese varlables (karlsson and nysLröm 2007).
1
Pence, knowledge
by lLself may only consLlLuLe a necessary - buL far from sufflclenL - condlLlon for growLh.
ln Lhls secLlon we wlll revlew Lhe LheoreLlcal growLh models and presenL Lhe emplrlcal evldence concernlng
Lhe relaLlonshlp beLween knowledge, enLrepreneurshlp and economlc growLh.
know|edge-based growth
1he semlnal conLrlbuLlon of Lhe knowledge-based (endogenous) growLh models LhaL appeared ln Lhe mld
1980s was Lo show LhaL lnvesLmenLs ln knowledge and human caplLal were underLaken by proflL-maxlmlzlng
flrms ln a general equlllbrlum seLLlng.
2
Whereas flrms lnvesLed ln 8&u Lo geL a compeLlLlve edge over lLs
compeLlLors, parL of LhaL knowledge spllled over Lo a socleLal knowledge sLock LhaL lnfluenced Lhe
producLlon funcLlon of all oLher flrms, augmenLlng Lhelr producLlvlLy. Pence, growLh was dlsenLangled from
lnvesLmenLs ln caplLal and lncreases ln labor supply: even lf Lhose remalned consLanL, lncreases ln
knowledge meanL LhaL growLh would lncrease.
1he flrsL wave of endogenous growLh models (8omer 1986, Lucas 1988, 8ebelo 1991, and oLhers)
emphaslzed Lhe lnfluence of knowledge splllovers on growLh wlLhouL speclfylng how knowledge spllls over.
3
?eL, Lhe crlLlcal lssue ln modellng knowledge-based growLh resLs on Lhe splllover of knowledge. 1haL ls, even
Lhough an economy lnvesLs heavlly lnLo 8&u, Lhe mechanlsms by whlch Lhls knowledge spllls over and ls
converLed lnLo goods and servlces, ls baslcally unknown.
1hls was Lo some exLenL remedled ln Lhe second generaLlon of endogenous growLh models (SchmlLz 1989,
SegersLrom, AnanL and ulnopoulos 1990, SegersLrom 1991, Aghlon and PowlLL 1992, Cheng and ulnopoulos
1992, SegersLrom 1993). ÞredomlnanLly Lhe neo-SchumpeLerlan models deslgned enLry as an 8&u race
where a fracLlon of 8&u Lurns lnLo successful lnnovaLlons. Whlle Lhls lmplles a sLep forward, Lhe essence of
1
See 8raunerh[elm (2008) and van Þraag and verslooL (2007) for surveys.
2
lor a survey of neoclasslcal growLh models, see 8raunerh[elm (2008).
3
See also ÞrecsoLL and 8oyd (1987) who modeled producLlon exLernallLles as a funcLlon of coallLlon conLracLs beLween senlor,
experlenced workers and younger less experlenced. ulmlnlshlng reLurn seL as ln Lhe numbers of younger workers lncreased.
Compare Lucas (1978) work on Lhe role of LalenLed managemenL and Lhe allocaLlon of resources.
wotkloq lopet 2010.02
28
Lhe SchumpeLerlan enLrepreneur ls mlssed. 1he lnnovaLlon process sLreLches far beyond 8&u races LhaL
predomlnanLly lnvolve large lncumbenLs and concern quallLy lmprovemenLs of exlsLlng goods.
ln Lhe mosL recenL veln of knowledge-based growLh models Lhe focus ls narrowed and more well-deflned.
MosL promlnenL among Lhose are Lhe effecLs of Lechnology-based enLry on Lhe lnnovaLlveness and
producLlvlLy of lncumbenLs, and Lhe lmpllcaLlons of flrm heLerogenelLy on creaLlve desLrucLlon and growLh
(Aghlon and CrlfflLh, 2003). As regards Lhe flrsL lssue, Lhe analysls follows an lndusLrlal organlzaLlon LradlLlon
LhaL examlnes Lhe effecLs of preempLlon, enLry regulaLlon, sLraLeglc lnLeracLlon, eLc. (CllberL and newbery
1982, 1lrole 1988, LaffonL and 1lrole 1993, nlckell 1996, 8lundell eL al. 1999, 8erry and Þakes 2003, Aghlon
eL al. 2006). 1he new elemenL ls LhaL Lhese models Lake lnLo accounL Lhe effecLs of compeLlLlon and
lnnovaLlon of boLh lncumbenLs and new flrms. lor lnsLance, Aghlon eL al. (2006) has shown LhaL enLry - or
enLry LhreaLs - has poslLlve effecLs on Lhe lnnovaLlve behavlor by lncumbenLs close Lo Lhe Lechnologlcal
fronLler, whlle no such effecLs could be found for Lechnologlcal laggards (see Lhe dlscusslon ln SecLlon 3).
Concernlng Lhe analysls of flrm heLerogenelLy, enLry, and producLlvlLy, Lhe baslc reasonlng ls LhaL elevaLed
flrm speclflclLy ln performance (sLock evaluaLlon, proflLs, eLc.) ls assoclaLed wlLh a growlng number of
smaller and new flrms (ÞasLor and veronesl 2003, llnk eL al., 2003). Moreover, flrm speclflclLy ls seen as
reflecLlng creaLlve desLrucLlon, enhanced efflclency and hlgher producLlvlLy and growLh (uurnev eL al. 2004,
Aghlon eL al. 2004, 2003, Acemoglu eL al. 2003, 2006 and Chun eL al., 2007). An lncreased lnfluence of small
flrms and sLarL-ups ls assoclaLed wlLh deregulaLlon, lncreased compeLlLlon, eLc., buL also because new and
young flrms are more prone Lo explolL new Lechnologles or knowledge (!ovanovlc and 8ousseau 2003).
kleLLe and korLum (2004), bulldlng on Þenrose's (1939) resource based Lheory of Lhe flrm, presenL a mulLl-
flrm, mulLl-varleLy model where Lhe lnnovaLlon producLlon funcLlon comblne codlfled (or known) knowledge
wlLh currenL ongolng 8&u Lo produce new or lmproved goods. LnLry occurs when sLarLups produce hlgher
quallLy producLs as compared Lo Lhose varleLles produced by Lhe lncumbenLs. Lmbarklng from a sLandard
endogenous growLh model, Acs eL al (2004) and 8raunerh[elm eL al (2009) presenL aL LheoreLlcal model
whlch lncludes Lhe SchumpeLerlan enLrepreneurs LhaL lnnovaLe buL are noL lnvolved ln 8&u-acLlvlLles (see
Lhe appendlx).
1hus, noLwlLhsLandlng LhaL knowledge-based growLh models lmplled a huge sLep forward ln undersLandlng
growLh, Lhe preclse mlcroeconomlc mechanlsms needs Lo be furLher plnned down. A number of emplrlcal
sLudles flnd amblguous supporL for knowledge varlables as explanaLlons of aggregaLe growLh (!ones 1993a,
1993b, 2006). 8ased on Lhese emplrlcal lrregularlLles, and Lhe dlscusslon ln secLlon 2 and 3 concernlng
knowledge dlssemlnaLlon and lnnovaLlon, Lhe key lssue ln growLh sLlll revolves around Lhe exacL
lmplemenLaLlon and LransformaLlon of knowledge lnLo commerclal value, l.e. knowledge splllovers. A
concelvable mlsslng llnk ln much of Lhe conLemporary growLh llLeraLure relaLes Lo Lhe lncorporaLlon of Lhe
ºLrue" SchumpeLerlan enLrepreneur. 1he laLLer, as shown ln prevlous secLlons, consLlLuLe a brldge beLween
opporLunlLy and economlc ouLcome, Lhereby lnfluenclng how knowledge ls more or less smooLhly fllLered
and subsLanLlaLed lnLo buslness acLlvlLy. Comlng Lo grlps wlLh Lhe mlcroeconomlc foundaLlons of growLh also
have lmporLanL bearlngs on Lhe effecLlveness of pollcy recommendaLlons.
1be mlctoecooomlc foooJotloo of cootempototy qtowtb moJels
wotkloq lopet 2010.02
29
ScruLlnlzlng Lhe knowledge-based growLh models reveals LhaL Lhey resL on Lhree cornersLones: knowledge
exLernallLles, lncreaslng reLurns ln Lhe producLlon of goods, and decreaslng reLurns ln Lhe producLlon of
knowledge. 1hese are consldered Lo provlde a mlcroeconomlc foundaLlon for explalnlng Lhe mechanlsms
LhaL promoLe growLh aL Lhe macro level. Pere we narrow down Lhe dlscusslon Lo how represenLaLlve some
of Lhe properLles of Lhese bulldlng blocks are for real world behavlor.
llrsL, Lhe ablllLy of lncumbenLs Lo absorb knowledge splllovers can be quesLloned (as dlscussed ln Lhe
prevlous secLlon). As shown above, Lhe poLenLlal advanLages ln knowledge sourclng are ofLen lmpeded by
Lhe lnherlL lncenLlve sLrucLures wlLhln Lhe flrm. lf we Lake Lhe vlew proposed by Cohen and LevlnLhal (1990)
LhaL aL any glven polnL ln Llme absorpLlon capaclLy depends on Lhe knowledge accumulaLed ln prlor perlods,
l.e. Lhe need Lo remaln wlLhln a well-deflned producL space when lnnovaLlng, lL ls noL surprlslng LhaL
absorpLlon and LransformaLlon of knowledge becomes paLh dependenL. Lmplrlcal evldence qulLe
persuaslvely also reveals LhaL a large number of radlcal breakLhrough lnnovaLlons orlglnaLe ln small, less
8&u-lnLenslve, buL enLrepreneurlally geared flrms. Some of Lhe currenL examples are MlcrosofL and Coogle,
who explolL, develop and use exlsLlng Lechnologles buL had none - or modesL - 8&u faclllLles lnlLlally. ln facL,
Lhe enLrepreneurs behlnd Lhese flrms share several of Lhe Lyplcal characLerlsLlcs of Lhe AusLrlan proLoLype
enLrepreneur. CLher llkely examples of growLh enhanclng enLrepreneurlal flrms are lkea and PM of Sweden,
and WalmarL and SLarbuck of Lhe uS. 1hese flrms have no research deparLmenLs (buL do underLake acLlvlLles
LhaL could be labeled developmenL), buL has cerLalnly conLrlbuLed Lo knowledge by lnLroduclng new
buslness models and developlng new markeLs.
1
Whereas Lhe producLlon of knowledge shlfLed from belng exogenous ln neoclasslcal growLh model Lo
becomlng endogenous ln Lhe knowledge-based models, Lhe crlLlcal lssue for growLh - dlffuslon of knowledge
- ls by and large sLlll exogenous. knowledge ls Lhus a necessary buL far from sufflclenL condlLlon ln order Lo
aLLaln growLh (nelson and Þack 1999, Acs eL al 2009). ln a sense, Lhe Solowlan Lechnlcal resldual can be
argued Lo have been Lransformed lnLo an enLrepreneurlal resldual.
As second sLrand of crlLlclsm concern Lhe lnLer-Lemporal and lndlrecL effecLs of enLrepreneurshlp on
aggregaLe growLh. Also Lhese are largely unaccounLed for. Assumlng an lnflux of flrms LhaL lnLenslfles forces
of creaLlve desLrucLlon and ralses Lhe ºad[usLmenL pressure", knowledge regardlng ºwhen and how" ls sLlll
qulLe rudlmenLary.
2
1he lndlrecL effecLs - such as lncreaslng compeLlLlon, Lhe replacemenL of older and less
producLlve flrms - may be more lmporLanL Lhan Lhe dlrecL effecLs (8oblnson eL al 2006). 1hese dynamlc
effecLs have largely been lgnored. Slmllarly, exlLs, belng Lhe oLher crlLlcal componenL of creaLlve desLrucLlon
1
klm eL al (2006) conclude LhaL sLarLups promoLe new and more flexlble organlzaLlons.
2
1hls has been noLed slnce long by e.g. klrzner (1973), Ceroskl (1993) and nlckell (1996) and Lhe prevlous references Lo Aghlon eL al
ln secLlon 3. !ohnson and Þarker (1996), ue[ardln (2008) and 1hurlk and Carre (2008) show LhaL neL enLry have a poslLlve lagged
effecL on reglonal growLh whlle ue[ardln (1998) falled Lo flnd such a relaLlonshlp. As argued Lhe enLry/exlL process ls characLerlzed by
a conslderable degree of heLerogenelLy and wlll noL necessarlly generaLe creaLlve desLrucLlon and economlc progress (Man[ón-
AnLolln 2004, vlvarelll 2007). Cabral (1997) even clalms LhaL mosL enLrepreneurlal venLures are enLry mlsLakes.
wotkloq lopet 2010.02
30
and dynamlcs, noL leasL because lL releases Lhe resources needed ln expandlng oLher parLs of Lhe economy,
ls much less researched Lhan enLry.
1
1he emp|r|ca| ev|dence
íottepteoeotsblp, koowleJqe ooJ ootloool qtowtb
1he llnk beLween knowledge producLlon and producLlvlLy aL Lhe mlcro-level ls well esLabllshed.
2
AL a hlgher
level of aggregaLlon, emplrlcal analyses become more lnLrlcaLe as endogenlLy and causallLy lssues make Lhe
lnLerpreLaLlon of Lhe resulLs conslderably harder. SLlll, a number of recenL emplrlcal sLudles suggesL LhaL
enLrepreneurshlp - measured as sLarLup raLes, Lhe relaLlve share of SMLs, self-employmenL raLes, eLc. - ls
lnsLrumenLal ln converLlng knowledge lnLo producLs and Lhereby propelllng growLh.
lor example, 1hurlk (1999) provlded emplrlcal evldence from a 1984-1994 cross-secLlonal sLudy of Lhe 23
counLrles LhaL are parL of Lhe CrganlzaLlon CLCu, LhaL lncreased enLrepreneurshlp, as measured by buslness
ownershlp raLes, was assoclaLed wlLh hlgher raLes of employmenL growLh aL Lhe counLry level. Slmllarly,
AudreLsch eL al. (2002) and Carree and 1hurlk (1999) flnd LhaL CLCu c counLrles exhlblLlng hlgher lncreases
ln enLrepreneurshlp also have experlenced greaLer raLes of growLh and lower levels of unemploymenL. See
also Wennekers and 1hurlk (1999).
ln a sLudy for Lhe CLCu, AudreLsch and 1hurlk (2002) underLook Lwo separaLe emplrlcal analyses Lo ldenLlfy
Lhe lmpacL of changes ln enLrepreneurshlp on growLh. Lach one uses a dlfferenL measure of
enLrepreneurshlp, sample of counLrles and speclflcaLlon. 1hls provldes some sense of robusLness across
dlfferenL measures of enLrepreneurshlp, daLa seLs, Llme perlods and speclflcaLlons. 1he flrsL analysls
measures enLrepreneurshlp ln Lerms of Lhe relaLlve share of economlc acLlvlLy accounLed for by small flrms.
lL llnks changes ln enLrepreneurshlp Lo growLh raLes for a panel of 18 CLCu counLrles spannlng flve years Lo
LesL Lhe hypoLhesls LhaL hlgher raLes of enLrepreneurshlp lead Lo greaLer subsequenL growLh raLes. 1he
second analysls uses a measure of self-employmenL as an lndex of enLrepreneurshlp and llnks changes ln
enLrepreneurshlp Lo unemploymenL aL Lhe counLry level beLween 1974 and 1998. 1he dlfferenL samples
lncludlng CLCu counLrles over dlfferenL Llme perlods reach conslsLenL resulLs - lncreases ln enLrepreneurlal
acLlvlLy Lends Lo resulL ln hlgher subsequenL growLh raLes and a reducLlon of unemploymenL.
Acs eL al. (2004) and 8raunerh[elm eL al. (2009) flnd a poslLlve relaLlonshlp beLween enLrepreneurshlp and
growLh aL Lhe counLry level examlnlng 20 CLCu-counLrles for Lhe perlod 1981-2002. 1he lmpacL ls
conslderably sLronger ln Lhe 1990s Lhan ln Lhe 1980s, whlle Lhe lmporLance of 8&u seems Lo dlmlnlsh ln Lhe
laLLer Llme perlod. Salgado-8anda (2003) lmplemenLs a measure of lnnovaLlve enLrepreneurshlp based on
quallLy ad[usLed paLenL daLa for 22 CLCu counLrles, whlch ls reporLed Lo poslLlvely lnfluence growLh whlle no
such effecL could be esLabllshed for self-employmenL.
1
8arLelsman eL al (2004) show LhaL Lhe fasLer pace of exlLs ln Lhe uS as compared Lo Lurope has had poslLlve sLrucLural effecLs.
2
See Adams (1990), LlchLenberg (1993), Caballero and !affe (1993), Coe and Pelpman (1993), 8aumol (2007), LeSage and llscher
(2008) and naude 2008).
wotkloq lopet 2010.02
31
Acs and ArmlngLon (2002) asked Lhe quesLlon whaL Lhe relaLlve conLrlbuLlon of new flrms ls ln Lerms of new
[obs? 1hey conclude LhaL new flrm sLarL-ups play a far more lmporLanL role ln Lhe economy Lhan has
prevlously been recognlzed. lor Lhe u.S. economy as a whole Lhey show LhaL for Lhe flrsL half of Lhe 1990s
new esLabllshmenLs accounLed for a conslderably larger share of [ob creaLlon Lhan already exlsLlng
esLabllshmenLs. As dlscussed ln a prevlous secLlon, aL more dlsaggregaLed spaLlal unlLs - l.e. a clLy, reglon or
sLaLe - Lhe emplrlcal evldence corroboraLes Lhe resulLs aL Lhe naLlonal level. 1hey also flnd LhaL new flrms
are more lmporLanL Lhan Lhe sLock of flrms ln a reglon, buL Lhe manufacLurlng secLor appears Lo be an
excepLlon. 1hls ls conslsLenL wlLh prlor research on manufacLurlng.
Slmllar resulLs are found ln sLudles by van SLel and SLorey (2004), 8apLlsLa eL al (2008) and van SLel and
Suddle (2008). ln addlLlon, lrlLsch and Muellers (2004) argue LhaL Lhese effecLs are sLrongesL ln Lhe earllesL
sLage of Lhe flrm's llfe cycle. ln a recenL paper by Claeser and kerr (2009) lL ls shown how a 10 percenL
lncrease ln Lhe number of flrms per worker lncrease employmenL growLh wlLh 9 percenL, whlle a 10 percenL
lncrease ln average slze of flrms ls clalmed Lo resulL ln a seven percenL decrease ln employmenL growLh due
Lo new sLarLups.
1
AL Lhe flrm level, sLarLups are more llkely Lo grow and creaLe new [obs (!ohnson eL al 2000, Llngelbach eL al
2006). 1he paLLern seem however Lo dlffer beLween Lhe u.S. and Lurope. 1he probable reasons Lo Lhese
dlfferences ls alloLLed Lhe lnsLlLuLlonal seL-up (SLorey 1994, uavles and Penrekson 1997).Whlle ln Lurope Lhe
maln effecL accrues Lo flrms employlng one or Lwo new persons (Wlklund 1998, Andersson and uelmar
2000), growLh ln Lhe u.S. ls clalmed Lo be domlnaLed by a small number of new enLrepreneurlal flrms
exhlblLlng exLraordlnary growLh (ºgazelles"). Cf course, gazelle effecLs also exlsL ln oLher counLrles (Wlklund
and Shepherd 2004). 1hey can also be found ln all Lypes of lndusLrles even Lhough Lhey seem Lo emerge
more frequenLly from explolLlng new knowledge (aL leasL ln Lhe u.S.). As shown by Penrekson and !ohansson
(2009), Lhe lmporLance of gazelles seems Lo have lncreased over Lhe years.
AL Lhe reglonal level numerous sLudles - whlch has Lhe advanLage of belng exposed Lo baslcally Lhe same
lnsLlLuLlonal seLup - appear where reglonal enLrepreneurshlp buL also knowledge seems slgnlflcanLly relaLed
Lo reglonal prosperlLy.
2
ulfferenL varlables have been used Lo capLure enLrepreneurlal acLlvlLles. uslng an
lndusLry Lurbulence varlable lrlLsch (1996) concluded LhaL enLry and exlLs lmpacL growLh. ue[ardln (2008),
lmplemenLlng a neL enLry varlable Lo capLure enLrepreneurshlp, found poslLlve lagged effecLs for enLry ln Lhe
servlce secLor 1982-1996 on growLh.
A recenL sLudy by SuLLer (2009) on uS daLa aLLrlbuLes 90 percenL of reglonal varlaLlon ln growLh (LoLal facLor
producLlvlLy) Lo Lhe reglonal knowledge sLock (paLenL) and reglonal new flrm formaLlon. LnLrepreneurshlp ls
1
1he resulLs are corroboraLed by MacMlllan and Woodruff (2002) and AudreLsch eL al (2006).
2
See AshcrofL and Love (1996), lrlLsch (1997), AudreLsch and lrlLsch (2002), Acs and ArmlngLon (2002), van SLel and SLorey (2002),
Carre eL al (2002) and klapper eL al (2006). A number of sLudles reporL a poslLlve correlaLlon beLween knowledge and reglonal
prosperlLy. Powever, as sLressed by several scholars, Lhese sLudles suffers from numerous problems, e.g. Lhe complex dynamlcs
beLween 8&u and lLs commerclal appllcaLlons (ulsney 2003, ScarpeLLa eL al 2002, Lrken eL al 2008), fall Lo accounL for physlcal and
human caplLal facLors/sLocks (PolLz-Lakln and kao 2003, Peden 2003, losLer eL al 2006). 1hus, much of Lhe varlaLlon ln producLlvlLles
may have llLLle Lo do wlLh dlfferences ln knowledge or Lechnology.
wotkloq lopet 2010.02
32
however clalmed Lo have an effecL on growLh LhaL ls flve Llmes larger Lhan knowledge.
1
1hus, Lhe emplrlcal
evldence hlnLs aL knowledge belng lmporLanL for sLeady-sLaLe economlc growLh slmulLaneously as lLs
commerclal lnLroducLlon Lhrough new venLures/flrms has a dramaLlcally larger lmpacL.
cooottles ot Jlffeteot level of ecooomlc Jevelopmeot
uo Lhe effecLs of enLrepreneurshlp on growLh and producLlvlLy dlffer wlLh respecL Lo counLrles' level of
developmenL? We Lake 8osLow (1960) as our polnL of deparLure, who suggesLed LhaL counLrles go Lhrough
flve dlfferenL sLages of economlc growLh ln as Lhey develop, endlng ln a sLage labeled Lhe age of hlgh mass-
consumpLlon. lollowlng LhaL Lhread, ÞorLer eL al (2002) presenLed a growLh cycle conslsLlng of Lhree sLages:
Lhe facLor drlven, Lhe efflclency drlven and Lhe lnnovaLlon drlven. Pence, counLrles aL dlfferenL level of
developmenL can be expecLed Lo dlsplay noL only dlverglng producLlon sLrucLures, buL also when lL comes Lo
smaller flrms and enLrepreneurs (Acs and Szerb 2009).
ln a neo-SchumpeLerlan growLh model conLexL, lnnovaLlve enLrepreneurshlp ls clalmed Lo be Lhe speclflc
mechanlsm Lhrough whlch producLlvlLy growLh ls lnLroduced ln advanced economlcs, conLrasLlng less
developed counLrles where dlffuslon of prevlous lnnovaLlons and prevlously developed Lechnology spur
producLlvlLy growLh (Acemouglu eL al 2006). Pence, Lechnologlcal lnnovaLlon ls broughL abouL Lhrough Lhe
creaLlon of new knowledge made manlfesL ln producLlon by enLrepreneurs ln developed economles, whlle
dlffuslon Lo a larger exLenL ls drlven by caplLal lnvesLmenL channeled Lhrough esLabllshed flrms (LrLur and
koch 2008). 1he presence of Lechnologlcal lnLerdependence beLween counLrles ls clalmed Lo faclllLaLe Lhe
dlffuslon of Lechnologles from leadlng Lo lagglng economles, Lhereby speedlng up producLlvlLy among
laggards.
1he causes of sLrucLural change Lhus dlffer beLween economles aL dlfferenL level of developmenL (nelson
and Þack 1999, Crles and naude 2008, 2010). ln developlng counLrles wlLh advanLageous cosL sLrucLures,
enLrepreneurshlp based on lmlLaLlon LogeLher wlLh lnflows of forelgn flrms and lnvesLmenLs by large
lncumbenLs, serve Lo achleve Lhls end (8odrlk 2007). ln more advanced economles lnnovaLlon and sLrucLural
change ls more llkely Lo Lake place Lhrough Lhe comblned efforLs by enLrepreneurlal small venLures and large
lnnovaLlve flrms (organlzed 8&u), complemenLlng each oLher (nooLeboom 1994, 8aumol 2002).
Some emplrlcal supporL for Lhe dlfferenL klnd of Lechnology dlffuslon and dynamlcs ls provlded by SLam and
van SLel (2009). 1hey pool mlcroeconomlcs daLa (CLM) wlLh more aggregaLe daLa and flnd LhaL
enLrepreneurshlp has no growLh effecL ln low lncome counLrles.
2
ln hlgh lncome and LranslLlon counLrles Lhe
opposlLe prevalls, parLlcularly wlLh regard Lo opporLunlLy based enLrepreneurshlp. 1he poslLlve effecLs are
mosL pronounced ln Lhe LranslLlon economles whlch ls aLLrlbuLed ample enLrepreneurlal opporLunlLles, a
1
See also Claeser eL al (1992), Mlracky (1993), 8eynolds eL al (1994), Acs and ArmlngLon (2006), SLam (2006) Claeser (2007) and
naude eL al (2008) for analyses on Lhe relaLlonshlp beLween enLrepreneurshlp and growLh, Lhe producL cycle, Lechnologlcal progress
and compeLlLlon.
2
SlmulLaneously as Lhe average enLrepreneurshlp raLe ls shown Lo be much hlgher ln low- and mlddle lncome counLrles Lhan ln hlgh-
lncome counLrles (Ardagna and Lusardl 2008). ln addlLlon, ln Lhe former Lwo caLegorles of counLrles, necesslLy enLrepreneurshlp
accounLs for abouL Lwo Lhlrds of sLarLups, whlle LhaL drops Lo 22 percenL ln hlgh-lncome counLrles. Lu has Lhe lowesL raLe of
enLrepreneurlal acLlvlLy. 1hls complemenLs Wennekers (2003) u-shape model, where hlgher enLrepreneurlal acLlvlLles are expecLed
ln low- and hlgh-lncome counLrles, by sLresslng Lhe Lype of enLrepreneurshlp.
wotkloq lopet 2010.02
33
hlghly educaLed people and quallfled enLrepreneurs LhaL are well connecLed Lo local neLworks. ln addlLlon,
opporLunlLy cosLs are low for poLenLlal enLranLs slnce alLernaLlve occupaLlons are sparse.
1o summarlze secLlon 4, LheoreLlcal advances, supporLed by emplrlcal flndlngs, clearly polnL Lo an lncreaslng
role for enLrepreneurs ln Lhe growLh process. SlmulLaneously, Lhere are conslderable gaps ln our
undersLandlng of Lhe sLrucLure and worklng of Lhe mlcroeconomlc mechanlsms ln Lhe growLh process.
wotkloq lopet 2010.02
34
5. The geography of entrepreneurship, innovation and growth
1he followlng secLlon ls devoLed Lo a brlef exploraLlon of some of Lhe domlnanL explanaLlons as regards Lhe
spaLlal dlsLrlbuLlon, more preclsely, Lhe lumplness of enLrepreneurshlp and knowledge, whlch seems Lo be a
dlsLlncL feaLure of Lhe economlc landscape. We wlll also Louch upon Lhe expecLed, and acLual, consequences
of geographlcally concenLraLed sLrucLures of economlc acLlvlLles. 1he mechanlsms LhaL have been ldenLlfled
Lend Lo generaLe geographlcally concenLraLed producLlon sLrucLures more generally ls however beyond Lhe
scope of Lhe currenL presenLaLlon. 8aLher, Lhe amblLlon ls Lo hlghllghL some aspecLs of parLlcular lnLeresL
when lL comes Lo Lhe lnLer-locus of enLrepreneurs and knowledge on one hand, and geographlc proxlmlLy
and growLh, on Lhe oLher.
1
Why |s geograph|ca| prox|m|ty |mportant?
1he modellng plllars of Lhe geographlcal dlsLrlbuLlon of economlc acLlvlLles are LransporL and Lrade cosLs
LogeLher wlLh pecunlary and non-pecunlary exLernallLles. 1he former Lype of exLernallLy refers Lo demand-
and supply-llnkages whlle Lhe laLLer has Lo do wlLh knowledge splllovers. lf Lrade and LransporL cosLs are
hlgh, economlc producLlon sLrucLures wlll be dlspersed wlLh no or llLLle Lrade. Cn Lhe oLher hand, lf Lhey are
very low or even zero, Lhen locaLlon of economlc acLlvlLy ls arblLrary.
2
lL ls somewhere ln beLween where Lhe
largesL consequences for Lhe spaLlal dlsLrlbuLlon of producLlon can be expecLed. Changlng Lrade cosLs could
Lhus lnduce an endogenous change ln Lhe locaLlon of producLlon.
3
Cnce a crlLlcal mass has been esLabllshed,
self-relnforclng and cenLrlpeLal forces seL lnLo moLlon. 1he counLer effecLs, l.e. Lhose LhaL hlnders all
economlc acLlvlLles from belng locaLed ln one place, are assoclaLed wlLh congesLlon cosLs and rlslng cosLs of
locally flxed producLlon facLors.
SerendlplLy ls also lnvolved when lL comes Lo explalnlng spaLlal dlfferences, parLlcularly ln Lhe lnlLlal sLages of
Lhe emergence of a clusLer or agglomeraLed producLlon mllleu (ChlnlLz 1961, kenney and ÞaLLon 2006, ScoLL
2006, Claeser and kerr 2009). Cne frequenLly clLed example ls Lhe move by Wllllam Schockley's
semlconducLor buslness from Lhe easL coasL Lo San lranclsco. lL was noL Lhe abnormal - lf any - dlfference ln
reLurns LhaL made Schockley relocaLe, buL Lhe facL LhaL hls slck moLher llved close Lo San lranclsco.
íottepteoeotsblp
When lL comes Lo enLrepreneurshlp and flrm locaLlon, Lhere ls a large llLeraLure polnLlng Lo a poslLlve effecL
of geographlcally concenLraLed envlronmenL on Lhe locaLlon of flrms and enLrepreneurs. lor lnsLance, access
1
lor more general surveys of economlc geography models, see lu[lLa eL al (1999), lu[lLa and 1hlsse (2002), 1hlsse and Penderson
(2004) and 8raunerh[elm and leldman (2006).
2
lor elecLronlcally LransmlLLed producLs, Lrade and LransporLs cosLs approaches zero.
3
noLe LhaL Lhe Luropean economy has a conslderably more geographlcally dlspersed producLlon Lhan Lhe uS, whlch ls explalned by
hlgher LransporL and Lrade cosLs (8raunerh[elm eL al 2000). As Lhose cosLs become lower due Lo Luropean lnLegraLlon, a reshuffllng
of producLlon and sLronger geographlc concenLraLlon can be expecLed. 1haL wlll have lmpllcaLlons aL Lhe reglonal level.
wotkloq lopet 2010.02
33
Lo flnance and servlces, hlgher flow of ldeas, larger markeLs and less swlngs ln demand, LogeLher wlLh lower
enLry cosLs, are among Lhe mosL commonly clLed advanLages of agglomeraLed economlc mllleus.
1
A
LheoreLlcal model of reglonal dlfferences ln sLarLups has been presenLed by Crels and naude (2008), where,
amongsL oLher dynamlc feaLures, enLrepreneurs can ldenLlfy and explolL reglon speclflc opporLunlLles, elLher
Lhrough lmlLaLlon or lnnovaLlon. 1hey supply lnLermedlaLes Lo flnal goods producers, whlch llnk
enLrepreneurs Lo quallLaLlve and sLrucLural change, and lncreased numbers of sLarLups lmply more of
dlverslLy and hlgher reglonal growLh.
lL ls also clalmed LhaL envlronmenLs characLerlzed by small flrm's causes more enLrepreneurshlp by lowerlng
Lhe effecLlve cosL of enLry Lhrough Lhe developmenL of lndependenL suppllers, LogeLher wlLh a larger and a
more dlverslfled supply of venLure caplLal where rlsk caplLal lnvesLors more easlly can spread rlsks.
2
Crek eL
al (2009) argues LhaL Lhe lmpacL of reglonal slze (local and exLernal accesslblllLy Lo gross reglonal producL) ls
found Lo poslLlvely lnfluence enLrepreneurshlp (lmplemenLlng several varlables) ln Lhe servlce secLor,
whereas a negaLlve lnfluence of enLrepreneurshlp seems Lo prevall ln manufacLurlng and prlmary secLors.
verheul eL al (2001) presenLs an overvlew of how declslon aL lndlvldual level are lnfluenced by reglonal
characLerlsLlcs, lncludlng culLure buL also oLher reglon-speclflc lnsLlLuLlons as well as demand and supply
facLors, generaLlng dlfferences ln reglonal enLrepreneurshlp.
1he reglonal economlc mllleu as manlfesLed ln culLure, knowledge base and buslness aLLlLude, ls also
reporLed Lo be lmporLanL for reglonal success and enLrepreneurshlp (Camagnl 1991). nl[kamp (2003) clalms
LhaL access Lo knowledge, skllls, denslLy, opporLunlLles, neLworks offers more favorable condlLlons for
lnnovaLlve enLrepreneurshlp. ln addlLlon, new flrms are frequenLly bullL around producL knowledge LhaL ls
geographlcally bounded (Wong eL al 2003, kosLer 2006). van CrL and SLam (2007) argue LhaL agglomeraLlon
effecLs have a sLronger lmpacL on enLrepreneurshlp Lhan on growLh of lncumbenLs (examlnlng Lhe
lnformaLlon and communlcaLlon lndusLry). 1he reasons are alleged spaLlally more dlsLrlbuLed organlzaLlons
of large lncumbenLs and a propenslLy Lo lnLernallze Lhelr knowledge base.
An lnLeresLlng emplrlcal observaLlon ls LhaL once enLrepreneurs have esLabllshed Lhemselves l a reglon, Lhey
rarely move (SLam 2007), whlch seems Lo be parLlcularly prevalenL ln hlgh Lech flrms (Cooper and lolLa
2000). LnLrepreneurs are also more llkely Lo be from Lhe reglon of blrLh Lhan workers and Lhey operaLe
sLronger buslnesses Lhan moved ln enLrepreneurs (klepper 2001, llguelredo eL al 2002, Mlchelaccl and Sllva
2007). 1hese flndlngs suggesL LhaL aL leasL seml-permanenL dlfferences and paLh-dependence exlsL ln Lhe
spaLlal dlsLrlbuLlon of enLrepreneurs.
1he dynamlcs due Lo enLry may dlffer over Llme.
3
ln Lhe shorL-run enLry may yleld prlce compeLlLlon whlch ln
Lurn Lends Lo lncrease purchaslng power and over Llme also boosL proflLs and dlverslLy. lL could also aLLracL
1
See for lnsLance ChlnlLz (1961), !acobs (1970), Mllls and PamllLon (1984), Pansen (1987), Saxenlan (1994), Culmarães, llguelredo
and Woodward (2000, 2002) and 8raunerh[elm and leldman (2006).
2
See 1hornLon and llynne (2003), 8ackman (2009) and Claeser (2009).
3
AnoLher dynamlc feaLure ls Lhe expecLed correlaLlon beLween reglonal enLry and exlL (keeble and Walker 1994, 8eynolds, SLorey
and WesLhead 1994). A more dense envlronmenL Lend Lo lower survlval raLe buL also lmplles hlgher growLh prospecLs for survlvors
(lrlLsch eL al 2006, Weyh 2006).
wotkloq lopet 2010.02
36
purchaslng power from ouLslde Lhe reglon and overall make Lhe reglon more aLLracLlve.
1
1he reglon may
Lhan galn from boLh a pull on ouLslde cusLomers, leadlng Lo an lncrease ln LoLal reglonal expendlLure,
slmulLaneously as Lhere ls modesL leakage of demand Lo oLher reglons due Lo more varled and quallLaLlve
supply. ln longer run, or lf Lhere are credlble lnnovaLlons-based enLry (see prevlous secLlons) LhreaLs ln Lhe
shorL-run, lnnovaLlve acLlvlLles can be expecLed Lo follow sulL. 1hus, enLry and expanslon of new lndusLrles
can be expecLed Lo sLrengLhen reglonal aLLracLlveness.
koowleJqe
Also wlLh regard Lo knowledge producLlon, a number of advanLages of geographlcally concenLraLed
sLrucLures have been observed. ÞroxlmlLy advanLages presenL Lhemselves ln faclllLaLlng knowledge dlffuslon
and creaLlng proxlmlLy-based communlcaLlons exLernallLles. 1he lmporLance of proxlmlLy Lo speclflc
knowledge nodes, such as unlverslLles, has also been lnvesLlgaLed. lL ls shown LhaL Lhe lnnovaLlveness ls
subsLanLlal and lncreaslng ln Lhe presence of unlverslLles.
2
1he effecL ls aLLrlbuLed Lo knowledge splllovers.
1here ls a vlrLual consensus LhaL splllovers are locally bounded. 1he dlsLance decay effecL has also been
esLabllshed ln a large number of sLudles.
3
knowledge splllovers Lend Lo be sLronger for more Lechnologlcally
sophlsLlcaLed producLlon, and ln more fluld and early sLages of producLlon of new knowledge. lnnovaLlve
processes assessed by elLher paLenLs, or quallLy ad[usLed measure of paLenLs, lndlcaLe LhaL lnnovaLlon ls
more concenLraLed Lhan lnvenLlve or producLlon acLlvlLles (Þacl and usal 1999, L[ermo 2009).
ConsequenLly, lnnovaLlon processes and enLrepreneurlal acLlvlLy are Lo a hlgh exLenL locallzed processes,
one reason belng LhaL lnnovaLlon frequenLly lnvolves Lhe exchange of complex knowledge whlch malnly
Lakes place wlLhln Lhe borders of a reglon. lnnovaLlon processes are Lhus governed by lnLerdependencles,
complemenLarlLles and neLworklng beLween Lhe dlfferenL acLors. Pence, lnnovaLlon capablllLles seem Lo
sLem from Lhe lnLerplay beLween generlc knowledge and learnlng processes ´LhaL are hlghly ºlocallzed" and
embedded ln Lhe knowledge and markeL envlronmenL of each reglon.
4
keqloool qtowtb
ApparenLly Lhere ls ample emplrlcal evldence of Lhe lmporLance of geographlcal proxlmlLy for knowledge
splllovers and lnnovaLlveness. 8uL Lo whaL exLenL ls LhaL reflecLed ln dlfferences ln reglonal producLlvlLy? As
shown ln 8raunerh[elm (2008), a large number of emplrlcal sLudles coverlng dlfferenL geographlcal unlLs and
1
1he effecL ls known as 8ellly's Law (1931).
2
1he reader ls referred Lo 8raunerh[elm (2008) for a more deLalled descrlpLlon of Lhe sLudles regardlng Lhe proxlmlLy Lo unlverslLles,
splllovers and growLh.
3
1hls llLeraLure goes way back. lor more conLemporary conLrlbuLlons, see for lnsLance Poover and vernon (1939), vernon (1962),
Þred (1977), Leone and SLruyck (1976), Acs eL al. (1994), Acs (1996), AudreLsch and vlvarelll (1996), Anselln eL al (1997), Claeser
(1999), leldman and AudreLsch (1999), Anselln eL al (2000), keller (2002), llscher and varga (2003), 8oLLazl and Þerl (2003), and Lhe
refences ln Lhose arLlcles.
4
1hough 8reschl and Llssonl (2001) argues ln a crlLlcal arLlcle LhaL a careful scruLlny reveals LhaL splllovers are more of a pecunlary,
markeL based naLure raLher Lhan relaLed Lo knowledge splllovers.
wotkloq lopet 2010.02
37
lndusLrles, reach Lhe concluslon LhaL geographlcal concenLraLlon of enLrepreneurshlp and knowledge ls
assoclaLed wlLh hlgher producLlvlLy.
Cne of Lhe flrsL sLudles on reglonal producLlvlLy was underLaken Clccone and Pall (1996). 1hey underLook a
cross secLlonal sLudy, based on u.S. daLa from 1988, on labor producLlvlLy and concenLraLlon aL Lhe counLy
level. ConLrolllng for knowledge (as measured by educaLlon levels) and caplLal-lnLenslLy, Lhey found LhaL Lhe
ma[or explanaLory power could be aLLrlbuLed reglonal employmenL denslLy. ln facL, accordlng Lo Lhelr
esLlmaLlons, doubllng Lhe employmenL denslLy aL Lhe counLy level lncreased labor producLlvlLy by slx
percenL. SLlll, Lhe lssues addressed focused on denslLy and knowledge whlle Lhe lmpacL of enLrepreneurs was
noL lncluded ln Lhe analysls. ln a subsequenL analysls (Clccone, 2002) on Luropean reglons slmllar resulLs
were obLalned.
WlLhln Lhe lasL decade Lhere have been several aLLempLs Lo pln down Lhe relaLlonshlp beLween
enLrepreneurshlp and reglonal growLh. 8eynold's (1999) sLudy lndlcaLed a poslLlve relaLlonshlp for Lhe
unlLed SLaLes, as dld PolLz-Lakln and kao (2003) analysls of Lhe lmpacL of enLrepreneurshlp on producLlvlLy
change over Llme. lL ls shown LhaL varlaLlons ln Lhe blrLh raLe and Lhe deaLh raLe for flrms are relaLed Lo
poslLlve changes ln producLlvlLy. Correspondlng analyses on Luropean daLa coverlng roughly Lhe same Llme
perlod reporL more amblguous resulLs. lor lnsLance, AudreLsch and lrlLsch (1996) and lrlLsch (1997),
lmplemenLed daLa on Cermany from Lhe 1980s and beglnnlng of Lhe 1990s, falled Lo deLecL any slgns of
enLrepreneurshlp augmenLlng growLh. Powever, rerunnlng Lhelr esLlmaLlons for a laLer Llme perlod,
AudreLsch and lrlLsch (2002) found LhaL reglons wlLh a hlgher sLarLup raLe exhlblLed hlgher growLh raLes.
1helr lnLerpreLaLlon was LhaL Cermany had changed over Llme, lmplylng LhaL Lhe englne of growLh was
shlfLlng Lowards enLrepreneurshlp.
Calle[on and Segarra (1999) used a daLa seL of Spanlsh manufacLurlng lndusLrles beLween 1980-1992 Lo llnk
new-flrm blrLh raLes and deaLh raLes, whlch Laken LogeLher consLlLuLe a measure of Lurbulence, Lo LoLal
facLor producLlvlLy growLh ln lndusLrles and reglons. 1hey adopL a model based on a vlnLage caplLal
framework ln whlch new enLranLs embody Lhe edge Lechnologles avallable and exlLlng buslnesses represenL
marglnal obsoleLe planLs. 1hey flnd LhaL boLh new-flrm sLarLup raLes and exlL raLes conLrlbuLe poslLlvely Lo
Lhe growLh of LoLal facLor producLlvlLy ln reglons as well as lndusLrles. Slmllar resulLs are reporLed by 8osma
and nleuwenhul[sen (2002), looklng aL 40 reglons ln neLherlands 1988 Lo 1996 and separaLlng beLween
servlce and manufacLurlng secLor. ÞoslLlve LoLal facLor producLlvlLy effecLs were observed for Lhe servlce
secLor. 1he analysls ls exLended Lo Lhe 2002 ln 8osma eL al (2008).
1he poslLlve relaLlonshlp beLween enLrepreneurshlp and growLh aL Lhe reglonal level has also been
concluded Lo prevall ln Sweden. lor example, lölsLer (2000) and 8raunerh[elm and 8orgman (2004), flnd
slmllar effecLs uslng Swedlsh daLa. lölsLer (2000) examlnes noL [usL Lhe employmenL lmpacL wlLhln new and
small flrms buL Lhe overall llnk beLween lncreases ln self-employmenL and LoLal employmenL ln Sweden
beLween 1976-1993. 8y uslng a Layard-nlckell framework, he provldes a llnk beLween mlcro behavlor and
macroeconomlc performance, and shows LhaL lncreased self-employmenL shares have had a poslLlve lmpacL
on reglonal employmenL raLes ln Sweden. 8raunerh[elm and 8orgman (2004) esLabllshed a poslLlve lmpacL
of enLrepreneurs on reglonal growLh measured as labor producLlvlLy. 1hey also found LhaL Lhe effecL was
mosL pronounced for knowledge-lnLenslve lndusLrles.
wotkloq lopet 2010.02
38
8eglonal performance may also be affecLed by Lhe composlLlon of lndusLrles (klepper 2002, 8osenLhal and
SLrange 2003). Lven Lhough a conslderable number of sLudles have shown how lnnovaLlve acLlvlLles and
growLh seem Lo be hlgher ln more dlverslfled reglons (Claeser eL al. 1992, leldman and AudreLsch 1999,
Penderson and 1hlsse 2004), Lhe lssue of dlverslLy versus speclallzaLlon ln reglonal composlLlon of lndusLrles
has been examlned by poollng reglonal daLa wlLh lnformaLlon on lnnovaLlve acLlvlLles. 1he emplrlcal
evldence as Lo wheLher knowledge exLernallLles occur beLween lndusLrles (!acoblan exLernallLles) or wlLhln
lndusLrles (Marshall-Arrow-8omer exLernallLles), ls lnconcluslve (8raunerh[elm 2008).
8omanelll and leldman (2006) looklng aL bloLechnology clusLers ln Lhe u.S. conclude LhaL Lhree lngredlenLs
are parLlcularly declslve for reglonal developmenL. llrsL, Lhelr sLudy reveals LhaL abouL Lwo Lhlrds of Lhe
clusLers were founded by local enLrepreneurs and lnvesLors. Second, reglons LhaL exhlblLed susLalned
growLh revealed a hlgher degree of spln-offs from local, l.e. flrsL generaLlon, flrms. 1hlrd, a qulLe slzeable
share (one Lhlrd) of Lhe enLrepreneurs relocaLed from one meLropollLan reglon Lo anoLher Lo found new
flrms. 1he concluslon ls LhaL enLrepreneurs are scannlng aLLracLlve locaLlons Lo whlch Lhey relocaLe. 1hese
resulLs corroboraLe Lhe flndlngs of klepper (1996, 2002).
More recenLly LeSage and llscher (2008) and LeSage and Þace (2009), assess Lhe lmpacL of reglonal
knowledge sLocks on reglonal LoLal facLor producLlvlLy (1lÞ), reached Lhe concluslon LhaL spaLlal facLors musL
be Laken lnLo accounL. 8oLh spaLlal and Lechnologlcal proxlmlLy are found Lo be lmporLanL when examlnlng
Lhe exLenL of reglonal splllovers. 1hey lmplemenL an exLended verslon of reglonal knowledge sLocks Lo fully
grasp avallable reglonal Lechnlcal knowledge.
SuLLer (2009), shows LhaL enLrepreneurshlp ls clusLered ln space, and LhaL Lhere are laLenL unobservable and
reglon-speclflc sources of varlaLlon ln enLrepreneurlal acLlvlLles whlch have an lmporLanL lnfluence on
enLrepreneurlal acLlvlLy. CrowLh ln hlgh-Lech ouLpuL as a share of reglonal ouLpuL, per caplLa lncome and
LoLal prlvaLe employmenL were Lhe mosL lmporLanL sLrucLural economlc varlables ln deLermlnlng reglonal
enLrepreneurshlp, suggesLlng paLh dependency ln Lhe hlgh-Lechnology. Also SuLLer, lmplemenLlng recenL
lmprovemenLs ln spaLlal economeLrlc Lechnlques, concludes LhaL knowledge and enLrepreneurshlp poslLlvely
lnfluence reglonal LoLal facLor producLlvlLy. ln addlLlon, dlsLance Lo Lhe Lechnologlcal fronLlers seems Lo have
no or modesL lmpacL on Lhe conLrlbuLlon by enLrepreneurs Lo LoLal facLor producLlvlLy. ulscovery and
explolLaLlon of opporLunlLles seem allled Lo boLh lndlvlduals and place (Schoonhoven and 8omanelll 2003).
1o conclude, a larger number of sLudles conflrm LhaL enLrepreneurshlp, agglomeraLed knowledge sLrucLures
and reglonal growLh are lnLerconnecLed ln a complex way, buL LhaL Lhe domlnanL share of splllovers seems
Lo have a local orlgln.
wotkloq lopet 2010.02
39
6. Implications for economic policies
1he prevlous secLlons generaLe some general observaLlons. llrsL, Lo achleve susLalnable growLh, pollcles
have Lo embrace dlfferenL buL complemenLary parLs of an economy. ApparenLly, economlc performance
cannoL be dlsenLangled from Lhe legal and lnsLlLuLlonal conLexL of an economy (norLh and 1homas 1973,
8osenberg and 8lrdzell, 1986).
1
ln addlLlon, a dlscrepancy beLween economlc pollcles aL Lhe macro- and Lhe
mlcro-level may lead Lo a subopLlmal growLh paLh. A subopLlmal pollcy mlx as regards Lhe condlLlons for
dlffuslon of knowledge, as compared Lo accumulaLlng knowledge, could lmpede counLrles and reglons from
reachlng Lhelr poLenLlal growLh Lra[ecLorles (!ovanovlc 2004, Mlccelachl 2004).
1hus, lrrespecLlve of facL LhaL Lhe macro-economlc seLLlng has lmproved over Lhe lasL decade (seL aslde Lhe
presenL macroeconomlc Lurmoll), whlch has been palred by Lhe amblLlon Lo augmenL counLrles' knowledge
base, Lhe leverage on Lhose changes may Lurn ouL Lo be qulLe dlsappolnLlng lf Loo llLLle aLLenLlon ls dlrecLed
Lowards Lhe mlcro-economlc condlLlons for knowledge based growLh.
Second, desplLe Lechnologlcal advances ln Lerms of faclllLaLlng lnformaLlon flows and communlcaLlon
channels, proxlmlLy sLlll seem Lo maLLer. CosLs of communlcaLlon Lhus remaln lmporLanL, as do lnsLlLuLlonal
and culLural barrlers beLween counLrles (PofsLede 2001). 1haL also holds aL a flner geographlcal level [udglng
from Lhe more ample splllovers wlLhln reglons.
1hlrd, an emerglng emplrlcal llLeraLure where mlcro-level daLa ls pooled wlLh counLry-daLa, provldes
sLaLlsLlcal supporL for a negaLlve relaLlonshlp beLween regulaLlon and aggregaLe lncome, whlle Lhe opposlLe
seems Lo prevall as regards ownershlp rlghLs and enLry of new flrms (Loayza eL al 2004). A couple of sLudles
also suggesL LhaL hlgh-Lech flrms and knowledge lnLenslve sLarL-ups seems Lo play ma[or role ln lnfluenclng
growLh (AudreLsch and kellbach 2004, Mueller 2007).
AlLogeLher Lhese observaLlons carry lnLeresLlng lmpllcaLlons for Lhe deslgn of pollcles. ÞarLlcularly lmporLanL
componenLs ln Lhe mlcro-economlc seLLlng refer Lo Lhe deslgn of regulaLlon effecLlng knowledge producLlon,
ownershlp, enLry barrlers, labor moblllLy and lnefflclenL flnanclal markeLs. 1hese all refer Lo Lhe dlffuslon of
knowledge Lhrough enLry. knowledge creaLlon has Lo be maLched by lncenLlves Lo explolL knowledge.
2
Þo||cy |mp||cat|ons
koowleJqe ptoJoctloo, owoetsblp ooJ eotty
1he uS unlverslLy research sysLem seems Lo be more plurallsLlc and decenLrallzed as compared Lo Lhe
Lurope's (Carlsson eL al 2009). lL has been argued Lurope's unlverslLles achleved organlzaLlonal raLlonallLy
1
1he remarkable growLh ln Sweden beLween 1870 and 1930 was preceded by a number of lmporLanL lnsLlLuLlonal changes,
compulsory schoollng was lnlLlaLed ln 1842, local monopolles (gullds) were abollshed ln 1846, whereas a new law for flrms wlLh
llmlLed llablllLles was passed ln 1847, followed 1862 by freedom of Lrade. Pence, Lhe Swedlsh case lllusLraLes Lhe slgnlflcance of Lhe
lnsLlLuLlonal seL-up (8raunerh[elm 2003).
2
1heoreLlcally dlfferenL vlews on regulaLlon van be found ln Lhe publlc cholce (8uchanan and 1ullock 1962) and publlc lnLeresL (Þlgou
1938) Lheorles. 1he former clalm LhaL publlc lnLervenLlon hlnders dynamlcs and economlc developmenL whlle Lhe laLLer argue LhaL
lnLervenLlons are necessary Lo proLecL Lhe lnLeresL of Lhe publlc.
wotkloq lopet 2010.02
40
and bureaucraLlc efflclency aL Lhe expense of compeLlLlon and lnnovaLlon. 1he degree Lo whlch unlverslLles
should be auLonomous, governed ln an alLernaLlve and more exposed Lo compeLlLlon, ls wldely debaLed
(8raunerh[elm 2009). 1he uS sysLem seems however Lo have beLLer llnks Lo Lhe commerclal secLor and a
more rapld pace of commerclallzlng of new knowledge. 1haL ls llkely Lo enLall lessons for Lhe Luropean
unlverslLy sysLem.
lL would however be a mlsLake Lo conclude LhaL Lhese dlfferences predomlnanLly can be aLLrlbuLed Lhe
changes ln Lhe lnLellecLual properLy rlghLs (lÞ8s) LhaL resulLed due Lo 8ayh-uole AcL (1980), l.e. where lÞ8s
were Lransferred Lo unlverslLles. WlLhouL pollcles LhaL promoLe enLrepreneurlal acLlvlLy, commerclallzaLlon
of new knowledge ls less llkely Lo be aLLalned. lf we belleve LhaL growLh and economlc developmenL ls drlven
by lnnovaLlon and creaLlve desLrucLlon processes, leadlng Lo Lemporary monopolles, a balanced deslgn of
lÞ8s can be expecLed Lo yleld such an ouLcome. Also Lhls vlew has, however, been debaLed. SLlll, wlLhouL
havlng Lhe legal rlghLs Lo approprlaLe Lhe reLurns from lnnovaLlons Lhe lncenLlves Lo engage ln such hlgh-rlsk
acLlvlLles are llkely Lo decllne.
ln addlLlon, legal proLecLlon of lnvesLors has been shown Lo enhance access Lo credlL for poLenLlal
enLrepreneurs and faclllLaLe enLry (Ardagna and Lusardl 2008). ln general, conLracL enforcemenL regulaLlon
whlch affecLs Lhe efflclency of Lhe legal sysLem Lends Lo lmprove Lhe posslblllLles for enLry and enhance
lnnovaLlon (u[ankov 2008, La ÞorLa 2008, Aldls eL al 2009). u[ankov (2008) shows LhaL Lhe dlfferences ln
enLry beLween counLrles wlLh llLLle regulaLlon as compared Lo Lhe mosL heavlly regulaLed, lnfluences enLry
raLe by flve percenL annually. 1hus, well-deflned and credlble ownershlp lnsLlLuLlons should have a poslLlve
lmpacL on Lhe raLe of lnnovaLlon and enLry.
keqolotloo of eotty
ln general Lerms regulaLlon ls shown Lo deLer growLh, buL exacLly how ls less clear, albelL Lhe negaLlve effecL
lncurred on enLrepreneurshlp ls one suggesLed mechanlsm, LogeLher wlLh Laxes and llquldlLy consLralnLs.
1
Clccone and Þapaloannou (2006) provlde evldence LhaL enLry regulaLlon can delay lnLroducLlon of new
varleLles/goods ln lndusLrles LhaL experlence expanslonary global demand and/or Lechnology shocks.
1he exLenL of regulaLlon has lnLeresLlng lndlrecL effecLs LhaL lnfluence enLry. As shown by Ardagna and
Lusardl (2008), Lhe poslLlve effecL assoclaLed wlLh skllls (educaLlon) dlmlnlshes conslderably ln more
regulaLed counLrles, parLlcularly for opporLunlLy-based enLrepreneurshlp. ln addlLlon, lL slgnlflcanLly reduces
Lhe propenslLy for marglnallzed groups Lo sLarL up flrms. Slmllarly, Lhe poslLlve effecLs of knowlng people
who are enLrepreneurs, run Lhelr own flrms, l.e. neLwork and belongs Lo an enLrepreneurlal culLure, ls
curbed.
2
1he resulLs comply wlLh earller flndlngs of klapper eL al (2006) and also of Clccone and Þapaloannou
(2006), referred Lo above.
1
See Lvans and !ovanovlc (1989), PursL and Lusardl (2004), Aleslna eL al (2003), u[ankov eL al (2007), llorl eL al (2007), CenLry and
Pubbard (2000), nlcoleLLl and ScarpeLLa (2003), u[ankov (2008) and Arnold eL al (2008). uelmar and Wennberg (2010) dlscuss Lhe
need for a mulLl-level (lndlvldual, flrm, lndusLry) pollcy approach. La ÞorLa (2008) clalms LhaL a lrench legal orlgln (clvll law) Lends Lo
weaken Lhe effecL of lnnovaLlon on growLh as compared Lo an anglosaxlan (common law).
2
1hese effecLs are quanLlfled by Ardagna and Lusardl (2008). lor example, Lhe poslLlve neLwork effecLs are reduced by more Lhan
Lwo Lhlrds.
wotkloq lopet 2010.02
41
1he resulLs by Aglon eL al (2006) of enLry on lnnovaLlon lmply LhaL enLry barrlers may reduce Lhe lnnovaLlon
raLe, producLlvlLy and growLh. ÞuL dlfferenLly, more of employees ln forelgn flrms may spur producLlvlLy
growLh ln lncumbenLs. Cpenness Lo encourage an lnflux of flrms, workers and poLenLlal enLrepreneurs ls
consequenLly lmporLanL. lnLernaLlonallzed flrms are also observed Lo be mosL lnnovaLlve (Suddle and Pessels
2007).
keqolotloo of lobot motkets ooJ eotty
1he lmpacL of regulaLed labor markeLs ls somewhaL more mlxed. Powever, Mlcco and Þages (2006), AuLhor
eL al (2007) and kugler and Þlca (2008) all reporL a slgnlflcanL negaLlve lmpacL on enLry of hlgher regulaLed
labor markeLs, as well as a slower resLrucLurlng of Lhe economy. Slmllarly, sLudles on Lhe deLermlnanLs of
forelgn dlrecL lnvesLmenLs flnd a negaLlve effecLs of regulaLed labor markeLs (!arvorclk eL al 2006, Cross and
8yan 2008). ln addlLlon, producLlvlLy seems Lo decrease as labor markeL regulaLlons become more severe
(8assanlnl and venn 2007, MarLlns 2009), and Lhe number of fasL growlng flrms - gazelles - seems Lo be
negaLlvely lmpacLed (llgure 1).
I|gure 1. Str|ctness of emp|oyment protect|on (2004) and h|gh-expectat|on of ear|y-stage
entrepreneursh|p 2004-2009.
"#$%&'( )#*+, ,-. /'01' 23445 "#$%&'( )#*+, ,-. /'01' 234456
wotkloq lopet 2010.02
42
Clccone and Þapaloannou (2006) reporL several lnLeresLlng resulLs lnLeracLlng dlfferenL varlables, l.e.
regulaLed labor markeL negaLlvely lnfluence enLry by lowerlng Lhe soclal neLwork facLor dlscussed above,
parLlcularly for opporLunlLy based enLrepreneurshlp. ln addlLlon, more regulaLed labor markeLs lmply LhaL
lndlvlduals rlsk Laklng aLLlLudes become more lmporLanL. Pence, Lhe percelved Lhreshold Lo cllmb before
Laklng Lhe sLep Lo become an enLrepreneur lncreases. Ardagna and Lusardl (2008) conclude LhaL labor
markeL regulaLlon has lLs sLrongesL lmpacL on opporLunlLy based enLrepreneurshlp whlle Caballero and
Pammour (2000) sLress LhaL "consLralned conLracLual capablllLles" aL labor markeLs (and ln Lhe flnanclal
sysLem) may hamper Lhe process of creaLlve desLrucLlon.
1
1oxes ooJ eotty
1here ls an exLenslve llLeraLure on Lhe effecL of Laxes on enLrepreneurshlp embraclng Lhe sLrucLure of Laxes,
Lhe overall Lax pressure and marglnal Lax raLes. MosL of Lhe emplrlcal sLudles are based on Amerlcan, or
anglosaxlan, daLa. 1he resulLs are a blL lnconcluslve, buL Lhe overall concluslon of Lhese sLudles seems Lo be
LhaL Lhe level of lndlvldual Laxes ls amblguous (and even poslLlve), whlle lncreased marglnal raLes have a
clearly dlscerned negaLlve effecLs on Lhe propenslLy Lo become enLrepreneur. 1he lmpacL on
enLrepreneurshlp ls however senslLlve for Lhe posslblllLles Lo arblLrage beLween Lax bases (CenLry and
Pubbard 2000, Þarker and 8obson 2003, Cullen and Cordon 2007). 1axes LhaL lower Lhe posslblllLles for
lndlvldual wealLh, Lhereby addlng Lo flnanclal consLralnLs are also reporLed Lo have a negaLlve effecL on
enLrepreneurshlp (Pansson 2008). noLe also LhaL Lhe admlnlsLraLlve burden assoclaLed wlLh Laxes only
affecLs enLrepreneurs negaLlvely (u[ankov eL al 2008).
2
ln a recenL sLudy by u[ankov eL al (2008), looklng aL effecLlve corporaLe Laxes ln 83 counLrles 2004 for a
sLandardlzed flrm, a large negaLlve lmpacL ls found on lnvesLmenLs (by lncumbenLs and forelgn dlrecL
lnvesLmenLs) and on enLrepreneurlal acLlvlLy. A 10 percenL lncrease ln corporaLe Lax ls shown Lo reduces
aggregaLe lnvesLmenL ln relaLlon Lo CuÞ by Lwo percenL and reduce enLry wlLh beLween Lwo and flve
percenL. A Lax ralse ls also negaLlvely correlaLed wlLh growLh buL poslLlvely assoclaLed wlLh growLh of Lhe
lnformal secLor.
3
AnoLher sLaLlsLlcally slgnlflcanL resulL ls LhaL corporaLe debL of flrms ls much hlgher (lower
solldlLy) ln counLrles wlLh hlgher corporaLe Laxes , l.e. debL flnanclng more ls common Lhan equlLy flnanclng.
5ectots ooJ tbe stoqe of fltms´ llfe cycle
uependlng on Lhe sLage of Lhe flrm's llfe cycle, dlfferenL seL of pollcles are concelvable. ln Lhe very early
phases of an enLrepreneurlal venLure, lndlvlduals' economlc sLaLus may be hard Lo dlsenLangle from Lhelr
flrms (AuLlo and Wennberg 2009). ln general, Lhere ls llLLle pollcy aLLenLlon looklng aL Lhe [olnL lmpllcaLlon of
publlc pollcles aL dlfferenL sLages of new flrm evoluLlon such as enLry, growLh and exlL. ln addlLlon, flrms
grow aL dlfferenL pace and Lhe requlremenLs of slow-growlng flrms and gazelles may be qulLe dlfferenL. 1he
1
See also u[ankov eL al (2002), uesal eL al (2003) and La ÞorLa eL al (1998, 2000).
2
See Pansson (2008) for a survey. La ÞorLa (2008) reach Lhe concluslon LhaL Lhe Lax burden ls subsLanLlally hlgher ln clvll law
counLrles and Lhe Lax raLe hlgher.
3
1he emplrlcal analysls conLrols for oLher Laxes (vA1, personal, eLc).
wotkloq lopet 2010.02
43
lmporLance of gazelles for [ob creaLlon seems Lo have lncreased over Llme. All ln all, lL ls llkely LhaL pollcy
varlables lnfluenclng growLh dlffer over flrms' evoluLlonary sLages.
ln addlLlon, Lhere are also secLoral dlfferences. lor lnsLance, removlng enLry barrlers may noL lncrease
producLlvlLy and growLh ln all lndusLrles. Pence, removlng enLry barrlers should be complemenLed wlLh
means LhaL faclllLaLes Lhe reallocaLlon of resources Lowards secLors LhaL reacL poslLlvely Lo enLry, Lhereby
releaslng resources Lo be employed ln expandlng secLors. LxlLs are ofLen neglecLed, buL consLlLuLe a pollcy
area (bankrupLcy lnsLlLuLlons eLc.) as lmporLanL as pollcles geared Lowards enLry.
level of ecooomlc Jevelopmeot
1he deslgn of pollcles may also vary wlLh level of economlc developmenL of counLrles. As dlscussed above,
Lhe mechanlsm for sLrucLural changes and lmplemenLaLlon of new Lechnology looks dlfferenL ln developlng
and developed counLrles large. 8ulldlng lnsLlLuLlons LhaL fosLer prlvaLe secLor developmenL and provlde
credlble enforcemenL Lo proLecL prlvaLe ownershlp, encourage educaLlon and aLLracL forelgn dlrecL
lnvesLmenLs and lmlLaLlve enLrepreneurshlp, should be hlgh-prlorlLy lssues ln developlng counLrles(van SLel
2003, Saxenlan 2006, 8odrlk 2007). ln more developed economles aLLenLlon should Lo a larger exLenL be
dlrecLed producLlon and dlffuslon of knowledge, LogeLher wlLh well funcLlonlng and experlmenLally
organlzed lnnovaLlon processes.
1he polnL emphaslzed ln Lhls secLlon ls LhaL a supplemenLary seL of pollcles focuslng on sLrengLhenlng Lhe
condulLs of knowledge splll-over also plays a cenLral role ln promoLlng economlc growLh. WlLhouL Lhe
approprlaLe lncenLlve sLrucLure for labor, enLrepreneurs and lnvesLors, Lhe poLenLlal beneflclal effecL of
approprlaLely deslgned pollcles wlll noL be aLLalned. 1herefore pollcles LhaL alm Lo seL economles on Lhelr
poLenLlally long-run susLalnable growLh Lra[ecLory, musL lmplemenL coherenL sLraLegles LhaL embrace boLh
Lhe macro- and mlcro-level. 1he dlfferenL pollcy areas musL be coordlnaLed and addressed slmulLaneously. lf
enLry barrlers are reduced buL exlL posslblllLles are lnferlor and properLy rlghL weak, Lhe resulL ln Lerm of
sLarLups, knowledge dlffuslon and producLlvlLy may be modesL.
wotkloq lopet 2010.02
44
7. Conclusion
A socleLy's ablllLy Lo lncrease lLs wealLh and welfare over Llme crlLlcally hlnges on lLs poLenLlal Lo develop,
explolL and dlffuse knowledge, Lhereby lnfluenclng growLh. 1he more pronounced sLep ln Lhe evoluLlon of
manklnd has been preceded by dlsconLlnuous, or lumpy, augmenLaLlons of knowledge and Lechnlcal
progress. As knowledge has advanced and reached new levels, perlods followed of economlc developmenL
characLerlzed by uncerLalnLy, markeL experlmenLs, redlsLrlbuLlon of wealLh, and Lhe generaLlon of new
sLrucLures and lndusLrles. 1hls paLLern mlrrors Lhe evoluLlon durlng Lhe flrsL and second lndusLrlal revoluLlon
ln Lhe 18Lh and 19Lh cenLurles, and ls also a consplcuous feaLure of Lhe ºLhlrd", and sLlll ongolng, dlglLal
revoluLlon.
uesplLe Lhe facL LhaL Lhere ls a general presumpLlon wlLhln Lhe economlc dlsclpllnes LhaL mlcro-level
processes play a vlLal role ln Lhe dlffuslon of knowledge, and Lhus Lhe growLh process, Lhere ls a lack of
sLrlngenL LheoreLlcal framework buL also of emplrlcal analyses Lo supporL Lhls allegaLlon. 1he economlc
varlables knowledge, enLrepreneurshlp, lnnovaLlon hang LogeLher ln a complex manner buL are LreaLed as
dlfferenL and separaLe enLlLles, or reduced Lo a consLanL or a sLochasLlc process. lL ls noL unLll Lhe lasL 10-13
years LhaL a llLeraLure has emerged LhaL alms aL lnLegraLlng Lhese economlc concepLs lnLo a coherenL
framework.
1hus, knowledge concernlng Lhe mlcroeconomlc processes LhaL leads Lo growLh ls sLlll lncompleLe. ln Lhe
neoclasslcal growLh models producLlon of knowledge was exogenous - Lhe Lechnlcal resldual - whereas Lhe
dlffuslon of knowledge ls elLher exogenous, sLochasLlc or alloLLed large flrms LhaL more resembles Lhe
pharmaceuLlcal companles where research deparLmenLs Lrles Lo come up wlLh nexL comblnaLlon of
molecules LhaL wlll be Lurned lnLo Lhe nexL block-busLer. 8uL knowledge ls developed, applled and dlffused ln
many oLher ways, ofLen Lhrough smaller lnnovaLlve flrms and by enLrepreneurs. 1he uncerLalnLy,
asymmeLrles and hlgh LransacLlon cosLs lnherenL ln knowledge also generaLe a dlvergence ln Lhe assessmenL
and evaluaLlon of Lhe expecLed value of new ldeas. 1hls dlvergence ln valuaLlon of knowledge across
economlc agenLs and wlLhln Lhe declslon-maklng process of lncumbenL flrms can lnduce agenLs Lo sLarL new
flrms as a mechanlsm Lo approprlaLe Lhe (expecLed) value of Lhelr knowledge. 1hls would suggesL LhaL
enLrepreneurshlp faclllLaLes Lhe splllover of knowledge ln Lhe form of sLarLlng a new flrm.
Pow do we accounL for LhaL klnd of dynamlcs ln Lhe presenL growLh models? 1o whaL exLenL are lagged
effecLs and lnLeracLlon effecLs lncluded ln an approprlaLe way? And whaL ls acLually endogenlzed Lhrough
knowledge accumulaLlon? Should knowledge be seen as Lhe englne of growLh, or ls lL a beLLer meLaphor Lo
vlew knowledge as fuel LhaL feeds lnLo Lhe mechanlsm LhaL converLs knowledge lnLo growLh, e.g.
enLrepreneurs, lnnovaLlon, labor moblllLy, eLc? Pas, lndeed, Lhe Solowlan Lechnlcal resldual been
Lransformed Lo an enLrepreneurlal resldual?
1hls paper has sLrlved Lo lllusLraLe Lhe relaLlonshlp beLween knowledge, enLrepreneurshlp and lnnovaLlon on
Lhe one hand, and how LhaL relaLes Lo growLh on Lhe oLher. 8ased on a (parLlal) survey of recenL and
prevlous LheoreLlcal and emplrlcal conLrlbuLlons ln Lhls veln of research, Lhe amblLlon has been Lo plnpolnL
some of Lhe weak spoLs ln our currenL undersLandlng of growLh, and Lo provlde some recenL lnslghL Lo Lhe
growLh process. ln addlLlon, pollcy areas of lmporLance for Lhe mlcroeconomlc foundaLlons for growLh have
wotkloq lopet 2010.02
43
also been dlscussed, sLresslng Lhe lmporLance of a hollsLlc approach lmplylng LhaL a mulLlLude of measures
and lnsLrumenLs has Lo be consldered Lo aLLaln susLalnable economlc developmenL.
1o paraphrase volLalre: ºuoubL ls noL a pleasanL condlLlon buL cerLalnLy ls absurd" and we can be assured
LhaL we do noL yeL fully comprehend Lhe mlcro-economlc mechanlsms of growLh. 1hus, Lhe challenges are
sLlll Lhere - leL us deal wlLh Lhem!
wotkloq lopet 2010.02
46
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of íottepteoeotlol Actlvlty, !Al Þress, Creenwlch, C1.
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wotkloq lopet 2010.02
72
Append|x. Lndogenous growth w|th know|edge exp|o|t|ng entrepreneurs
1
8esearch deparLmenLs wlLhln lncumbenL flrms employ labor ( ) as Lhe only producLlon facLor, and
research acLlvlLles are lnfluenced by Lhe avallable sLock of knowledge (A) and an efflclency parameLer ( )
relaLed Lo research acLlvlLles.
1he producLlon funcLlon can be wrlLLen as,
(1)
where research producLlon ls poslLlvely lnfluenced by a larger knowledge sLock and hlgher efflclency.
ln order Lo lnclude Lhe SchumpeLerlan enLrepreneur, we flrsL assume LhaL enLrepreneurlal ablllLy ls
embodled ln labour buL ln conLrasL Lo raw labour lL ls dlsLrlbuLed unevenly across Lhe populaLlon. 1hus,
enLrepreneurlal acLlvlLles are assumed characLerlzed by decreaslng reLurns Lo scale ( ). 1he producLlon
funcLlon for enLrepreneurlal acLlvlLles Lakes Lhe followlng form,
. (2)
Pence, slmllar Lo 8&u-workers, Lhe represenLaLlve enLrepreneur Lakes advanLage of exlsLlng knowledge. Cn
Lhe oLher hand, Lhe producLlon Lechnology dlffers (decreaslng reLurns Lo scale) and Lhey do noL engage ln
research. 8aLher, Lhey comblne Lhelr enLrepreneurlal ablllLy wlLh Lhe exlsLlng sLock of knowledge Lo
lnLroduce new producLs and buslness models. 1he dlfferenL varleLles of caplLal goods ( ) produced by
enLrepreneurs and researchers ls employed ln Lhe flnal goods (?) secLor LogeLher wlLh labor,
(3)
where • (0‚•‚1) represenLs Lhe scale parameLer. Clven LhaL Lhe demand for all varleLles ln equlllbrlum ls
symmeLrlc, l.e. for all , we rewrlLe equaLlon 6 as
(4)
Assume LhaL caplLal goods (k) are produced wlLh Lhe same Lechnology as flnal goods and LhaL lL Lakes
unlLs of caplLal goods Lo produce one unlL of caplLal. 1hen lL can be shown LhaL,
(3)
SubsLlLuLlng equaLlon 3 lnLo 4 glves,
(6)
1
See also Braunerhjelm et al (2009).
wotkloq lopet 2010.02
73
1hus, Lhe economy employs Lhree facLors of producLlon, l.e. raw labor (produclng flnals), LogeLher wlLh
researchers and enLrepreneurs LhaL produces varleLles of caplLal goods. Labor markeL equlllbrlum ls aLLalned
when employmenL ln 8&u, enLrepreneurshlp and flnal producLlon equals LoLal supply,
(7)
As a slde effecL of Lhelr efforLs, researchers and enLrepreneurs produce new knowledge LhaL wlll be publlcly
avallable for use ln fuLure caplLal good developmenL, poslLlvely lnfluenclng comlng generaLlons of research
and enLrepreneurlal acLlvlLles. LquaLlon 8 descrlbes Lhe producLlon of new knowledge, l.e. Lhe evoluLlon of
Lhe sLock of knowledge, ln relaLlon Lo Lhe amounL of labor channelled lnLo 8&u ( ) and enLrepreneurlal
acLlvlLy ( ),
(8)
SubsLlLuLlng from equaLlon 1 and 2,
(9)
where, agaln, Lhe represenLs Lhe knowledge efflclency ln lnvenLlon acLlvlLles (8&u) and lnnovaLlon
(enLrepreneurshlp), whereas A ls Lhe sLock of avallable knowledge aL a glven polnL ln Llme. 1he raLe of
Lechnologlcal progress ls Lhus an lncreaslng funcLlon ln 8&u, enLrepreneurshlp and Lhe efflclency of Lhese
Lwo acLlvlLles.
Assumlng LhaL demand ls governed by consumer preferences characLerlzed by consLanL lnLerLemporal
elasLlclLy of subsLlLuLlon ( ) Lhe maxlmlzaLlon problem can be expressed ln followlng way:
(10)
sub[ecL Lo Lhe law of moLlons for knowledge and caplLal.
(11)
. (12)
1he currenL value PamllLonlan for Lhe represenLaLlve consumer ls Lhen
(13)
1he flrsL order condlLlons for maxlmum, leLLlng , are as follows:
wotkloq lopet 2010.02
74
,
(14)
(13)
(16)
Comblnlng equaLlons 13 and 16 glves
(17)
1hus, on a balanced growLh paLh, where boLh 8&u and enLrepreneurshlp ls proflLable, Lhe amounL of
resources engaged ln enLrepreneurlal acLlvlLles ls lndependenL of consumer preferences ( ). As ls less
Lhan 1, enLry lnLo enLrepreneurshlp ls lncreaslng ln and decreaslng ln .
1he maxlmlzaLlon of equaLlon 13 also glves Lhe equaLlons of moLlon for Lhe shadow prlces of caplLal (k) and
knowledge (A) as
,
(18)
,
(19)
(20)
(21)
wotkloq lopet 2010.02
73
A balanced growLh paLh, l.e. where , requlres LhaL . lrom (14) and Lhe law of
moLlon for knowledge (11),
(22)
Lquallzlng equaLlons 18 and 19, uslng equaLlon 22, ylelds Lhe followlng expresslon,
(23)
Solvlng for employmenL ln Lhe research secLor glves
(24)
lnserLlng Lhe expresslons for equlllbrlum employmenL ln Lhe enLrepreneurlal (17) and research secLors (24)
lnLo Lhe law of moLlon for knowledge, Lhe sLeady sLaLe growLh raLe (q) can be derlved as,
(23)
noLe LhaL some enLrepreneurlal acLlvlLy (equaLlon 17) wlll always be proflLable - l.e. - as long as Lhe
sLock of knowledge exceeds zero ( ), whlch does noL however always apply Lo 8&u acLlvlLles (equaLlon
24).
wotkloq lopet 2010.02
76
1
1he model shares a number of characLerlsLlcs wlLh prevlous models, e.g. growLh ls decreaslng ln Lhe
dlscounL facLor ( ) and lncreaslng ln a larger labour force.
1
This depends in a non-trivial way on a range of parameters. The degree of entrepreneurial activity is, for instance,
decreasing in the productivity of R&D as long as R&D is profitable. Thus, R&D and entrepreneurship are to some extent
substitutes. If R&D is not sufficiently profitable, then we cannot combine equations 14, 15, 18 and 19 to derive the
reduced-form growth. The resulting expression provides little insight and is not shown here.
WWW. E NT R E P R E NOR S K AP S F OR UM. S E
doc_884496723.pdf
With this data related to entrepreneurship, innovation and economic growth.
WO R K I N G P A P E R
2 0 1 0 : 0 2
Entrepreneurship, Innovation and
Economic Growth
Past experiences, current knowledge and policy implications
Pontus Braunerhjelm
Working Papers Series from
Swedish Entrepreneurship Forum
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ABOUT SWEDISH ENTREPRENEURSHIP FORUM
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1
INDEX
1 .lnLroducLlon 3
2. LnLrepreneurshlp -ueflnlLlon, measure and orlgln 7
3. LnLrepreneurshlp, opporLunlLles and lnnovaLlon 19
4. LnLrepreneurshlp and growLh 27
3. 1he geography of enLrepreneurshlp, lnnovaLlon and growLh 34
6. lmpllcaLlons for economlc pollcles 39
7. Concluslon 44
wotkloq lopet 2010.02
2
Entrepreneurship, Innovation and
Economic Growth
PAST EXPERI ENCES, CURRENT KNOWLEDGE AND POLI CY I MPLI CATI ONS
1
lebruary 2010
Þontus 8raunerh[e|m
Swedlsh LnLrepreneurshlp lorum and Lhe 8oyal lnsLlLuLe of 1echnology
2
Abstract
Conslderable advances, even breakLhroughs, have been made durlng Lhe lasL decades ln our undersLandlng
of Lhe relaLlonshlp beLween knowledge and growLh on one hand, and enLrepreneurshlp and growLh on Lhe
oLher. Slmllarly, more profound lnslghLs have also been galned as Lo how enLrepreneurshlp, lnnovaLlon and
knowledge are lnLerrelaLed. ?eL, a comprehenslve undersLandlng ls sLlll lacklng concernlng Lhe lnLerface of
all of Lhose varlables: knowledge, lnnovaLlon, enLrepreneurshlp and growLh. 1he llnk beLween Lhe mlcro-
economlc orlgln of growLh and Lhe macro-economlc ouLcome ls sLlll Loo rudlmenLary modeled Lo grasp Lhe
full wldLh of Lhese complex and lnLersecLlng forces. 1he maln ob[ecLlve of Lhls paper ls hence Lo shed llghL
on recenL advances ln our undersLandlng of Lhe forces LhaL underpln Lhe creaLlon of knowledge, lLs dlffuslon
and commerclallzaLlon Lhrough lnnovaLlon, and Lhe role of Lhe enLrepreneur ln Lhe growLh process. 1he
pollcy lmpllcaLlons of recenL research flndlngs conclude Lhls survey. ÞarLlcularly lmporLanL pollcy lmpllcaLlons
refer Lo Lhe deslgn of regulaLlon lnfluenclng knowledge producLlon, ownershlp, enLry barrlers, labor moblllLy
and (lnefflclenL) flnanclal markeLs. 1hey all have lmpllcaLlon for Lhe efflclenL dlffuslon of knowledge Lhrough
enLry. knowledge creaLlon has Lo be maLched by lncenLlves LhaL lnduce mechanlsms Lo converL knowledge
lnLo socleLal and useful needs.
keywords: LnLrepreneurs, knowledge, lnnovaLlon, growLh, pollcy
1
Swedlsh LnLreprenurshlp lorum, Södra kungsLorneL, kungsgaLan 33, 111 36 SLockholm ,
[email protected], and ueparLmenL of 1ransporL and Lconomlcs, 8oyal lnsLlLuLe of 1echnology, 100 44
SLockholm, SWLuLn, [email protected]. 1hls paper parLly draws on Lhe survey ln 8raunerh[elm (2008).
wotkloq lopet 2010.02
3
´1be qteotest Jooqet fot most of os ls oot tbot oot olm ls too blqb ooJ we mlss lt bot tbot lt ls too low
ooJ we teocb lt ´ (Mlchelangelo)
1 .Introduction
Conslderable advances, even breakLhroughs, have undoubLedly been made durlng Lhe lasL decades ln our
undersLandlng of Lhe relaLlonshlp beLween knowledge and growLh on one hand, and enLrepreneurshlp and
growLh on Lhe oLher. Slmllarly, more profound lnslghLs have also been galned as Lo how enLrepreneurshlp,
lnnovaLlon and knowledge are lnLerrelaLed. ?eL, a comprehenslve undersLandlng ls sLlll lacklng concernlng
Lhe lnLerface of all of Lhose varlables: knowledge, lnnovaLlon, enLrepreneurshlp and growLh. 1he knowledge-
lnnovaLlon-enLrepreneurshlp-growLh nexus ls lnLrlcaLe and lnfluenced by forces LhaL are llkely Lo
slmulLaneously affecL all varlables, aL leasL parLlally, whlle oLhers can be expecLed Lo have a unldlrecLlonal
lmpacL or affecL only a few of Lhese varlables. 1he llnk beLween Lhe mlcro-economlc orlgln of growLh and Lhe
macro-economlc ouLcome ls sLlll Loo rudlmenLary modelled Lo grasp Lhe full wldLh of Lhese complex and
lnLersecLlng forces.
CrowLh can baslcally be aLLrlbuLed Lhe followlng fundamenLal forces: an lncrease ln facLors of producLlon,
lmprovemenLs ln Lhe efflclency of allocaLlon across economlc acLlvlLles, knowledge and Lhe raLe of
lnnovaLlon. Clven full employmenL and efflclenL allocaLlon, growLh ls Lhus drlven by knowledge accumulaLlon
and lnnovaLlon. 1he process of lnnovaLlon ls Lyplcally modeled as a funcLlon of Lhe lncenLlve sLrucLure, l.e.
lnsLlLuLlons, assumed access Lo exlsLlng knowledge, and a more sysLemlc parL. lnnovaLlon also lmplles LhaL
Lhe sLock of (economlcally) useful knowledge lncreases. ln oLher words, lnnovaLlon ls one vehlcle LhaL
dlffuses and upgrades already exlsLlng knowledge, Lhereby servlng as a condulL for reallzlng knowledge
splllovers. 1he process of lnnovaLlon ls consequenLly consldered Lo be one of Lhe crlLlcal lssues ln
comprehendlng growLh.
lrrespecLlve of Lhe advances made ln Lhls veln of economlcs, a number of baslc quesLlons relaLed Lo Lhe
dynamlcs of Lhe growLh process, and Lhe ensulng normaLlve concluslons, are only fragmenLally undersLood
and [usL parLlally explored. Lven qulLe baslc lssues, as Lhe deflnlLlon of Lhe concepL lnnovaLlon are clearly noL
seLLled, noL Lo menLlon how Lhey come abouL and by whom, l.e. Lhe connecLlon Lo enLrepreneurlal acLlvlLles.
Moreover, ln preclsely whaL way does lnnovaLlon conLrlbuLe Lo new knowledge (Lhrough sclenLlflc/Lechnlcal
dlscoverles or Lhrough a much broader vlew on lnnovaLlon?) and whlch knowledge bases and cognlLlve
ablllLles are crlLlcally lmporLanL for lnnovaLlon Lo Lake place? LxacLly how does lnnovaLlon subsLanLlaLe lnLo
growLh and how are Lhe effecLs spaLlally dlffused? And whlch pollcy measures should be Laken ln order Lo
boosL Lhe probablllLy of susLalned knowledge based growLh? 1hose are Lhe quesLlons LhaL wlll be focussed
on ln Lhls paper Lhrough a selecLed survey of Lhe llLeraLure.
1he lack of deLalled lnslghL lnLo Lhese lssues lmplles LhaL our knowledge concernlng Lhe mlcroeconomlc
foundaLlons of growLh ls aL besL parLlal, buL could poLenLlally also be qulLe flawed. WlLhouL accuraLe
mlcroeconomlc speclflcaLlon of Lhe growLh model Lhere ls also an obvlous rlsk LhaL Lhe derlved pollcy
lmpllcaLlons are lncorrecL. 1he reclpes for growLh are llkely Lo be lnconslsLenL over Llme and also vary over
dlfferenL sLages of economlc developmenL. 1oday's developlng counLrles may learn from pollcles prevlously
wotkloq lopet 2010.02
4
pursued by Lhe developed counLrles, whlle developed counLrles Lhemselves confronL a more dlfflculL Lask ln
carvlng ouL growLh pollcles for Lhe fuLure. Pence, Lhe relaLlonshlp beLween Lhe level of developmenL,
enLrepreneurshlp, lnnovaLlon and growLh wlll also be consldered.
8ockqtoooJ
uesplLe Lhe enhanced undersLandlng of Lhe bulldlng blocks of dynamlc processes, economlcs-based Lheorles
and models largely fall shorL of addresslng Lhe lnfluence of Lhe lndependenL lnnovaLor or enLrepreneur Lo
lmporLanL economlc ouLcomes. 1he accumulaLlon of facLors of producLlon, l.e., knowledge, human and/or
physlcal caplLal, cannoL alone explaln economlc developmenL. lnnovaLlon and enLrepreneurshlp are needed
Lo Lransform Lhese lnpuLs ln proflLable ways, an lnslghL forwarded already by Adam SmlLh (Andersson and
1olllson 1982).
AL Lhe same Llme Lhere seem Lo be preconcelved percepLlons aL pollcy level concernlng Lhe effecLs of
acLlvlLles by enLrepreneurs and enLrepreneurlal flrms. lor lnsLance, lL ls more or less Laken for granLed LhaL
seLLlng up a new company, or Lhe performance of new venLures, auLomaLlcally LranslaLe lnLo socleLal
beneflLs. Powever, Lhls ls an overslmpllflcaLlon, enLrepreneurshlp may under cerLaln condlLlons reduce
raLher Lhan enhance economlc progress. 1hls would be Lhe case for lllegal enLerprlslng, buL also when
enLrepreneurlal LalenL ls spenL on renL seeklng acLlvlLles such as llLlgaLlon, or whenever Lhe Coaslan
LransacLlon cosLs argumenLs for lnLernallzlng economlc acLlvlLles are vlolaLed Lhrough pollcy lnduced
lncenLlves. ln oLher words, lL ls fully concelvable for successful new enLerprlse aL Lhe mlcro level Lo LranslaLe
lnLo economlc regress aL Lhe socleLal level and for a falled enLrepreneurshlp aL Lhe mlcro level Lo conLrlbuLe
Lo economlc developmenL. 1he socleLal lmpllcaLlons of Lhe acLlons of lndlvldual enLrepreneurs, l.e. how LhaL
LranslaLes lnLo growLh and prosperlLy, ls Lhus noL fully consldered.
ln connecLlng knowledge, lnnovaLlon and enLrepreneurshlp, lL ls essenLlal Lo emphaslze Lhe non-rouLlne
processes LhaL are consplcuous phenomena of Lhe dynamlcs of economlc developmenL. knowledge drlvlng
lnnovaLlon ls frequenLly LhoughL of as a llnear process, belng an ouLcome of acLlvlLles labeled 8&u.
Cbvlously a seL of oLher processes, such as learnlng-by dolng, cognlLlve ablllLles, neLworklng, comblnaLorlal
lnslghLs, eLc., also fuse socleLal knowledge. uncerLalnLy, search and experlmenLs are cruclal parLs of Lhe
lnnovaLlve process. 1he knowledge generaLlng acLlvlLles of enLrepreneurs and small flrms have been shown
Lo be spread across a number of dlfferenL funcLlonal areas. ulsregardlng Lhese aspecLs means LhaL several
sLudles neglecL a subsLanLlal share of Lhe knowledge creaLlon relevanL Lo lnnovaLlon and economlc growLh.
ConsequenLly, desplLe maklng small lnvesLmenLs ln 8&u and oLher formal knowledge generaLlng acLlvlLles,
enLrepreneurs and small flrms may sLlll subsLanLlally conLrlbuLe Lo aggregaLe lnnovaLlon, Lhanks Lo Lhelr
enLrepreneurlal ablllLles. SLlll, Lhere ls no guaranLee LhaL new knowledge wlLh commerclal poLenLlal ls
lmmedlaLely Lransformed lnLo enLrepreneurlal lnlLlaLlves, Lhese effecLs could fall Lo show up aL all, or appear
wlLh a Llme lag.
8ecause enLrepreneurshlp enLalls Lhe acLlons and acLlvlLles of lndlvlduals worklng wlLhln flrms or for
Lhemselves, lncenLlves LhaL encourage Lhe rlsky endeavor of enLrepreneurlal acLlvlLy seems essenLlal, as ls
Lhe lnfrasLrucLure allowlng Lhe Lransfer of knowledge from knowledge generaLlng acLors Lo knowledge
explolLlng enLrepreneurs. ln addlLlon, flrms and enLrepreneurs have Lo develop sLraLegles Lo balance slow
knowledge developmenL processes wlLh fleeLlng wlndows of opporLunlLy and flnd ways of speedlng up
wotkloq lopet 2010.02
3
knowledge generaLlon and explolLaLlon. Pere Lhe flnanclal sysLem, by evaluaLlng prospecLlve enLrepreneurs,
moblllzlng and channellng savlngs Lo flnance Lhe mosL producLlvlLy-enhanclng acLlvlLles, dlverslfylng rlsks,
eLc., play a vlLal role. 1hus, Lhe deslgn of flnanclal sysLems lnfluences growLh by lncreaslng Lhe probablllLles
of successful lnnovaLlon (klng and Levlne 1993). 1he quesLlon ls how LhaL ls accounLed for ln sLandard
knowledge drlven growLh models.
1he vlew LhaL enLrepreneurshlp could play an lmporLanL role ln a knowledge-based economy seems Lo
conLrasL much of Lhe convenLlonal wlsdom. Accordlng Lo for lnsLance CallbralLh (1967), Wllllamson (1968)
and Chandler (1977), lL seemed lnevlLable LhaL explolLaLlon of economles of scale by large corporaLlons
would become Lhe maln englne of lnnovaLlon and Lechnlcal change. 8uL also Lhe ºlaLe" !oseph SchumpeLer
(1942) shared Lhese vlews, albelL wlLh conslderably more skepLlclsm abouL Lhe beneflclal ouLcome Lhan hls
colleagues. 8aLher, SchumpeLer feared LhaL Lhe replacemenL of small and medlum slzed enLerprlse by large
flrms would negaLlvely lnfluence enLrepreneurlal values, lnnovaLlon and Lechnologlcal change. uesplLe Lhese
early prophecles of promlnenL scholar, Lhere ls ample emplrlcal evldence LhaL Lhe developmenL has acLually
reversed slnce Lhe early 1970s for mosL lndusLrlallzed counLrles. 1he Llde has Lurned, Lhe rlsk prone
enLrepreneur has experlenced a vlrLual renalssance and ls lncreaslngly seen as lndlspensable Lo economlc
developmenL.
1heoreLlcal advances and emplrlcal research seem Lo supporL Lhe vlew LhaL knowledge generaLlon,
lnnovaLlon and enLrepreneurshlp processes are locallzed processes. lrrespecLlve of knowledge flows largely
belng bounded ln space, lL ls however also posslble Lo observe how knowledge, lnnovaLlons and
enLrepreneurlal lnlLlaLlves flow beLween funcLlonal urban reglons and even counLrles. 1hus, even Lhough
reglons are characLerlzed by Lhelr varylng lnLernal economlc and lnfrasLrucLure neLworks, Lhey are also
connecLed by a mulLlLude of such neLworks. lL ls obvlous LhaL Lhere ls an lmporLanL lnLerplay beLween
locallzed processes of knowledge generaLlon, lnnovaLlon and enLrepreneurshlp, buL currenL lnslghLs are
baslcally lacklng concernlng Lhe relaLlve lmporLance of lnLerreglonal and lnLernaLlonal neLworks. An
lncreaslngly global knowledge base serve Lo enhance and dlverslfy Lhe local knowledge base, l.e. whaL has
been colned ºlocal buzz and global plpellnes".
ln Lerms of pollcy, lL ls a well-esLabllshed resulL LhaL markeL economles normally do noL generaLe a soclally
opLlmal volume of knowledge creaLlon, lnnovaLlon and enLrepreneurshlp. Powever, Lhere ls no consensus
concernlng whaL lnsLlLuLlonal frameworks and pollcy measures LhaL mlghL generaLe such a soclal opLlmum
glven Lhe lmperfecLlons of boLh Lhe economlc and Lhe pollLlcal markeLs. 1hls has noL sLopped pollcy-makers
from launchlng a large number of lnsLlLuLlonal changes and pollcy measures Lo sLlmulaLe knowledge
creaLlon, lnnovaLlon and enLrepreneurshlp. neverLheless, Lhe number of carefully carrled Lhrough pollcy
evaluaLlons ls raLher llmlLed, whlch lmplles LhaL Lhere ls a huge knowledge gap concernlng whlch pollcles
acLually work and wheLher Lhey are worLh Lhelr cosLs.
1he maln ob[ecLlve of Lhls paper ls hence Lo shed llghL on recenL advances ln our undersLandlng of Lhe forces
LhaL underpln Lhe creaLlon of knowledge, lLs dlffuslon and commerclallzaLlon Lhrough lnnovaLlon, and Lhe
role of Lhe enLrepreneur ln Lhe growLh process. 1he followlng secLlon 2 dlscusses Lhe deflnlLlon, orlgln and
measuremenL of enLrepreneurshlp, and how lL relaLes Lo knowledge producLlon, whlle secLlon 3 ls devoLed
Lo lnnovaLlon and Lhe lnnovaLlon process. SecLlon 4 presenLs how Lhese componenLs have been lnLegraLed
lnLo a growLh conLexL, and dlscusses Lhe weak llnks ln currenL models of growLh. ln Lhe subsequenL secLlon 3
wotkloq lopet 2010.02
6
Lhe reglonal aspecLs of enLrepreneurshlp, knowledge exLracLlon and growLh are hlghllghLed. 1he paper ls
concluded by a pollcy dlscusslon (secLlon 6), and a summary of Lhe maln flndlngs, LogeLher wlLh suggesLlons
for fuLure research (secLlon 7).
wotkloq lopet 2010.02
7
2. Entrepreneurship –Definition, measure and origin
Why do lndlvlduals engage ln enLrepreneurlal venLures wlLh uncerLaln and rlsky ouLcomes?
1he earller enLrepreneurshlp llLeraLure suggesLs a pleLhora of dlfferenL reasons as Lo why lndlvlduals become
enLrepreneurs, albelL lnsLlLuLlons are always aL Lhe hearL of Lhe maLLer when Lhe exLenL of enLrepreneurlal
acLlvlLles ls explalned. 1he alleged explanaLlons of enLrepreneurshlp comprlse a mlx of clear-cuL economlc
explanaLlons, speclflc aLLrlbuLes LhaL are clalmed Lo characLerlze enLrepreneurs, as well as forces relaLed Lo
culLure and paLh-dependency. SomeLlmes Lhey are classlfled accordlng Lo Lhe level of aggregaLlon, sLarLlng aL
Lhe macro-level and worklng Lhelr way down Lo lndusLry-relaLed facLors, mlcro-economlc lncenLlve
sLrucLures and cognlLlve ablllLles of lndlvlduals. AlLernaLlvely, slmllar forces Lrlggerlng enLrepreneurshlp ls
presenLed ln a supply and demand Laxonomy. ln Lhls secLlon l wlll brlefly survey Lhe mosL frequenL
explanaLlons Lo enLrepreneurlal acLlvlLles, zerolng ln aL Lhe emplrlcal flndlngs concernlng Lhe role of
lnsLlLuLlons and access Lo knowledge. 1he ldlosyncrasles perLalnlng Lo Lhe deflnlLlon and producLlon of
knowledge are llkewlse addressed.
1
1he Austr|an her|tage
WlLhln Lhe lasL decades we have wlLnessed an AusLrlan renalssance ln economlcs - puLLlng Lhe enLrepreneur,
sLrucLural change and creaLlve desLrucLlon ln Lhe forefronL - boLh from an academlc polnL of vlew as well as
ln pollcymaklng. MosL conLemporary Lheorles of enLrepreneurshlp, and Lhe lmpllcaLlons of
enLrepreneurshlp, Lhus bulld on Lhe semlnal conLrlbuLlons by parLlcularly SchumpeLer (1911/1934). Pe
sLressed Lhe lmporLance of lnnovaLlve enLrepreneurs as Lhe maln vehlcle Lo move an economy forward from
sLaLlc equlllbrlum, based on Lhe comblnaLorlal capablllLles of enLrepreneurlal lndlvlduals.
2
ln hls own words:
ºWhaLever Lhe Lype, everyone ls an enLrepreneur only when he acLually carrles ouL new comblnaLlons and
loses LhaL characLer as soon as he has bullL up hls buslness, when he seLLles down Lo runnlng lL as oLher
people run Lhelr buslness" (SchumpeLer 1911/1934, p78).
ºAnd whaL have Lhey done: Lhey have noL accumulaLed any klnd of goods, Lhey have creaLed no orlglnal
means of producLlon, buL have employed means of producLlon dlfferenLly, more advanLageously. 1hey have
carrled ouL new comblnaLlons! 1hey are Lhe enLrepreneurs. And Lhelr proflL, Lhe surplus Lo whlch no llablllLy
corresponds, ls Lhe enLrepreneurlal proflL." (SchumpeLer 1911/1934, p. 132).
SchumpeLer vlewed Lhe creaLlon of Lechnologlcal opporLunlLy as belng baslcally ouLslde Lhe domaln of Lhe
enLrepreneur. 8aLher, Lhe ldenLlflcaLlon and explolLaLlon of such opporLunlLles ls whaL dlsLlngulshes
1
1he followlng secLlon lncludes a brlef and parLlal presenLaLlon of some of Lhe mosL lnfluenLlal LhoughLs as regards enLrepreneurs.
lor a more Lhorough survey, see SexLon and LandsLröm (2000), Acs and AudresLch (2003) and 8raunerh[elm (2008).
2
Clsson (2000) and Clsson and lrey (2002) presenLs a LheoreLlcal model of enLrepreneurs as underLakers of new comblnaLlons of
ldeas.
wotkloq lopet 2010.02
8
enLrepreneurs, l.e. lnnovaLlon. Also ln Lhls respecL SchumpeLer's orlglnal LhoughLs on enLrepreneurlal
opporLunlLy has had a conslderable lnfluence on Lhe succeedlng generaLlon of enLrepreneurshlp researchers.
nor dld SchumpeLer vlew enLrepreneurs as rlsk-Lakers, even Lhough he dld noL compleLely dlsmlss Lhe ldea,
and was aware LhaL lnnovaLlon conLalns elemenLs of rlsk also for Lhe enLrepreneur. 8uL baslcally LhaL Lask
was aLLrlbuLed Lhe caplLallsLs who flnanced enLrepreneurlal venLures.
A decade laLer, knlghL (1921) proposed Lhe role of Lhe enLrepreneur as someone who Lransforms
uncerLalnLy lnLo a calculable rlsk. SchumpeLer's model was Lhereby complemenLed by Lhe expllclL
lnLroducLlon of cognlLlve ablllLles as an explanaLlon of enLrepreneurlal acLlvlLy. SomewhaL laLer, Lhe
deflnlLlon of Lhe enLrepreneur as someone who moved Lhe economy Lowards equlllbrlum (parLly conLrasLlng
SchumpeLer), by Laklng advanLage of arblLrage posslblllLles, was forwarded by klrzner's (1973, 1996, 1997).
1he AusLrlan herlLage can be Lraced even furLher back. Menger (1871) sLressed Lhe uncerLalnLles and
sub[ecLlvlLles LhaL he clalmed musL be lnherenL phenomena ln economles characLerlzed by exLenslvely
dlsLrlbuLed and fragmenLed economlc acLlvlLles.
1
1hese ldeas were furLher elaboraLed by von Payek (1943).
1hus, Lhere seems Lo be a raLher clear connecLlon beLween Menger's vlew on Lhe sub[ecLlve economy, von
Payek's ldeas abouL Lhe dlsLrlbuLlon of knowledge, and klrzner's arblLraglng enLrepreneur, whlch ln Lurn
baslcally llnks well wlLh SchumpeLer's deflnlLlon of Lhe enLrepreneur's lnnovaLlve capaclLy, lncludlng Lhe
deLecLlon of new markeLs.
2
More recenLly, Lhe research fleld of enLrepreneurshlp has been deflned as analyses of ºhow, by whom and
wlLh whaL consequences opporLunlLles Lo produce fuLure goods and servlces are dlscovered, evaluaLed and
explolLed" (Shane and venkaLaraman 2000). As regards by ºwhom", an eclecLlc deflnlLlon of Lhe
enLrepreneur, LhaL has become lncreaslngly accepLed, ls suggesLed by Wennekers and 1hurlk (1999). 1he
enLrepreneur: l) ls lnnovaLlve, l.e. percelves and creaLes new opporLunlLles, ll) operaLes under uncerLalnLy
and lnLroduces producLs Lo Lhe markeL, decldes on locaLlon, and Lhe form and use of resources, and lll)
manages hls buslness and compeLes wlLh oLhers for a share of Lhe markeL. ApparenLly, Lhls deflnlLlon can be
llnked Lo all Lhree conLrlbuLlons referred Lo above. noLe LhaL lnvenLlon ls noL expllclLly menLloned (albelL
creaLlon of opporLunlLy ls) ln Lhls deflnlLlon, nor excluded from Lhe lnLerpreLaLlon of enLrepreneurshlp. A
summary of dlfferenL deflnlLlons of enLrepreneurs over Llme ls presenLed ln 1able 1.
1
Menger dld however noL deflne or lnclude Lhe enLrepreneur ln hls work. von Mlses (1949) dld, Lhough much laLer, deflne
enLrepreneurs ln Lerms of unevenly dlsLrlbuLed LalenL.
2
SchumpeLer deflned flve dlfferenL Lypes of lnnovaLlon: Lhe recognlLlon of a new good/quallLy, a new meLhod/process, a new
markeL, a new source of supply or a new way of organlzlng Lhe flrm/producLlon.
wotkloq lopet 2010.02
9
1ab|e 1. Some def|n|t|ons and character|st|cs of entrepreneursh|p, 17SS to 2001.
1
8. CanLlllon (1733) - LnLrepreneurs ls deflned as self-employed
- Self-employed deals wlLh addlLlonal uncerLalnLy
-LnLrepreneurs should balance Lhelr acLlvlLles Lo markeL demand
!.8. Say (1803) - LnLrepreneurs shlfLs economlc resources from low Lo hlgh
producLlvlLy areas wlLh hlgher yleld
- LnLrepreneurshlp lmplles many obsLacles and uncerLalnLles
A.Marshall (1890) - LnLrepreneurs and managers have dlfferenL buL complemenLlng
characLerlsLlcs
!. SchumpeLer (1911) - LnLrepreneurshlp are Lhe maln vehlcle Lo move an
economy forward from sLaLlc equlllbrlum, based on Lhe
comblnaLorlal capablllLles of enLrepreneurlal lndlvlduals
- ComblnaLorlal capablllLles resulLs ln recognlLlon of a new
good/quallLy, a new meLhod/process, a new markeL, a new source of
supply or a new way of organlzlng Lhe flrm/producLlon
- LnLrepreneurs' role ls dlsLlncLly separaLed from Lhe role of
lnvenLors
l. knlghL (1921) - LnLrepreneurs are a speclal soclal class who dlrecL economlc
acLlvlLy
- uncerLalnLy ls Lhe prlmary aspecL of enLrepreneurshlp
L. Þenrose (1930) - LnLrepreneurlal and managerlal ablllLles should be dlsLlngulshed
- ueLecLlng and explolLlng opporLunlLles for smaller flrms ls Lhe baslc
aspecL of enLrepreneurshlp
P. LlebensLeln (1968) - LnLrepreneurlal acLlvlLy malnly lmplles decreaslng organlzaLlonal
lnefflclencles and reverslng organlzaLlonal enLropy
- 1here are Lwo Lypes of enLrepreneurs: a managerlal who allocaLes
lnpuLs lnLo Lhe producLlon process ln an effecLlve manner, and a
1
Table 1 partly builds on Salgado-Banda (2005).
wotkloq lopet 2010.02
10
SchumpeLerlan who fllls obserbed markeL gaps by lnLroduclng new
producLs or processes
l.klrzner (1973, 1997) - LnLrepreneurlal acLlvlLy moves Lhe markeL Lowards equlllbrlum as
enLrepreneurs dlscover proflLable arblLrage posslblllLles.
M. Casson (1982) - LnLrepreneurs speclallze ln Laklng [udgmenLal declslons abouL Lhe
coordlnaLlon of scarce resources
W. CarLner (1983), P. Aldrlch
and C. Zlmmer (1986)
- LnLrepreneurshlp ls Lhe ouLcome of acLlons of lndlvlduals LhaL acL
ln and are lnfluenced by Lhe organlzaLlonal and reglonal
envlronmenL ln whlch Lhey llve and work.
W. 8aumol (1990) - LnLrepreneurlal acLlvlLy cruclal for (radlcal) lnnovaLlon and growLh.
- lnsLlLuLlons declde Lhe allocaLlon of enLrepreneurlal acLlvlLy
beLween producLlve (lnnovaLlon) and unproducLlve acLlvlLles (renL
seeklng, organlzed crlme, eLc.).
8. Polcombe (1998) - LnLrepreneurs promoLe a more producLlve economy due Lo more
efflclenL and lnnovaLlve ways of producLlon, lL ls Lhe foundaLlon for
economlc growLh
CLCu (1998) - LnLrepreneurs represenLs Lhe ablllLy Lo marshal resources Lo selze
new buslness opporLunlLles, deflned broadly Lhey are cenLral Lo
economlc growLh
S. Wennekers and 8. 1hurlk
(1999)
- LnLrepreneurs have mulLl-Lask ablllLles.
- LnLrepreneurs percelve and creaLes new opporLunlLles, operaLe
under uncerLalnLy and lnLroduce producLs Lo Lhe markeL, declde on
locaLlon and Lhe form and use of resources, and, flnally manage Lhelr
buslness and compeLe wlLh oLhers for a share of Lhe markeL.
P. Aldrlch and M.MarLlnez
(2001)
- LnLrepreneurlal acLlvlLy noL necessarlly synonoumos wlLh
lnnovaLlon slnce enLrepreneurlal acLlvlLles also lnvolve lmlLaLlon.
- SupporL Lhe dlsLlncLlon beLween lnnovaLlon and reproducLlon ln
enLrepreneurlal acLlvlLles.
wotkloq lopet 2010.02
11
Mooy exploootloos bot few tbeotles
1he above brlef and, of course, lncompleLe presenLaLlon Lheorlze and descrlbe Lhe percelved characLerlsLlcs
belleved belng possessed by Lhe enLrepreneur. Lven Lhough explanaLlons as Lo why enLrepreneurlal
acLlvlLles are embarked upon can be lnferred from Lhose enLrepreneurlal characLerlsLlcs, Lhls ls far from
presenLlng a rlgorous LheoreLlcal model of enLrepreneurshlp. 1here exlsLs, few, lf any compelllng LheoreLlcal
model of enLrepreneurlal behavlor, whlch sLems from Lhe heLerogenelLy and sLochasLlc elemenLs LhaL seems
Lo be an undlspuLable parL of enLrepreneurshlp. 1he closesL conLemporary aLLempL Lo model on
enLrepreneurshlp ls probably Lhe occupaLlonal cholce models (Lvans and LelghLon 1989, 8aner[ee and
newman 1993, van Þraag and Cramer 2001). SLlll, Lhe dlsLlncLlon beLween Lhese and oLher models of proflL
maxlmlzlng agenLs based on perfecL lnformaLlon ls Lhln. lnsLead enLrepreneurshlp models are based on
processes drlven by sLochasLlcally dlsLrlbuLed ablllLles and learnlng capaclLles.
1
lor lnsLance, ln !ovanovlc's (1982) model new flrms, or enLrepreneurs, face cosLs LhaL are noL only random
buL also dlffer across heLerogeneous flrms. A cenLral feaLure of Lhe model ls LhaL new flrms do noL know
Lhelr cosL funcLlons, LhaL ls, Lhelr relaLlve efflclency, whlch ls dlscovered Lhrough Lhe process of learnlng from
lLs acLual posL-enLry performance once Lhe buslness ls esLabllshed. Pence, enLry per se ls noL lmporLanL and
dynamlcs ls characLerlzed by a nolsy selecLlon process where performance ls parLly exogenous. !ovanlc and
Lach (1989), presenL a modlfled verslon of Lhe 1982 model whlch also bullds on learnlng by dolng, and
generaLes a S-shaped dlffuslon paLLern of lnnovaLlon (and enLry) over Llme.
nelLher of Lhese approaches ls parLlcularly saLlsfacLory and wheLher Lhey can offer lnslghLs more valuable
Lhan an eclecLlc approach based on emplrlcal observaLlons ls quesLlonable. We Lherefore resLrlcL Lhe
remalnlng presenLaLlon Lo an overvlew of Lhe mosL common emplrlcal regularlLles as Lo why
enLrepreneurshlp occurs.
Lmp|r|ca| exp|anat|ons of entrepreneursh|p
Accordlng Lo Lhe llLeraLure Lhe fundamenLal source of economlc developmenL, dynamlsm and changes can
be ascrlbed Lhe lnsLlLuLlonal seLLlng ln whlch agenLs operaLe. Lven Lhough needs may drlve lndlvldual
acLlons, Lhe way Lhose needs are fulfllled and Lhe efflclency ln accompllshlng Lhem, depends on lnsLlLuLlons.
Pence, aL an overarchlng level, Lhe exLenL and Lype of enLrepreneurshlp can always be aLLrlbuLed
lnsLlLuLlons, formal and lnformal (de SoLo 1989, 2000, 8aumol 1990, norLh 1990, 1994, Penrekson 2003).
2
lnsLlLuLlons also appear aL all levels of economlc acLlvlLles: Lhe macroeconomlc framework, lndusLrlal
pollcles, knowledge creaLlon, aLLlLudes and lndlvldual lncenLlves.
ln Lhe followlng we wlll classlfy Lhe emplrlcal explanaLlons Lo enLrepreneurshlp on Lhe dlfferenL facLors and
levels of aggregaLlons LhaL have been presenLed ln Lhe llLeraLure. 1hese wlll also be brlefly relaLed Lo oLher
1
See Shane (2003)
2
8aumol (1990) emphaslze Lhe role of lnsLlLuLlons for Lhe allocaLlon beLween producLlve (lnnovaLlon) and unproducLlve acLlvlLles
(renL seeklng, organlzed crlme, eLc).
wotkloq lopet 2010.02
12
conLexLual concepLs, such as push and pull facLors, and Lhe demand and supply of enLrepreneurs. 1he
secLlon ls concluded wlLh some observaLlon as regards Lhe deflnlLlon, role and producLlon of knowledge.
Powever, before excavaLlng lnLo Lhe observed emplrlcal regularlLles ln explalnlng enLrepreneurshlp, Lhe
measuremenL problems relaLed Lo enLrepreneurshlp wlll be consldered.
Meosotloq eottepteoeotsblp
8aLher Lhan belng synonymous wlLh sLarLlng a new venLure, enLrepreneurshlp refers Lo a seL of ablllLles
embodled wlLhln an lndlvldual. AdequaLely capLurlng such ablllLles ln daLa LhaL are comparable over
lndlvlduals, noL Lo menLlon comparlsons across reglons or naLlons are slmply noL posslble. 1hus, Lhe
measures of enLrepreneurshlp wlll always be parLly erroneous and sub[ecL Lo crlLlclsm slnce emplrlcal sLudles
have Lo rely on proxles whlch (hopefully) are correlaLed wlLh enLrepreneurshlp.
A conslderable share of sLudles on enLrepreneurshlp relles on self-employmenL daLa. Cne obvlous reason ls
LhaL Lhose were slmply avallable for a large number of reglons and counLrles (Lvans and LelghLon 1989,
8lanchflower and Cswald 1998, Ceorgells eL al 2000, CLCu 2000, AudreLsch and 1hurlk 2001, 8lanchflower
eL al 2001, 8ruce and PolLz-Lakln 2001, lonseca eL al 2001). ?eL, as noLed by 8lanchlower (2000) and Larle
and Sakova (2000), self-employed conslsLs of a very heLerogeneous group more or less lnvolved ln
producLlve enLrepreneurlal acLlvlLles, lL could [usL as well represenL employmenL push facLors.
AlLernaLlve buL relaLed measures of enLrepreneurshlp are Lhe number of esLabllshmenLs (8eck and Levlne
2001), denslLy of flrms (klapper eL al 2008), or buslness ownershlp (Carre, van SLel and 1hurlk 2002). As
polnLed ouL above, self-employed less llkely Lo capLure producLlve enLrepreneurshlp, lL could [usL as well
represenL enLrepreneurlal pull as unemploymenL push. neL blrLh raLe (enLry less exlLs) has also been
suggesLed as an lndlcaLor of enLrepreneurshlp, ln addlLlon Lo Lraclng sLrucLural lndusLrlal changes (ue[ardln
2008). llrm demography ls however qulLe dlfferenL beLween lndusLrles lmplylng LhaL secLorally ad[usLed
lndlcaLors are needed Lo capLure sLrucLural changes uslng neL blrLh raLes (Ceroskl 1993, Caves 1998). 8uL
also Lurbulence (enLry plus exlLs) have been advocaLed as an approxlmaLlon of enLrepreneurshlp (lrlLsch
1996).
A relaLlvely new seL of daLa has been complled by Lhe Clobal LnLrepreneurshlp MonlLor (CLM). 1hese daLa
are based on quesLlonnalres deslgned Lo capLure boLh poLenLlal enLrepreneurs and oLher respondenLs. 1he
daLa also conLaln addlLlonal lnformaLlon, such as moLlves for embarklng on enLrepreneurlal acLlvlLy, eLc.
Comparlson wlLh oLher daLaseLs, for lnsLance Lhose collecLed by LurosLaL (llash LurobaromeLer) and Lhe
World 8ank, reveal a hlgh degree of correlaLlon (8eynolds eL al 2003). 1haL Lhey caLch abouL Lhe same
phenomena does noL however mean LhaL Lhey are good lndlcaLors of enLrepreneurlal acLlvlLy.
LnLrepreneurshlp ls ofLen caLegorlzed as opporLunlLy- or necesslLy-based venLures. 1he former represenLs a
proflLable opporLunlLy as percelved by an lndlvldual, whlle Lhe laLLer ls assoclaLed wlLh enLrepreneurshlp as a
lasL resorL, l.e., due Lo lmposslblllLy of flndlng oLher sources of lncome. 1he dlsLlncLlon beLween opporLunlLy
wotkloq lopet 2010.02
13
and necesslLy based enLrepreneurs could also be lnLerpreLed as Lhe separaLlon beLween self-employed and
hlgh-growLh enLrepreneurshlp (Claeser and kerr 2009).
1
Mocto-level exploootloos of eottepteoeotsblp
1he mosL commonly deflned deLermlnanLs of enLrepreneurshlp aL Lhe macro-level ln Lhe llLeraLure are Lhe
level and growLh of CuÞ, LogeLher wlLh (un)employmenL, lnvesLmenLs, cosL levels, lnflaLlon and Lhe lnLeresL
raLe level (Plghfleld and Smlley 1987, 8osma eL al 2003, Wang 2006). Also facLors llke governmenL spendlng
on educaLlon, lnfrasLrucLure and healLh seem Lo be poslLlvely correlaLed wlLh sLarLups (8eynolds and SLorey
1993).
Some of Lhese facLors relaLe Lo Lhe buslness cycle - l.e. Lhere may be a cycllcal componenL ln
enLrepreneurshlp acLlvlLy - whlle oLher, albelL less explalned, can be assoclaLed wlLh long waves lnfluenclng
economlc acLlvlLy, lnnovaLlon and enLrepreneurshlp (SchumpeLer 1939).
2
See also lrlLsch (1996) who shows
LhaL enLry and exlL varles durlng Lhe producL cycle, l.e. lL ls parLlcularly hlgh ln Lhe earller sLages.
keqloos, loJostty ooJ fltm level foctots
Cne sLrand of enLrepreneurlal economlcs looks aL how dlfferences ln reglonal characLerlsLlcs and
precondlLlons lnfluence enLrepreneurshlp. Low LransporLaLlon cosLs, concenLraLlon of human caplLal and
exLenslve research and developmenL acLlvlLles LogeLher wlLh avallablllLy Lo flnanclal caplLal, seems Lo be Lhe
mosL crlLlcal facLors.
3
Also populaLlon (demand), employmenL and lncome growLh Lurns ouL Lo be lmporLanL
deLermlnanLs of enLrepreneurshlp (Acs and ArmlngLon 2002). We wlll furLher elaboraLe on Lhe reglonal
dlmenslon of enLrepreneurshlp ln secLlon 3.
Cn Lhe lndusLry level Lhe mosL promlnenL facLors LhaL have been ldenLlfled Lo lmpacL enLrepreneurshlp are
Lhe level of proflLs, enLry barrlers, level of demand, and Lhe exLenL of agglomeraLed or urbanlzed producLlon
sLrucLures (8eynolds 1992, 8eynolds and SLorey 1993).
4
1he deLermlnanLs of enLrepreneurshlp Lhus relaLe Lo
varlables derlved ln Lhe lndusLrlal organlzaLlon, economlc geography and sLandard mlcro-economlc Lheorles
of economlcs. 1here are mlxed resulLs for dlfferenL varlables ln dlfferenL counLrles buL baslcally proflLs,
lndusLry growLh and lndusLry slze are poslLlvely relaLed Lo sLarLups whlle lncreaslng caplLal requlremenLs and
need for producL dlfferenLlaLlon seem Lo negaLlvely lmpacL enLrepreneurshlp.
ulsaggregaLlng Lo Lhe flrm level, human caplLal (educaLlon) shows up as one of Lhe fundamenLal varlables
explalnlng enLrepreneurshlp (Lvans and LelghLon 1990, klm eL al 2006). Cverall, Lhe llkellhood of becomlng
an enLrepreneur ls sLrongesL for skllled lndlvlduals, parLlcularly for enLrepreneurs seeklng Lo explolL an
1
We wlll noL conslder explanaLlons relaLed Lo Lhe soclologlcal dlsclpllnes (Leams, neLworks, eLc.), nor Lhose relaLed Lo nascenL
enLrepreneurshlp, ºcomblnaLors", eLc.
2
An alLernaLlve approach ls represenLed by Lhe long wave llLeraLure, see e.g. klLchln (1923, long waves appear due Lo lnvesLmenLs
cyscles), !uglar (1862, lnvesLmenLs ln machlnery, kuzneLs (1971, lnvesLmenLs ln real esLaLe) and kondraLleff (1923/1933) who slmply
conclude LhaL long waves of economlc acLlvlLy seems Lo be a facL.
3
See 8arLlk (1989), Lvans and !ovanovlc (1989), 8eynolds eL al (1994), uunn and PolLz-Lakln (1993), (2000), Cuadrlnl (2000) and Acs
eL al (2007).
4
1he demand varlable goes back Lo Adam SmlLh's argumenL abouL Lhe slze of Lhe markeL and Lhe scope for speclallzaLlon.
wotkloq lopet 2010.02
14
opporLunlLy. Puman caplLal slgnals quallLy, works as a sorLlng mechanlsm, helps overcomlng barrlers ln
obLalnlng credlL/equlLy, as well as lmprovlng neLwork formlng.
1
Soclal neLworks can ln Lurn be expecLed Lo
reduce LransacLlon cosLs (Wllllamson 1971), whlch also has galned emplrlcal supporL, parLlcularly for
opporLunlLy based enLrepreneurshlp.
2
8egulaLlon as such has been shown Lo lnfluence enLrepreneurshlp and slze of sLarLups (Clccone and
Þapalonnou 2006, Ardagna and Lusardl 2009).
3
ÞarLlcularly deLrlmenLal effecLs are aLLrlbuLed hlgh sLarLup
cosLs (lonseca eL al 2001, 2007). Claeser and kerr (2009) presenLs (reglonal) evldence LhaL cosL levels are
one of Lhe ma[or lmpedlmenLs Lo enLrepreneurshlp, whlle Cordon (1998), and Cullen and Cordon (2007),
conclude LhaL hlgher Laxes has a dlsLlncL and slgnlflcanL negaLlve lmpacL on enLrepreneurshlp. Moreover,
lndlrecL effecLs have been reporLed Lhrough Lhe effecLs of Laxes on wealLh formaLlon (Lvans and !ovanovlc
1989, 8aner[ee and newman 1993). lndlvldual wealLh has been shown Lo be a robusL predlcLor of Lhe
probablllLy of sLarLlng a flrm.
AL Lhe lndlvldual level progresslve marglnal Lax raLes seem Lo negaLlvely lmpacL enLry, even Lhough Lhe
magnlLude depends on Lhe dlfference beLween Laxes on wages and Laxes on proflLs (CenLry and Pubbard
2000, Pansson 2008). lL ls also noLeworLhy LhaL lndlvlduals ln elLher Lhe hlghesL or Lhe lowesL lncome
brackeLs are mosL llkely Lo sLarL a flrm, whlch probably mlrrors LhaL lndlvldual ablllLles govern wheLher
opporLunlLy- or necesslLy-based enLrepreneurlal venLures ls embarked upon.
Notms ooJ coltote
A number of sLudles flnd LhaL soclal norms, or enLrepreneurlal culLure, do lnfluence enLrepreneurshlp.
4
An
obvlous lndlcaLor of Lhls ls Lhe parenL effecL, LhaL ls, Lhe llkellhood of becomlng a flrm-owner or sLarLlng a
new flrm lncreases lf Lhe parenLs had Lhelr own flrms (uunn and PolLz-Lakln 2000, uavldsson and Ponlg
2003, ClaneLLl and Slmonov 2004). 1here also seem Lo be Lhe case LhaL an envlronmenL domlnaLed by
smaller and lndependenL flrms become more conduclve Lo enLrepreneurshlp Lhan envlronmenLs hosLlng
larger flrms (Claeser eL al 2009, Claeser and kerr 2009). Poldlng an lndusLry's esLabllshmenL slze consLanL
(or/and clLy), enLrepreneurs lncrease when Lhe surroundlng clLy has a greaLer number of small
esLabllshmenLs. ln addlLlon, Lhere ls a remarkably sLrong correlaLlon beLween average esLabllshmenL slze
and subsequenL employmenL growLh Lhrough sLarLups, parLlcularly ln manufacLurlng (see also 8osenLhal and
SLrange 2009). CrowLh of new sLarL-ups ls Lhus correlaLed Lo Lhe number of exlsLlng esLabllshmenLs ln Lhe
area. 1he dlrecLlon of causallLy ls however noL clear.
Claeser and kerr (2009) also flnds LhaL hlgher amenlLles (deflned as exogenous reglonal dlfferences ln
cllmaLe facLors) Lend Lo drlve up Lhe prlce of land whlch aLLracL low flxed cosL lndusLrles LhaL Lend Lo have a
1
1hough, as argued by Leff (1979), caplLal markeL lmperfecLlons should noL be enough Lo explaln enLrepreneurlal dlfferences, slnce lL
could be argued LhaL overcomlng such dlfflculLles consLlLuLes parLs of enLrepreneurlal ablllLles.
2
See Ardagan and Lusardl (2008) where lL ls shown LhaL knowlng someone wlLh enLrepreneurlal experlence lncreases Lhe llkellhood
of becomlng an enLrepreneur by Lhree percenL. See also u[ankov eL al (2006), Culso eL al (2004), nanda and Sorenson (2007).
3
Cordon (2004) and 8osma and Pardlng (2007) clalm LhaL lnsLlLuLlonal dlfferences explalns Lhe growLh dlfferences beLween Lurope
and Lhe uS.
4
An excepLlon, based on uS daLa, ls klm (2006).
wotkloq lopet 2010.02
13
hlgher share of enLrepreneurshlp. Pence, hlgh amenlLy places aLLracL people and flrms, labor lnLenslve
lndusLrles, Lhereby lnduclng a poslLlve lmpacL on enLrepreneurshlp.
1
A relaLed observaLlon ls LhaL Lhe
fracLlon of enLrepreneurs LhaL are acLlve ln Lhe reglon where Lhey were born ls slgnlflcanLly hlgher Lhan Lhe
correspondlng fracLlon for workers. 1hls local preference ls sLrongesL ln developed reglons wlLh well
developed flnanclal secLors. ln addlLlon, Mlchaleccl and Sllva (2006) show LhaL flrms creaLed by locals are
more valuable, blgger, more caplLal lnLenslve and obLaln more flnanclng per unlL of caplLal lnvesLed.
loJlvlJool ooJ coqoltlve foctots
A conslderable parL of Lhe llLeraLure ls pre-occupled wlLh Lhe cognlLlve processes by whlch lndlvlduals
dlscover opporLunlLles and Lake Lhe declslon Lo sLarL a new flrm (8raunerh[elm 2008). 1hese sLudles confer
LhaL a number of lndlvldual ablllLles and cognlLlve capablllLles are characLerlsLlc for enLrepreneurs. lor
lnsLance, rlsk accepLance (knlghLerlan uncerLalnly) ls clalmed Lo dlsLlngulshed enLrepreneurs from oLher
lndlvldual, as ls Lhelr Lolerance for amblgulLy. 1hey are also clalmed Lo have a sLronger need Lo achleve, for
self-efflcacy as well as preferences for auLonomy.
2
ln some sLudles such lndlvldual characLerlsLlcs are broken
down aL Lhe reglonal level ln order Lo capLure how varlaLlons ln soclal caplLal, creaLlvlLy and Lolerance may
lnfluence enLrepreneurshlp (Coleman 1988, 1990, ÞuLnam 1993, Lee eL al 2004, llorlda 2002, llorlda eL al
2008).
3
ln a recenL emplrlcal analysls, SuLLer (2009) seLs ouL Lo LesL Lhe lmpacL of a composlLe facLor deflned as
ºpsychologlcal caplLal". Compared Lo prevlous sLudles, SuLLer's embrace a more varled seL of lndlvldually
deflned characLerlsLlcs, such as Lhose relaLed Lo en[oylng oLher people's and one's own llfe, ablllLy Lo conLrol
emoLlons, capablllLy Lo enLhuslasm oLher people, eLc., whlch are all lncorporaLed ln a ºpsychologlcal caplLal"
lndex. ConLrolllng for oLher lndlvldual facLors relaLed Lo access Lo opporLunlLles, educaLlon, soclal caplLal,
creaLlvlLy and LrusL, Lhe emplrlcal analysls conclude LhaL Lhe psychologlcal lndex ls an lmporLanL deLermlnanL
of enLrepreneurlal endeavor.
uemooJ ooJ sopply slJe exploootloos of eottepteoeotsblp
ln Lhe prevlous llLeraLure Lhere are frequenL references Lo demand- and supply slde deLermlnanLs of
enLrepreneurshlp.
4
l am noL convlnced LhaL Lhls ls Lhe paLh forward Lo a beLLer undersLandlng of
enLrepreneurshlp and lLs effecLs. Lmplrlcally lL also seems hard Lo pln down wheLher enLrepreneurlal
acLlvlLles descend from Lhe demand or supply facLors, some places [usL seem Lo have greaLer supply of
enLrepreneurs (cf. ChlnlLlz 1961, Sassens 2006, Claeser and kerr 2009). Such reglonal dlfferences are llkely Lo
be a consequence of local norms, LradlLlons, serendlplLous evenLs, l.e. a resldual of ºunmeasurables".
1
Compare Lhe sLudles by 8lack eL al (1996), PursL and Lusardl (2004) and nanda (2009), where lL ls shown how hlgher real esLaLe
process ease llquldlLy consLralnLs and poslLlvely lnfluences enLrepreneurshlp.
2
See McClelland 1961, Wllllamson 1971, 1lmmons 1976, klhlsLrom and LaffonL 1979, 8rockhaus 1980, 8udner 1982, Schere 1982,
Chell 1986, 8egley and 8oyd 1987, Chen eL al 1998, Zucker eL al 1998, van Þraag and Cramer 2001, Markman eL al 2002, Agrawal eL al
2006, Sorenson and Slngh 2007, 8enz and lrey 2008.
3
noLe Lhe analogy Lo successful organlzaLlons, where psychologlcal caplLal has been deflned as one lmporLanL explanaLory facLor
(LuLhans eL al 2007 and LuLhans and ?oussef 2007).
4
See for lnsLance lrlLsch Mueller (2007), kosLer and karlsson (2009).
wotkloq lopet 2010.02
16
Moreover, ln some cases Lhe dlsLrlbuLlon beLween supply slde and demand slde forces seem somewhaL
amblguous. ls, for lnsLance, unemploymenL a varlable LhaL can be derlved from Lhe demand or Lhe supply
slde of Lhe economy?
lramlng Lhe sources as enLrepreneurshlp ln Lerms of demand and supply lmpllclLly also seems Lo suggesL
LhaL equlllbrlum could be aLLalned, l.e. a sLaLlonary polnL exlsLs where elLher enLrles equal exlLs or LhaL
dynamlcs cease. 1haL ls of course qulLe conLradlcLory when one ls dlscusslng phenomena feaLured by
exLenslve dynamlcs, non-llnear behavlor and experlmenLally organlzed processes.
noLwlLhsLandlng LhaL Lhe dlsLlncLlon beLween demand and supply slde facLors may be lmpreclse, prevlous
research seem Lo alloL mosL explanaLory power Lo Lhe laLLer. Among Lhose are knowledge, broadly deflned,
and how lL Lles ln wlLh human caplLal and knowledge resources for producLlon, mosL lmporLanL.
1
know|edge, |ts organ|zat|on and entrepreneursh|p
koowleJqe
lL could be argued LhaL Lhere ls a dlvldlng llne ln economlcs where knowledge ls deflned as elLher an ob[ecL
or a process. Þrecedlng LhaL dlscusslon ls Lhe quesLlon how lnformaLlon and knowledge are relaLed Lo each
oLher. SomeLlmes lnformaLlon ls deflned as daLa LhaL can be easlly codlfled, LransmlLLed, recelved,
Lransferred and sLored. knowledge, on Lhe oLher hand, ls seen as conslsLlng of sLrucLured lnformaLlon LhaL ls
dlfflculL Lo codlfy and lnLerpreL due Lo lLs lnLrlnslc lndlvlslblllLy. Pence, lL ls embodled ln lndlvlduals and
organlzaLlons. Lven Lhough Lhe ablllLy Lo lndulge knowledge relaLe Lo human cognlLlve ablllLles Lo absorb and
selecL among avallable lnformaLlon, lndlvldual compeLence may have llLLle or no value ln lsolaLlon, buL
comblned wlLh oLher compeLencles ln an organlzaLlon lL may consLlLuLe an lmporLanL parL of Lhe
organlzaLlon's knowledge caplLal. ÞarL of knowledge ls llkely Lo always remaln ºLaclL" and Lhus non-codlflable
(Þolyanl, 1966).
ln conLrasL Lo lnformaLlon LhaL may be lnLerpreLed as facLual, knowledge may be consldered as esLabllshlng
generallzaLlons and correlaLlons beLween varlables. knowledge ls also cumulaLlve ln Lhe sense LhaL Lhe
beLLer known a fleld, Lhe easler lL ls Lo asslmllaLe new pleces of knowledge wlLhln Lhls fleld. Cenerally,
knowledge can be descrlbed somewhere beLween Lhe compleLely LaclL and Lhe compleLely codlfled. 1aclL,
sLlcky or complex knowledge, l.e. hlghly conLexLual and uncerLaln knowledge, seems besL Lransferred vla
face-Lo-face lnLeracLlons (von Plppel 1988). ÞroxlmlLy Lhus maLLers slnce knowledge developed for any
parLlcular appllcaLlon can easlly splll over and flnd addlLlonal appllcaLlons.
1here wlll always be llmlLaLlons ln accesslng knowledge. Measures concernlng access and level of knowledge
Lend llkewlse Lo be parLlal. lndeed, even lf Lhe LoLal sLock of knowledge were freely avallable, knowledge
abouL lLs exlsLence would noL necessarlly be. 1he knowledge space ls ln lLself unbounded, lmplylng LhaL
declslons are made under ºbounded raLlonallLy" (Slmon 1939). Pence, parLlallLy and sub[ecLlvlLy Lend Lo
1
CloballzaLlon ls clalmed Lo lnfluence boLh Lhe demand (lower LransporL cosLs, expanslon of markeLs, eLc.) and supply slde facLors
(mlgraLlon, lul, spln-offs, eLc.) of enLrepreneurshlp (karlsson eL al 2009).
wotkloq lopet 2010.02
17
lnfluence declslons. 8ulldlng on Lhese lnslghLs, Payek (1943) concluded LhaL a key feaLure of a markeL
economy ls Lhe dlsLrlbuLlon of knowledge across a large number of lndlvlduals. ConsequenLly, dlvergence ln
Lhe valuaLlon of new ldeas across economlc agenLs, or beLween economlc agenLs and declslon-maklng
hlerarchles of lncumbenL enLerprlses, can also be expecLed. 1haL consLlLuLes one fundamenLal source of
enLrepreneurlal opporLunlLy and also lmplles a markeL sLrucLures domlnaLed by lmperfecL lnformaLlon and
lmperfecL compeLlLlon.
AnoLher Lyplcal characLerlsLlc of knowledge ls lLs non-excludablllLy, lmplylng LhaL only parL can be
approprlaLed by Lhe ºowner" whlle parL of knowledge dlffuse Lo an lndeflnlLe number of users. Low cosLs ln
LransmlLLlng codlfled knowledge, LogeLher wlLh conslderable flxed cosLs ln acqulrlng and complllng
knowledge, polnLs Lo Lhe dlfflculLles ln knowledge produclng acLlvlLles.
Otqoolzotloo of koowleJqe ptoJoctloo ooJ eottepteoeotsblp
1he way knowledge producLlon ls organlzed has shlfLed over Lhe years and dlsLlncL dlfferences can also be
observed beLween Lurope and Lhe uS (Carlsson eL al 2009). lurLhermore, lLs organlzaLlon ls shown Lo have
lnfluenced Lhe raLe of enLry of new flrms. ln Lhe 19
Lh
cenLury an lnLerdependence emerged beLween Lhe
needs of Lhe growlng uS economy and Lhe conLemporary rlse of unlverslLy educaLlon - whaL 8osenberg
(1983) has called ºendogenous lnsLlLuLlons". ln Lurope Lhe role of Lhe unlverslLles was more orlenLed
Lowards lndependenL and baslc research, as manlfesLed by Lhe PumboldL unlverslLy ln 1809. 1he dlfference
ln knowledge producLlon seems Lo have glven Lhe uS a Lechnologlcal lead ln Lhe 20Lh cenLury, even Lhough
baslc sclence was weak ln Lhe uS unLll Lhe 1930s/40s. 1he research unlverslLy ln Lhe uS was a posL world war
Lwo lnsLlLuLlon, baslcally deslgned as a modlfled verslon of Lhe PumboldL sysLem, where compeLlLlon and
plurallsm was kepL.
1o develop and lmprove Lhe flndlngs/lnvenLlons LhaL were Lhe base of Lhe 2nd lndusLrlal revoluLlon ln Lhe
laLe 19
Lh
cenLury, Lhe beglnnlng of Lhe 20
Lh
cenLury saw Lhe developmenL of corporaLe lab, where also baslc
research was conducLed (Lhe flrsL corporaLe lab was seL up ln Cermany ln Lhe 1870s). 1he close llnks
beLween lndusLry and sclence, characLerlzed by collaboraLlve research and Lwo-way knowledge flows, were
Lhus relnforced. WlLhln flrm research was much hlgher ln Lhe uS Lhan ln Lurope, employmenL of sclenLlsLs
and englneers grew Lenfold ln Lhe uS beLween 1921 and 1940.
uurlng Lhe 1940s Lhere was a huge lncrease ln 8&u-spendlng drlven by Lhe war, whlle Lhe followlng decades
saw a decrease ln 8&u relaLlve Lo CuÞ. 8aslc research dlmlnlshed, buL also flrms cuL down on Lhelr 8&u
spendlng. As a resulL, flrms seemed Lo lose Louch wlLh Lhelr knowledge base, spln-offs decllned and Lhere
was also less growLh ln large flrms.
ln Lhe beglnnlng of Lhe 1980s Lhe slLuaLlon swlLched agaln, propelled by a number of lnsLlLuLlonal reforms
dlrecLed Lowards lnLellecLual properLy rlghLs, penslon caplLal and Laxes. 1haL was palred wlLh a parLly new
seL-up of organlzaLlons, such as S8l8 where 2,3 percenL of federal agencles research fundlng musL go Lhe
SMLs, and deregulaLlons of large parL of Lhe uS economy LhaL gave rlse Lo new enLrepreneurlal
opporLunlLles. 1hus, enLrepreneurlal opporLunlLles were creaLed Lhrough sclenLlflc and Lechnlcal dlscoverles
whlch were paralleled by governmenLal pollcles whlch lnserLed a new dynamlsm ln Lhe uS economy. A shlfL
followed away from large lncumbenL flrms Lo small, lnnovaLlve, skllled-labor lnLenslve and enLrepreneurlal
enLlLles (Carlsson eL al 2009).
wotkloq lopet 2010.02
18
1o conclude Lhls secLlon, even Lhough enLrepreneurshlp ls shown Lo be lmporLanL for opporLunlLy
recognlLlon, dlscovery and creaLlon (Shane and venkaLamaran 2000), llLLle ls sald abouL Lhe orlgln of
opporLunlLles ln Lhe enLrepreneurshlp llLeraLure. 1hls Lhread ls Laken up by Acs eL al (2009), suggesLlng LhaL
knowledge endowmenLs, and Lhe way knowledge splllovers are maLerlallzed, consLlLuLes Lhe perhaps mosL
lmporLanL source for enLry and enLrepreneurshlp. Cbvlously, new lnslghLs - knowledge - should be
lnsLrumenLal ln Lhe dynamlcs descrlbed by SchumpeLer ln Lhe followlng way: º[l]ncessanLly revoluLlonlzes
Lhe economlc sLrucLure from wlLhln, lncessanLly desLroylng Lhe old one, lncessanLly creaLlng a new one"
(SchumpeLer 1942, p. 83). Pow hlgher raLes of enLrepreneurshlp augmenLs Lhe posslblllLles of Lurnlng
knowledge ln Lo lnnovaLlons and seL forces of creaLlve desLrucLlon lnLo moLlon, wlll be furLher consldered ln
Lhe nexL secLlon.
wotkloq lopet 2010.02
19
3. Entrepreneurship, opportunities and innovation
As dlscussed ln secLlon 2 Lhe ldea LhaL opporLunlLles are ob[ecLlve buL Lhe percepLlon of opporLunlLles ls
sub[ecLlve has perslsLed ln economlc Lheory slnce long. 1he realm of opporLunlLles ls always presenL, lL ls Lhe
ablllLy Lo ldenLlfy such opporLunlLles LhaL deLermlne wheLher Lhey are revealed and explolLed. 1hus, Lhere ls
a vlrLual consensus Laken ln Lhe conLemporary llLeraLure on enLrepreneurshlp LhaL lL revolves around Lhe
recognlLlon of opporLunlLles and Lhe pursulL of Lhose opporLunlLles (venkaLaraman, 1997).
1
ldenLlflcaLlon of
lnnovaLlon opporLunlLles ls Lhus argued Lo consLlLuLe Lhe speclflc Lool of enLrepreneurs (urucker 1983).
lor Lhls Lool Lo be efflclenLly used, a proper lnsLlLuLlonal seLLlng ls requlred Lo explolL enLrepreneurlal
opporLunlLles. lnLellecLual properLy rlghLs have been shown crlLlcal ln maklng enLrepreneurshlp aLLracLlve
(Murphy eL al 1991), buL a broader perspecLlve on lnsLlLuLlons are requlred, lncludlng lncenLlve sLrucLures,
markeL sLrucLures, openness, eLc. Cbvlously, Lhese are facLors LhaL largely fall under Lhe conLrol of a socleLy
and Lhus lmpacL Lhe opporLunlLy space for enLrepreneurs. 1hus, Lhe predomlnanL vlew LhaL Lhe opporLunlLy
space ls assumed exogenous ln relaLlon Lo enLrepreneurshlp, whereas Lhe lndlvldual ablllLles deLermlne how
enLrepreneurs can explolL Lhe glven opporLunlLles, seems Loo agnosLlc. lrom a pollcy polnL of vlew, such
faLed aLLlLude Lowards Lhe posslblllLles Lo lnfluence enLrepreneurlal acLlvlLy wlLhln an economy ls far Loo
passlve. We wlll reLurn Lo Lhe pollcy lmpllcaLlons ln SecLlon 6.
Pence, Lhe prevlous secLlon emphaslzed Lhe role of lnnovaLlon buL sald llLLle abouL Lhe prlme source of
enLrepreneurlal opporLunlLles. 1he resL of Lhls secLlon wlll focus on Lhe role of knowledge ln creaLlng
opporLunlLles LhaL can be explolLed Lhrough lnnovaLlon, how dlfferenL Lypes of enLrepreneurs accompllsh
dlfferenL Lasks, and also glve a brlef accounL of Lhe emplrlcal evldence ln Lhls sLrand of research. lnlLlally we
wlll dlscuss Lhe dlfferences beLween lnnovaLlon and lmlLaLlon, and Lhe measuremenL problems relaLed Lo
lnnovaLlons.
now to Jefloe ooJ meosote looovotloo?
Þerhaps more Lhan any oLher economlsL, SchumpeLer (1911/1934) ls expllclL abouL Lhe economlc funcLlon of
Lhe enLrepreneur. Accordlng Lo SchumpeLer, Lhe process of economlc developmenL could be dlvlded lnLo
Lhree clearly separaLe sLages. 1he flrsL sLage lmplles Lechnlcal dlscovery of new Lhlngs or new ways of dolng
Lhlngs, whlch SchumpeLer refers Lo as lnvenLlon. ln Lhe subsequenL sLage lnnovaLlon occurs, l.e. Lhe
successful commerclallzaLlon of a new good or servlce sLemmlng from Lechnlcal dlscoverles or, more
generally, a new comblnaLlon of knowledge (new and old). 1he flnal sLep ln Lhls Lhree-sLage process -
lmlLaLlon - concerns a more general adopLlon and dlffuslon of new producLs or processes Lo markeLs.
2
1
Shane (2003) presenLs a dlscusslon concernlng Lhe dlfferences beLween SchumpeLerlan and klrznerlan sources of opporLunlLy
where lL ls clalmed LhaL only SchumpeLerlan Lype of opporLunlLy requlres ºcreaLlon" by Lhe enLrepreneur.
2
Also 8aumol (1990) separaLes beLween Lhe lnnovaLor and flrm creaLor (lmlLaLor).
wotkloq lopet 2010.02
20
SchumpeLer was also clear abouL Lhe dlfference beLween roles played by Lhe lnvenLor as compared Lo Lhe
lnnovaLor. Lven Lhough he foresaw slLuaLlons when Lhe roles could colnclde, LhaL was accordlng Lo
SchumpeLer excepLlons Lo Lhe rule.
Cbvlously Lhere are numerous plLfalls ln Lhe measuremenL of lnvenLlons and lnnovaLlons. no maLLer whaL
scale LhaL ls applled, measuremenL dlfflculLles and sub[ecLlve evaluaLlon crlLerla may Lo a varlous exLenL
dlsLorL daLa on knowledge and can always be sub[ecL Lo crlLlclsm.
1
Some frequenLly lmplemenLed knowledge
varlables are llkely Lo mlss essenLlal parLs, whlle oLhers Lend Lo exaggeraLe Lhe knowledge conLenL. 1he mosL
commonly applled measure of knowledge explolLaLlon and lnnovaLlve acLlvlLles are 8&u-expendlLures or
paLenLs.
2
8&u-expendlLures suffer from Lhe apparenL drawback of applylng lnpuL measures ln order Lo approxlmaLe
lnnovaLlve ouLpuL. ÞaLenL ls a beLLer performance varlable buL does also suffer from serlous llmlLaLlons.
ÞaLenLs can be expecLed Lo reflecL condlLlons (red Lape, flnanclal secLor quallLy, eLc) LhaL affecL Lhe declslon
Lo lnnovaLe.
3
lL ls also llkely Lo be more closely relaLed Lo Lhe Lype of lnnovaLlve and producLlve
enLrepreneurshlp LhaL has been emphaslzed by SchumpeLer and 8aumol (Larle and Sakova 2000). ÞaLenL
auLhorlLles do however rarely know wheLher paLenLs been commerclallzed, nor do Lhey know wheLher
commerclallzaLlon was successful, or Lhe slze of Lhe lnvenLlng flrm. SLlll, paLenLs are wldely used and ls also
clalmed Lo be a falrly reasonable measure of lnnovaLlveness (Acs eL al 2002).
An lnLeresLlng and more relevanL measure Lo separaLe beLween lnvenLlon and lnnovaLlon uslng paLenL daLa
ls Lo lmplemenL quallLy ad[usLed paLenLs (Lan[ouw and Schankerman 1999, Pall eL al 2000). As shown by for
lnsLance L[ermo (2008, 2009), reglonal lnnovaLlon ls beLLer explalned by quallLy-ad[usLed paLenL daLa and ls
shown Lo be hlghly correlaLed wlLh reglonal 8&u, whereas lnLer-reglonal 8&u falls Lo reveal any slgnlflcanL
lmpacL on reglonal lnnovaLlon.
4
1urbulence, l.e. enLry and exlL of flrms, ls yeL anoLher lndlcaLor proposed Lo capLure lnnovaLlve acLlvlLy.
Powever, flrms' deaLh and blrLh seem correlaLed wlLh many facLors whereof some are lnLernal Lo flrms
(mlsmanagemenL, lnexperlence, reLlremenL, eLc.) whlle oLhers are assoclaLed wlLh lnnovaLlon by lncumbenLs
and LhreaL of enLry (8aumol, Þanzar and Wllllg 1982). ln addlLlon, some secLors wlLh many enLry and exlLs
(for lnsLance consumer servlces) can hardly be ldenLlfles as lnnovaLlve, raLher enLry Lakes place due Lo
lmlLaLlon. neL enLry, supposed Lo capLure expanslon of new and lnnovaLlve lndusLrles, has Lherefore been
suggesLed as a beLLer proxy for lnnovaLlve enLry.
5
1
Cbvlously Lhe same measure weaknesses appear wlLh regard Lo counLrles' knowledge caplLal.
2
ÞaLenLs, and paLenLs clLaLlons, are also frequenLly used as a proxy for knowledge splllovers (!affe eL al 1993, 2000, Acs eL al 2002,
lurman eL al 2002).
3
See 8raunerh[elm and Svensson (2009) and Lhe references Lhere.
4
Mairesse and Mohnen (2001) suggest using an alternatives measure based on the composite of the share in sales attributed
innovative products, R&D, proximity to basic research and market structure (competitiveness).
5
CorL and klepper (1982), klepper and Craddy (1990), !ovanovlc and Mcuonald (1994), klepper (1996) and Agarwal and CorL (1996).
wotkloq lopet 2010.02
21
A symb|ot|c re|at|onsh|p between |arge and sma|| f|rms?
1he SchumpeLerlan separaLlon beLween Lhe lnvenLor and Lhe enLrepreneur has repeaLedly been challenged
(see for lnsLance Schmookler 1966). AL Lhe same Llme good reasons for lnLegraLlng Lhe lnvenLlve and
lnnovaLlve sLages has been presenLed ln Lhe lndusLrlal organlzaLlon llLeraLure. Crossman and ParL's (1986)
semlnal arLlcle refers Lo Lhe conLracLual problems when lnformaLlon ls asymmeLrlc, whlch could be
overcome Lhrough verLlcal lnLegraLlon. Cn a more aggregaLe level, Lhe merglng of Lhe lnvenLlve and
lnnovaLlve sLages ls presenL ln Lhe earller neo-SchumpeLerlan growLh models.
1
8aumol (2002) emphaslze Lhe
symblosls beLween small and large flrms ln hls uavld and CollaLh lnnovaLlon framework.
ln Lhe managemenL llLeraLure 1eece (1986, 2006) presenLs a ºnascenL neo-SchumpeLerlan Lheory", where he
ouLllnes Lhe sLraLeglc lmpllcaLlons of commerclallzlng an lnvenLlon ln an lndependenL flrms seL up by
lnvenLors, as compared Lo llcenslng lL Lo an lncumbenL flrm. Pe ldenLlfles Lhree key facLors LhaL deLermlne
wheLher lL would be Lhe lnvenLor, Lhe followlng flrms, or flrms wlLh relaLed capaclLy - or complemenLary
asseLs - LhaL exLracL Lhe proflLs from an lnvenLlon: l) Lhe lnsLlLuLlons Lled Lo lÞ8s, ll) Lhe exLenL Lo whlch
complemenLary asseLs were needed for commerclallzaLlon, and, lll) Lhe emergence of a domlnanL deslgn.
1eece was Lhus noL prlmarlly preoccupled wlLh Lhe organlzaLlonal reglme beLween Lhe lnvenLor and Lhe
lnnovaLor raLher he sLressed Lhe prerequlslLes governlng Lhe enLry mode lrrespecLlve of wheLher lL was Lhe
lnvenLor or Lhe lnnovaLor/enLrepreneur LhaL was abouL Lo launch a new producL. lurLhermore, Lhe presence
of large lncumbenLs could be essenLlal for Lhe emergence of a markeL for ºldeas", l.e. large flrms could
procure and develop small flrms' lnvenLlons (norback and Þersson 2010).
1hus, Lhere seems Lo be a number of lmporLanL reasons why small and large flrms complemenL each oLher
whlch ls llkely Lo lnfluence Lhe lnnovaLlon processes. 1he galns of speclallzaLlon are aL Lhe boLLom of Lhls
argumenL where enLrepreneurs/small flrms slmply perform beLLer Lhan large flrms wlLh respecL Lo cerLaln
acLlvlLles. And vlce versa. 8elaLed Lo Lhls ls also Lhe lssue of agglomeraLlon and knowledge splllovers Lo whlch
we reLurn ln SecLlon 3.
Leads, |aggards and techno|og|ca| reg|me
ln a serles of papers Aghlon eL al (2001, 2004, 2003, 2006) has examlned Lhe lnnovaLlve acLlvlLles ln
Lechnologlcally leadlng lndusLrles as compared Lo oLher lndusLrles (laggards). A number of lnLeresLlng resulLs
orlglnaLes from Lhose sLudles.
2
ln parLlcular, Lhe lnduced effecLs of enLry on lncumbenLs' lnnovaLlon and
producLlvlLy are shown Lo dlffer across heLerogeneous lndusLrles. Pow does flrm enLry lnfluence lnnovaLlon
lncenLlves and producLlvlLy growLh ln lncumbenL flrms? ln Lhe earller conLrlbuLlons lL was shown LhaL
lncumbenLs ln more advanced lndusLrles lncrease Lhelr lnnovaLlve acLlvlLles, hoplng Lo clrcumvenL Lhe
negaLlve effecLs of compeLlLlon based on lnnovaLlve enLry. 1he auLhors refer Lo Lhls mechanlsm as Lhe
ºescape enLry effecL Lhrough lnnovaLlon". Powever, laggards have no or llLLle hope of wlnnlng agalnsL
1
See 8raunerh[elm (2008) and Aghlon and CrlfflLh (2003) for surveys.
2
lor references Lo relaLed papers ln Lhe lndusLrlal organlzaLlon veln, see Lhose papers. See also Aghlon and CrlfflLh (2003).
wotkloq lopet 2010.02
22
enLranLs, Lhus Lhey raLher Lend Lo reduce lnnovaLlon due Lo enLry, whlch ls referred Lo as Lhe SchumpeLerlan
approprlablllLy effecL of producL markeL compeLlLlon.
ln Aghlon eL al (2006) Lhe analysls ls exLended Lo accounL for enLry by forelgn flrms, l.e. forelgn dlrecL
lnvesLmenLs. A slmllar dynamlcs ls shown Lo lnduce lncumbenLs ln Lechnologlcally advanced lndusLrles Lo
lncrease Lhelr lnnovaLlve efforLs due Lo forelgn enLry (or LhreaL of), whereas Lhe opposlLe prevalls ln laggard
lndusLrles. Successful lnnovaLlon prevenLs enLry. ln laggard lndusLrles lL dlscourages lnnovaLlon slnce enLry
reduces Lhe expecLed reLurn from lnnovaLlng, whlch ls labeled Lhe dlscouragemenL effecL.
1hus, enLry of new flrms - domesLlc or forelgn - lnlLlaLes an lmproved allocaLlon of lnpuLs and ouLpuLs Lend
Lo Lrlgger knowledge splllovers and affecL lnnovaLlon lncenLlves among lncumbenLs. 8uL Lhe dynamlcs wlll
dlffer beLween lndusLrles and ln order Lo reap Lhe poLenLlal welfare effecLs of a sLrucLural ad[usLmenL wlLhln
and beLween lndusLrles, dlfferenL pollcles are requlred for dlfferenL lndusLrles.
ln Lhe evoluLlonary framework developed by nelson and WlnLer (1982) Lhe quesLlons of Lhe orlgln of
varlaLlon (lnnovaLlon), how selecLlon of lnnovaLlons Lake place, and Lhe way ln whlch such selecLed varlaLlon
ls LransmlLLed beLween perlods, are addressed. Accordlng Lo nelson and WlnLer, Lhe answer refers Lo
rouLlnes LhaL are clalmed Lo have gene-llke sLablllLy (lnherlLance) properLles, comblned wlLh an ablllLy Lo
muLaLe, l.e. lnduce varlaLlon. 1hus, rouLlnes drlves evoluLlon and dlfferenL modes of lnnovaLlon are
suggesLed Lo occur Lhrough Lhe explolLaLlon of opporLunlLles due Lo speclflc knowledge reglmes assoclaLed
by Lhe parLlcular lndusLry conLexL. Pence, large lncumbenL flrms are modeled as lnvesLors of 8&u and oLher
knowledge creaLlng efforLs, whlch are referred Lo as a rouLlnlzed Lechnologlcal reglme. 1hese are Lhen
explolLed by Lhe same flrms, where Lhe selecLlon of wlnners (lnnovaLlon and hlgher producLlvlLy) ls
lnfluenced by exogenous, sLochasLlc facLors.
1
AlLernaLlvely, oLher reglmes based on lmlLaLlons or where
enLrepreneurs or Lhe small flrms are consldered Lo have Lhe capaclLy of explolLlng commerclal opporLunlLles
wlLhouL relylng on 8&u, may also exlsL. WlnLer (1964, 1984) refer Lo Lhose as enLrepreneurlal Lechnologlcal
reglme.
2
Lndogenous entrepreneursh|p
Summarlzlng Lhe above dlscusslon and drawlng on Lhe dlscusslon ln SecLlon 2, knowledge, broadly deflned,
and Lhe lnsLlLuLlons governlng Lhe dlffuslon and ownershlp of knowledge, seems Lo consLlLuLe Lhe mosL
lmporLanL aspecLs of lnnovaLlve enLrepreneurshlp. lndlvlduals wlLh a cerLaln mlx of ablllLles and characLers
descrlbed ln Lhe prevlous secLlon, Lend Lo engage ln enLrepreneurlal processes whlch are characLerlzed by
search, uncerLalnLy and randomness. A consplcuous feaLure of enLrepreneurs seems Lo be LhaL Lhey
1
lmplylng LhaL Lhe dlfference for Lhls secLor as compared Lhe neoclasslcal lnnovaLlon producLlon funcLlon (uasgupLa and SLlgllLz
1981, Þakes and Crlllches 1984), Malresse eL al 1991, 1993, 2004), perhaps ls noL LhaL large.
2
See WlLL (2002) for a crlLlclsm of Lhe evoluLlonary dynamlcs ln Lhe nelson and WlnLer model. WlnLer (1984) lnLroduces enLry and
exlL where flrm level producLlvlLy ls sLochasLlcally deLermlned. 1he enLerlng flrm decldes ex posL wheLher lL should belong Lo Lhe
rouLlnlzed reglme, whlch ylelds lower buL safer reLurns, or Lhe enLrepreneurlal reglme where poLenLlal proflLs are hlgher buL also
uncerLaln
wotkloq lopet 2010.02
23
consLanLly geL lnvolved ln experlmenLs, where many dlfferenL varleLles and models may be Lrled ouL before
Lhe rlghL one ls found (8osenberg and 8lrdzell 1986). ln order Lo funcLlon, such an experlmenLally organlzed
economy requlres a proper lnsLlLuLlonal seLLlng. ÞroperLy rlghLs, lnLellecLual as well as Lo Lhe enLrepreneurlal
renL, and non-sLlgmaLlzlng fallure mechanlsms, seems Lo be some of Lhe cornersLones of an approprlaLe
lnsLlLuLlonal seLLlng LhaL ls conduclve Lo enLrepreneurlal acLlvlLles.
1
1aklng LhaL as Lhelr polnL of deparLure, Acs eL al. (2004, 2009) argue LhaL Lhe explolLaLlon of knowledge
depends on Lhe broad specLrum of lnsLlLuLlons, rules and regulaLlons, or, ln Lhelr Lermlnology, an economy's
knowledge fllLer. 1he knowledge fllLer ls Lhe gap beLween new knowledge and economlc knowledge or
commerclallzed knowledge. 1he Lhlcker ls Lhe knowledge fllLer, Lhe more pronounced ls Lhe gap beLween
new knowledge and new economlc - l.e. commerclallzed - knowledge. 1hls relaLes Lo Arrow's (1962)
percepLlon of knowledge, sLresslng LhaL knowledge dlffers from oLher facLors of producLlon. 1he expecLed
value of any new ldea ls hlghly uncerLaln, and as Arrow polnLed ouL, has a much greaLer varlance Lhan would
be assoclaLed wlLh Lhe deploymenL of LradlLlonal facLors of producLlon. Arrow emphaslzed LhaL when lL
comes Lo lnnovaLlon, Lhere ls uncerLalnLy abouL wheLher Lhe new producL can be produced, how lL can be
produced, and wheLher sufflclenL demand for LhaL vlsuallzed new producL mlghL acLually maLerlallze.
1hus, boLh Lhe lndlvlduals and Lhe conLexLs ln whlch agenLs operaLe have Lo be lnLegraLed ln Lhe model. ln
oLher words, Lhe lndlvldual-opporLunlLy nexus has Lo be operaLlonallzed. 1he key lssue - ofLen dlsregarded -
ls LhaL even Lhough new knowledge leads Lo opporLunlLles LhaL can be explolLed commerclally, lL has Lo be
converLed lnLo commerclal appllcaLlons. Such opporLunlLles rarely presenL Lhemselves ln neaL packages,
raLher Lhey have Lo be dlscovered and applled commerclally (Shane and LckhardL, 2003). ln parLlcular, Lhe
uncerLalnLy, asymmeLrles and hlgh LransacLlon cosLs lnherenL ln knowledge generaLe a dlvergence ln Lhe
assessmenL and evaluaLlon of Lhe expecLed value of new ldeas. lL means LhaL ablllLy Lo commerclallze
knowledge - Lo become enLrepreneurs - also vary across lndlvlduals.
8ulldlng on Lhese lnslghLs, Acs eL al (2004, 2009) model Lhe supply of enLrepreneurs as a funcLlon of l) Lhe
socleLal lnvesLmenLs ln knowledge, l.e. Lhe exlsLlng knowledge sLock aL a glven polnL ln Llme, and ll) how
efflclenL Lhe economy works (Lhe knowledge fllLer, l.e. Lhe deslgn of Lhe lnsLlLuLlonal seLup), and lll) Lhe glven
lndlvldual enLrepreneurlal ablllLy. ln addlLlon, culLure and LradlLlons and lnsLlLuLlons, l.e. counLry- or reglon-
speclflc facLors, lnfluence enLrepreneurshlp. 1hose are Lhe bulldlng blocks of Lhe knowledge splllover Lheory
of enLrepreneurshlp, presenLed by Acs eL al. (2004, 2009). More preclsely, producLlon of new
producLs/quallLles can elLher occur due Lo an lnvenLlon of lncumbenL flrms lnvesLlng ln 8&u, or by
enLrepreneurlal sLarL-ups where exlsLlng knowledge ls comblned ln lnnovaLlve ways whlch do noL requlre
any lnvesLmenL ln 8&u.
2
lnsLead, lndlvlduals comblne Lhelr glven enLrepreneurlal ablllLy (where hlgher
1
See 8aumol (1990), Lllasson (2007), !ohnson eL al (2000), 8oeLke and Coyne (2003), Acemouglu eL al (2004) and Þowell (2008).
2
Compare Lhe resource-based vlews (Þenrose 1939, 8arney 1991) whlch sLressed heLerogeneous lnLernal resources and capablllLles.
1he early evoluLlonary neo-SchumpeLer also acknowledged Lhe role of lnLernal facLors buL focused on secLor characLerlsLlcs and
Lechnologlcal reglmes (Malerba and Crsenlgo 1993).
wotkloq lopet 2010.02
24
ablllLy lncreases Lhe probablllLy of success) wlLh Lhe overall knowledge sLock wlLhln an economy Lo dlscover
commerclal opporLunlLles. 1he socleLal knowledge sLock ls a composlLe of prevlous knowledge sLemmlng
from acLlvlLles by lncumbenLs and sLarL-ups, l.e., knowledge refers noL only Lo sclenLlflc dlscoverles buL also
Lo knowledge assoclaLed wlLh novel ways of produclng and dlsLrlbuLlng ln LradlLlonal buslnesses, changlng
buslness models, new markeLlng sLraLegles, eLc.
1o summarlze, endogenous enLrepreneurs seem Lo be one cruclal vehlcle ln Lransformlng knowledge lnLo
useful goods and servlces. ln oLher words, splllovers are acLually generaLed Lhrough enLrepreneurs,
slmulLaneously as commerclal opporLunlLles ls lncreaslng ln a larger sLock of knowledge. 8y servlng as a
condulL for Lhe splllover of knowledge LhaL mlghL noL oLherwlse be commerclallzed, enLrepreneurshlp ls one
mechanlsm LhaL llnks knowledge Lo commerclallzaLlon and economlc growLh (see secLlon 4). A moblle
worklng force may be anoLher mechanlsm. lrom LhaL perspecLlve Lhere are undoubLedly many mechanlsms
LhaL may also lmpede Lhe commerclallzaLlon of knowledge - and growLh - whlch opens up a new fleld of
economlc pollcles as compared Lo Lhe LradlLlonal growLh lnsLrumenLs of Laxes and subsldles (see secLlon 6).
Innovat|on, entrepreneurs and sma|| f|rms: ´1he emp|r|ca| ev|dence
As polnLed ouL by AudreLsch eL al. (2006), Lhere ls an lnLeresLlng conLrasL beLween mosL predomlnanL
Lheorles of Lhe flrm and Lhe enLrepreneurlal llLeraLure's assumpLlon on opporLunlLy. Accordlng Lo Lhe
former, lnnovaLlve opporLunlLles are Lhe resulL of sysLemaLlc and purposeful efforLs Lo creaLe knowledge and
new ldeas by lnvesLlng ln 8&u, whlch subsequenLly are approprlaLed Lhrough commerclallzaLlon of such
lnvesLmenLs (Crlllches 1979, Chandler 1990, Cohen and LevlnLhal 1989, Warsh 2006), whlch sLands ln sharp
conLrasL Lo Lhe enLrepreneurlal LradlLlon of a glven, exogenous opporLunlLy space.
As regards Lhe emplrlcal evldence, several sLudles reach Lhe concluslon LhaL lrrespecLlve of modesL 8&u
lnvesLmenLs, small and enLrepreneurlal flrms conLrlbuLe subsLanLlally Lo aggregaLe lnnovaLlon (AudreLsch
1993b, leldman and AudreLsch 1999). Mlcro sLudles also suggesL LhaL enLrepreneurs/small flrms have Lhelr
knowledge produclng acLlvlLles spread across a number of dlfferenL funcLlonal areas aparL from formal 8&u
acLlvlLles (lreel 2003) and LhaL Lhese flrms draw on many knowledge sources oLher Lhan 8&u ln Lhelr
lnnovaLlon (Shane 2000).
ln a couple of papers Acs and AudreLsch (1988, 1990) provlde lnLeresLlng resulLs for Lhe u.S.
noLwlLhsLandlng LhaL Lhe large corporaLlons accounL for mosL of Lhe counLry's prlvaLe 8&u lnvesLmenLs,
Lhere are subsLanLlal dlfferences across lndusLrles and large flrms dld noL accounL for Lhe greaLesL amounL of
lnnovaLlve acLlvlLy ln all lndusLrles. lor example, ln Lhe pharmaceuLlcal and alrcrafL lndusLrles Lhe large flrms
were much more lnnovaLlve, whlle ln compuLers and process conLrol lnsLrumenLs small flrms conLrlbuLed
Lhe bulk of lnnovaLlons. More preclsely, Lhelr resulLs lndlcaLe a small-flrm lnnovaLlon raLe ln manufacLurlng
of 0.309, compared Lo a large-flrm lnnovaLlon raLe of 0.202. 1helr flndlngs llnks Lo Lhe suggesLed resLralnLs
on lnnovaLlon capaclLles ln large flrms dlscussed ln secLlon 2.3. Slmllar resulLs are obLalned by 8aldwln and
!ohnson (1999), who confer a parLlcular lmporLanL role Lo small flrm lnnovaLlons ln Lhe elecLronlcs,
lnsLrumenLs, medlcal equlpmenL and bloLechnology lndusLry. 8aldwln (1993) suggesLs LhaL more successful
flrms adopL more lnnovaLlve sLraLegles.
wotkloq lopet 2010.02
23
8ased on a deLalled Swedlsh daLa seL, Andersson and Lööf (2009) show LhaL one Lhlrd of paLenL appllcaLlons
ln Lhe manufacLurlng secLor emanaLes from flrms wlLh less Lhan 23 employees. Moreover, compared Lo non-
paLenLlng flrms, flrms engaged ln paLenLlng have more skllled labor, larger proflL margln and beLLer access Lo
bank loans, and also belongs Lo Lhe hlgh-Lechnology segmenL of lndusLry. ln addlLlon, a subsLanLlal share of
paLenLlng small flrms has llnks Lo a Swedlsh mulLlnaLlonal enLerprlse (MnL). ÞerslsLence ls also shown Lo be
hlgh, 99 percenL of Lhose noL applylng ln one year dld noL do so ln Lhe subsequenL year, whlle 30 percenL
flrms wlLh more Lhan 23 employees applled ln Lhe subsequenL year and 17 percenL of Lhose wlLh less Lhan 23
employees. Access Lo sklll, lnLernaLlonallzaLlon (exporL share) and llnks Lo an MnL are mosL sLrongly
correlaLed wlLh small flrm paLenLlng.
ÞaLenL daLa have also been used Lo examlne dlfferences ln commerclallzaLlon performance beLween new
flrms and exlsLlng flrms. 8raunerh[elm and Svensson (2009), also uslng a Swedlsh daLa-seL, show LhaL
commerclallzaLlon performance ls superlor when a paLenL ls sold or llcensed, or when Lhe lnvenLor ls
employed ln an already exlsLlng flrm, as compared Lo Lhe alLernaLlve when Lhe lnvenLor commerclallzes ln
hls own exlsLlng or new flrm. 1hls supporLs SchumpeLer's vlew LhaL enLrepreneurs have superlor skllls ln
commerclallzlng new knowledge (lnnovaLlng). Cn Lhe oLher hand, Lhe analysls also shows lnvenLor
parLlclpaLlon durlng Lhe commerclallzaLlon ls lmporLanL. Cne lnLerpreLaLlon ls LhaL Lhe lnvenLor ls cruclal for
furLher adapLaLlon (cusLom speclflc, eLc.) of Lhe lnnovaLlon, buL also ln order Lo reduce uncerLalnLy abouL Lhe
flrm's capaclLy.
1hus, enLrepreneurs and small flrms explolL exlsLlng knowledge - Lhrough Lhelr neLwork and llnks Lo oLher
knowledge producers - Lo saLlsfy Lhelr speclflc needs ln Lhe producLlon of goods and servlces. 1hereby Lhey
also produce new knowledge, even lf lL does noL show up ln Lhe 8&u-sLaLlsLlcs. SomeLlme Lhey do so
lndependenLly, some Llme ln con[uncLlon wlLh oLher flrms, e.g. lnvenLors or MnLs. 8uL Lhe process dlffers
radlcally as compared Lo large, 8&u-lnvesLlng, flrm.
AnoLher dlfference relaLes Lo Lhe lnLerLemporal dynamlcs wlLhln large enLerprlses. As Lhey seL ouL Lo aLLaln
esLabllshed growLh LargeLs, lL Lends Lo make lncumbenLs less adapL Lo change a sysLem LhaL may affecL Lhe
usefulness or value of an exlsLlng producLlon sLrucLure (ChrlsLensen 1997). Slmllarly, Aldrlch and AusLer
(1990) make Lhe slmpler argumenL LhaL Lhe larger and older Lhe flrm, Lhe less recepLlve Lo change Lhe
organlzaLlon becomes. As a resulL, lncumbenLs have an lnherenL Lendency Lo develop and lnLroduce less-
rlsky, lncremenLal lnnovaLlons lnLo Lhe markeL.
ConLrasL LhaL wlLh new venLures. 1hese are more prone Lo develop, use, and lnLroduce radlcal, markeL-
maklng producLs LhaL glve Lhe flrm a compeLlLlve edge over lncumbenLs (Casson 2002a, 2002b, 8aumol
2007a). 1hus, new flrms are noL consLralned by paLh dependencles and parLlal lock-ln effecLs, raLher Lhey
compeLe Lhrough lnnovaLlon and SchumpeLerlan manners of creaLlve desLrucLlon.
1
1haL also suggesLs LhaL
radlcal lnnovaLlons wlll more llkely sLem from new venLures (Scherer 1980, 8aumol 2004), ln parLlcular lf
new flrms have access Lo knowledge splllovers from Lhe avallable sLock of knowledge. 1herefore Lhey are
1
CreaLlve desLrucLlon ls Lhough noL solely a funcLlon of enLry and small buL also relaLe Lo lnnovaLlon wlLhln large flrms as well as
mergers and acqulslLlons (!ovanovlc and 8osseau 2002, Lllasson and Lllasson 2002).
wotkloq lopet 2010.02
26
llkely Lo play a dlsLlncL and declslve role ln Lhe LransformaLlon of knowledge-based economles. Moreover, an
lmpresslve share of radlcal breakLhrough lnnovaLlons sLem from enLrepreneurs and small flrms. Almelda and
koguL (1997), and Almelda (1999), show LhaL small flrms lnnovaLe ln relaLlvely unexplored flelds of
Lechnology.
1
Also 8lock eL al (2009) emphaslze Lhe role enLrepreneurs and small flrms ln Lhelr emplrlcal LesL of Lhe
knowledge splllover Lheory. As a sLarLlng polnL Lhey conclude LhaL knowledge (ln Lerms of 8&u-ouLlays) has
been shown Lo poslLlvely lnfluence growLh, buL LhaL Lhere remaln large and unexplalned dlfferences across
counLrles. 1hey aLLrlbuLe Lhose dlfferences Lo varylng Lhlckness of Lhe respecLlve counLry's knowledge fllLer.
1he emplrlcal analysls covers 21 Luropean counLrles for Lhe perlod 1998-2006, and lnnovaLlon ls deflned as
elLher Lhe share of Lurnover accounLed for by new producLs ln flrms, or Lhe share of Lurnover from new or
lmproved goods LhaL are new Lo Lhe markeL. CounLry's level of knowledge ls deflned as Lhe share of flrms
LhaL have applled for aL leasL one paLenL. ln Lhe emplrlcal analysls, where communlLy lnnovaLlon daLa ls
pooled wlLh counLry level daLa, Lhey flnd sLaLlsLlcal supporL for enLrepreneurshlp belng an lmporLanL vehlcle
for Lurnlng knowledge lnLo lnnovaLlve producL, conLrasLlng lmlLaLlng flrms/producLs where no such effecL
could be deLecLed. 1hey also show LhaL lnnovaLlve acLlvlLles have lncreased compared Lo lmlLaLlve ln Lhe
lnvesLlgaLed perlod. 1helr lnLerpreLaLlon ls LhaL Lhls reflecLs a swlLch Lo a more enLrepreneurlal reglme,
replaclng Lhe LradlLlonal managerlal reglme.
1hus, emplrlcal evldence sLress Lhe new and growlng flrms role ln lnLroduclng new producLs and processes,
come up wlLh buslness model lnnovaLlons, and develop new markeLs as well as changlng Lhe rules of Lhe
game of Lhelr lndusLrles (8hlde 2000). AparL from Lhose changes, Lhey also generaLe employmenL.
ApparenLly Lhose processes are ln Lurn llkely Lo render subsLanLlal knowledge splllovers. 1he lmpllcaLlon ls
LhaL only a subseL of lnnovaLlons are normally Laken lnLo accounL ln Lhe mosL commonly applled measures,
such as paLenLs and ouLlays on 8&u.
So far we have explored how enLrepreneurlal acLlvlLy lmpacL lnnovaLlon, Lhe measuremenL dlfflculLles ln
ldenLlfylng lnnovaLlve acLlvlLles, and Lhe role of lnsLlLuLlons. ln parLlcular, we have emphaslzed Lhe role of
lnsLlLuLlons LhaL governs ownershlp, knowledge producLlon and knowledge dlffuslon and lLs lnLerface wlLh
enLrepreneurshlp. ln Lhe nexL secLlon Lhe ob[ecLlve ls Lo show how Lhese processes lnLegraLes lnLo Lhe
growLh process, and Lhe exLenL Lo whlch Lhls ls capLured ln conLemporary growLh models.
1
8oLhwell and Zegveld (1982), 8aumol (2004), CrLega-Arglles, vlvarelll and volghL (2009).
wotkloq lopet 2010.02
27
4. Entrepreneurship and growth
ConLemporary models of economlc growLh are based on lnvesLmenL and explolLaLlon of knowledge as Lhe
prlme source of economlc developmenL. CrowLh performance may however dlffer across counLrles, even
Lhough counLrles may have slmllar, albelL noL ldenLlcal, knowledge endowmenLs and lnsLlLuLlonal deslgn.
SlmulLaneously, a frequenL emplrlcal regularlLy seems Lo suggesL LhaL economlc growLh ls hlghly correlaLed
wlLh abundance of small, enLrepreneurlal flrms. ln facL, an emerglng emplrlcal llLeraLure suggesLs LhaL
enLrepreneurlal sLarLups are lmporLanL llnks beLween knowledge creaLlon and Lhe commerclallzaLlon of such
knowledge, parLlcularly aL Lhe early sLage when knowledge ls sLlll fluld. AbouL Lwo Lhlrds of all emplrlcal
sLudles on enLrepreneurshlp/small flrms and growLh reach Lhe concluslon LhaL Lhere ls a poslLlve, and
generally qulLe sLrong, correlaLlon beLween Lhese varlables (karlsson and nysLröm 2007).
1
Pence, knowledge
by lLself may only consLlLuLe a necessary - buL far from sufflclenL - condlLlon for growLh.
ln Lhls secLlon we wlll revlew Lhe LheoreLlcal growLh models and presenL Lhe emplrlcal evldence concernlng
Lhe relaLlonshlp beLween knowledge, enLrepreneurshlp and economlc growLh.
know|edge-based growth
1he semlnal conLrlbuLlon of Lhe knowledge-based (endogenous) growLh models LhaL appeared ln Lhe mld
1980s was Lo show LhaL lnvesLmenLs ln knowledge and human caplLal were underLaken by proflL-maxlmlzlng
flrms ln a general equlllbrlum seLLlng.
2
Whereas flrms lnvesLed ln 8&u Lo geL a compeLlLlve edge over lLs
compeLlLors, parL of LhaL knowledge spllled over Lo a socleLal knowledge sLock LhaL lnfluenced Lhe
producLlon funcLlon of all oLher flrms, augmenLlng Lhelr producLlvlLy. Pence, growLh was dlsenLangled from
lnvesLmenLs ln caplLal and lncreases ln labor supply: even lf Lhose remalned consLanL, lncreases ln
knowledge meanL LhaL growLh would lncrease.
1he flrsL wave of endogenous growLh models (8omer 1986, Lucas 1988, 8ebelo 1991, and oLhers)
emphaslzed Lhe lnfluence of knowledge splllovers on growLh wlLhouL speclfylng how knowledge spllls over.
3
?eL, Lhe crlLlcal lssue ln modellng knowledge-based growLh resLs on Lhe splllover of knowledge. 1haL ls, even
Lhough an economy lnvesLs heavlly lnLo 8&u, Lhe mechanlsms by whlch Lhls knowledge spllls over and ls
converLed lnLo goods and servlces, ls baslcally unknown.
1hls was Lo some exLenL remedled ln Lhe second generaLlon of endogenous growLh models (SchmlLz 1989,
SegersLrom, AnanL and ulnopoulos 1990, SegersLrom 1991, Aghlon and PowlLL 1992, Cheng and ulnopoulos
1992, SegersLrom 1993). ÞredomlnanLly Lhe neo-SchumpeLerlan models deslgned enLry as an 8&u race
where a fracLlon of 8&u Lurns lnLo successful lnnovaLlons. Whlle Lhls lmplles a sLep forward, Lhe essence of
1
See 8raunerh[elm (2008) and van Þraag and verslooL (2007) for surveys.
2
lor a survey of neoclasslcal growLh models, see 8raunerh[elm (2008).
3
See also ÞrecsoLL and 8oyd (1987) who modeled producLlon exLernallLles as a funcLlon of coallLlon conLracLs beLween senlor,
experlenced workers and younger less experlenced. ulmlnlshlng reLurn seL as ln Lhe numbers of younger workers lncreased.
Compare Lucas (1978) work on Lhe role of LalenLed managemenL and Lhe allocaLlon of resources.
wotkloq lopet 2010.02
28
Lhe SchumpeLerlan enLrepreneur ls mlssed. 1he lnnovaLlon process sLreLches far beyond 8&u races LhaL
predomlnanLly lnvolve large lncumbenLs and concern quallLy lmprovemenLs of exlsLlng goods.
ln Lhe mosL recenL veln of knowledge-based growLh models Lhe focus ls narrowed and more well-deflned.
MosL promlnenL among Lhose are Lhe effecLs of Lechnology-based enLry on Lhe lnnovaLlveness and
producLlvlLy of lncumbenLs, and Lhe lmpllcaLlons of flrm heLerogenelLy on creaLlve desLrucLlon and growLh
(Aghlon and CrlfflLh, 2003). As regards Lhe flrsL lssue, Lhe analysls follows an lndusLrlal organlzaLlon LradlLlon
LhaL examlnes Lhe effecLs of preempLlon, enLry regulaLlon, sLraLeglc lnLeracLlon, eLc. (CllberL and newbery
1982, 1lrole 1988, LaffonL and 1lrole 1993, nlckell 1996, 8lundell eL al. 1999, 8erry and Þakes 2003, Aghlon
eL al. 2006). 1he new elemenL ls LhaL Lhese models Lake lnLo accounL Lhe effecLs of compeLlLlon and
lnnovaLlon of boLh lncumbenLs and new flrms. lor lnsLance, Aghlon eL al. (2006) has shown LhaL enLry - or
enLry LhreaLs - has poslLlve effecLs on Lhe lnnovaLlve behavlor by lncumbenLs close Lo Lhe Lechnologlcal
fronLler, whlle no such effecLs could be found for Lechnologlcal laggards (see Lhe dlscusslon ln SecLlon 3).
Concernlng Lhe analysls of flrm heLerogenelLy, enLry, and producLlvlLy, Lhe baslc reasonlng ls LhaL elevaLed
flrm speclflclLy ln performance (sLock evaluaLlon, proflLs, eLc.) ls assoclaLed wlLh a growlng number of
smaller and new flrms (ÞasLor and veronesl 2003, llnk eL al., 2003). Moreover, flrm speclflclLy ls seen as
reflecLlng creaLlve desLrucLlon, enhanced efflclency and hlgher producLlvlLy and growLh (uurnev eL al. 2004,
Aghlon eL al. 2004, 2003, Acemoglu eL al. 2003, 2006 and Chun eL al., 2007). An lncreased lnfluence of small
flrms and sLarL-ups ls assoclaLed wlLh deregulaLlon, lncreased compeLlLlon, eLc., buL also because new and
young flrms are more prone Lo explolL new Lechnologles or knowledge (!ovanovlc and 8ousseau 2003).
kleLLe and korLum (2004), bulldlng on Þenrose's (1939) resource based Lheory of Lhe flrm, presenL a mulLl-
flrm, mulLl-varleLy model where Lhe lnnovaLlon producLlon funcLlon comblne codlfled (or known) knowledge
wlLh currenL ongolng 8&u Lo produce new or lmproved goods. LnLry occurs when sLarLups produce hlgher
quallLy producLs as compared Lo Lhose varleLles produced by Lhe lncumbenLs. Lmbarklng from a sLandard
endogenous growLh model, Acs eL al (2004) and 8raunerh[elm eL al (2009) presenL aL LheoreLlcal model
whlch lncludes Lhe SchumpeLerlan enLrepreneurs LhaL lnnovaLe buL are noL lnvolved ln 8&u-acLlvlLles (see
Lhe appendlx).
1hus, noLwlLhsLandlng LhaL knowledge-based growLh models lmplled a huge sLep forward ln undersLandlng
growLh, Lhe preclse mlcroeconomlc mechanlsms needs Lo be furLher plnned down. A number of emplrlcal
sLudles flnd amblguous supporL for knowledge varlables as explanaLlons of aggregaLe growLh (!ones 1993a,
1993b, 2006). 8ased on Lhese emplrlcal lrregularlLles, and Lhe dlscusslon ln secLlon 2 and 3 concernlng
knowledge dlssemlnaLlon and lnnovaLlon, Lhe key lssue ln growLh sLlll revolves around Lhe exacL
lmplemenLaLlon and LransformaLlon of knowledge lnLo commerclal value, l.e. knowledge splllovers. A
concelvable mlsslng llnk ln much of Lhe conLemporary growLh llLeraLure relaLes Lo Lhe lncorporaLlon of Lhe
ºLrue" SchumpeLerlan enLrepreneur. 1he laLLer, as shown ln prevlous secLlons, consLlLuLe a brldge beLween
opporLunlLy and economlc ouLcome, Lhereby lnfluenclng how knowledge ls more or less smooLhly fllLered
and subsLanLlaLed lnLo buslness acLlvlLy. Comlng Lo grlps wlLh Lhe mlcroeconomlc foundaLlons of growLh also
have lmporLanL bearlngs on Lhe effecLlveness of pollcy recommendaLlons.
1be mlctoecooomlc foooJotloo of cootempototy qtowtb moJels
wotkloq lopet 2010.02
29
ScruLlnlzlng Lhe knowledge-based growLh models reveals LhaL Lhey resL on Lhree cornersLones: knowledge
exLernallLles, lncreaslng reLurns ln Lhe producLlon of goods, and decreaslng reLurns ln Lhe producLlon of
knowledge. 1hese are consldered Lo provlde a mlcroeconomlc foundaLlon for explalnlng Lhe mechanlsms
LhaL promoLe growLh aL Lhe macro level. Pere we narrow down Lhe dlscusslon Lo how represenLaLlve some
of Lhe properLles of Lhese bulldlng blocks are for real world behavlor.
llrsL, Lhe ablllLy of lncumbenLs Lo absorb knowledge splllovers can be quesLloned (as dlscussed ln Lhe
prevlous secLlon). As shown above, Lhe poLenLlal advanLages ln knowledge sourclng are ofLen lmpeded by
Lhe lnherlL lncenLlve sLrucLures wlLhln Lhe flrm. lf we Lake Lhe vlew proposed by Cohen and LevlnLhal (1990)
LhaL aL any glven polnL ln Llme absorpLlon capaclLy depends on Lhe knowledge accumulaLed ln prlor perlods,
l.e. Lhe need Lo remaln wlLhln a well-deflned producL space when lnnovaLlng, lL ls noL surprlslng LhaL
absorpLlon and LransformaLlon of knowledge becomes paLh dependenL. Lmplrlcal evldence qulLe
persuaslvely also reveals LhaL a large number of radlcal breakLhrough lnnovaLlons orlglnaLe ln small, less
8&u-lnLenslve, buL enLrepreneurlally geared flrms. Some of Lhe currenL examples are MlcrosofL and Coogle,
who explolL, develop and use exlsLlng Lechnologles buL had none - or modesL - 8&u faclllLles lnlLlally. ln facL,
Lhe enLrepreneurs behlnd Lhese flrms share several of Lhe Lyplcal characLerlsLlcs of Lhe AusLrlan proLoLype
enLrepreneur. CLher llkely examples of growLh enhanclng enLrepreneurlal flrms are lkea and PM of Sweden,
and WalmarL and SLarbuck of Lhe uS. 1hese flrms have no research deparLmenLs (buL do underLake acLlvlLles
LhaL could be labeled developmenL), buL has cerLalnly conLrlbuLed Lo knowledge by lnLroduclng new
buslness models and developlng new markeLs.
1
Whereas Lhe producLlon of knowledge shlfLed from belng exogenous ln neoclasslcal growLh model Lo
becomlng endogenous ln Lhe knowledge-based models, Lhe crlLlcal lssue for growLh - dlffuslon of knowledge
- ls by and large sLlll exogenous. knowledge ls Lhus a necessary buL far from sufflclenL condlLlon ln order Lo
aLLaln growLh (nelson and Þack 1999, Acs eL al 2009). ln a sense, Lhe Solowlan Lechnlcal resldual can be
argued Lo have been Lransformed lnLo an enLrepreneurlal resldual.
As second sLrand of crlLlclsm concern Lhe lnLer-Lemporal and lndlrecL effecLs of enLrepreneurshlp on
aggregaLe growLh. Also Lhese are largely unaccounLed for. Assumlng an lnflux of flrms LhaL lnLenslfles forces
of creaLlve desLrucLlon and ralses Lhe ºad[usLmenL pressure", knowledge regardlng ºwhen and how" ls sLlll
qulLe rudlmenLary.
2
1he lndlrecL effecLs - such as lncreaslng compeLlLlon, Lhe replacemenL of older and less
producLlve flrms - may be more lmporLanL Lhan Lhe dlrecL effecLs (8oblnson eL al 2006). 1hese dynamlc
effecLs have largely been lgnored. Slmllarly, exlLs, belng Lhe oLher crlLlcal componenL of creaLlve desLrucLlon
1
klm eL al (2006) conclude LhaL sLarLups promoLe new and more flexlble organlzaLlons.
2
1hls has been noLed slnce long by e.g. klrzner (1973), Ceroskl (1993) and nlckell (1996) and Lhe prevlous references Lo Aghlon eL al
ln secLlon 3. !ohnson and Þarker (1996), ue[ardln (2008) and 1hurlk and Carre (2008) show LhaL neL enLry have a poslLlve lagged
effecL on reglonal growLh whlle ue[ardln (1998) falled Lo flnd such a relaLlonshlp. As argued Lhe enLry/exlL process ls characLerlzed by
a conslderable degree of heLerogenelLy and wlll noL necessarlly generaLe creaLlve desLrucLlon and economlc progress (Man[ón-
AnLolln 2004, vlvarelll 2007). Cabral (1997) even clalms LhaL mosL enLrepreneurlal venLures are enLry mlsLakes.
wotkloq lopet 2010.02
30
and dynamlcs, noL leasL because lL releases Lhe resources needed ln expandlng oLher parLs of Lhe economy,
ls much less researched Lhan enLry.
1
1he emp|r|ca| ev|dence
íottepteoeotsblp, koowleJqe ooJ ootloool qtowtb
1he llnk beLween knowledge producLlon and producLlvlLy aL Lhe mlcro-level ls well esLabllshed.
2
AL a hlgher
level of aggregaLlon, emplrlcal analyses become more lnLrlcaLe as endogenlLy and causallLy lssues make Lhe
lnLerpreLaLlon of Lhe resulLs conslderably harder. SLlll, a number of recenL emplrlcal sLudles suggesL LhaL
enLrepreneurshlp - measured as sLarLup raLes, Lhe relaLlve share of SMLs, self-employmenL raLes, eLc. - ls
lnsLrumenLal ln converLlng knowledge lnLo producLs and Lhereby propelllng growLh.
lor example, 1hurlk (1999) provlded emplrlcal evldence from a 1984-1994 cross-secLlonal sLudy of Lhe 23
counLrles LhaL are parL of Lhe CrganlzaLlon CLCu, LhaL lncreased enLrepreneurshlp, as measured by buslness
ownershlp raLes, was assoclaLed wlLh hlgher raLes of employmenL growLh aL Lhe counLry level. Slmllarly,
AudreLsch eL al. (2002) and Carree and 1hurlk (1999) flnd LhaL CLCu c counLrles exhlblLlng hlgher lncreases
ln enLrepreneurshlp also have experlenced greaLer raLes of growLh and lower levels of unemploymenL. See
also Wennekers and 1hurlk (1999).
ln a sLudy for Lhe CLCu, AudreLsch and 1hurlk (2002) underLook Lwo separaLe emplrlcal analyses Lo ldenLlfy
Lhe lmpacL of changes ln enLrepreneurshlp on growLh. Lach one uses a dlfferenL measure of
enLrepreneurshlp, sample of counLrles and speclflcaLlon. 1hls provldes some sense of robusLness across
dlfferenL measures of enLrepreneurshlp, daLa seLs, Llme perlods and speclflcaLlons. 1he flrsL analysls
measures enLrepreneurshlp ln Lerms of Lhe relaLlve share of economlc acLlvlLy accounLed for by small flrms.
lL llnks changes ln enLrepreneurshlp Lo growLh raLes for a panel of 18 CLCu counLrles spannlng flve years Lo
LesL Lhe hypoLhesls LhaL hlgher raLes of enLrepreneurshlp lead Lo greaLer subsequenL growLh raLes. 1he
second analysls uses a measure of self-employmenL as an lndex of enLrepreneurshlp and llnks changes ln
enLrepreneurshlp Lo unemploymenL aL Lhe counLry level beLween 1974 and 1998. 1he dlfferenL samples
lncludlng CLCu counLrles over dlfferenL Llme perlods reach conslsLenL resulLs - lncreases ln enLrepreneurlal
acLlvlLy Lends Lo resulL ln hlgher subsequenL growLh raLes and a reducLlon of unemploymenL.
Acs eL al. (2004) and 8raunerh[elm eL al. (2009) flnd a poslLlve relaLlonshlp beLween enLrepreneurshlp and
growLh aL Lhe counLry level examlnlng 20 CLCu-counLrles for Lhe perlod 1981-2002. 1he lmpacL ls
conslderably sLronger ln Lhe 1990s Lhan ln Lhe 1980s, whlle Lhe lmporLance of 8&u seems Lo dlmlnlsh ln Lhe
laLLer Llme perlod. Salgado-8anda (2003) lmplemenLs a measure of lnnovaLlve enLrepreneurshlp based on
quallLy ad[usLed paLenL daLa for 22 CLCu counLrles, whlch ls reporLed Lo poslLlvely lnfluence growLh whlle no
such effecL could be esLabllshed for self-employmenL.
1
8arLelsman eL al (2004) show LhaL Lhe fasLer pace of exlLs ln Lhe uS as compared Lo Lurope has had poslLlve sLrucLural effecLs.
2
See Adams (1990), LlchLenberg (1993), Caballero and !affe (1993), Coe and Pelpman (1993), 8aumol (2007), LeSage and llscher
(2008) and naude 2008).
wotkloq lopet 2010.02
31
Acs and ArmlngLon (2002) asked Lhe quesLlon whaL Lhe relaLlve conLrlbuLlon of new flrms ls ln Lerms of new
[obs? 1hey conclude LhaL new flrm sLarL-ups play a far more lmporLanL role ln Lhe economy Lhan has
prevlously been recognlzed. lor Lhe u.S. economy as a whole Lhey show LhaL for Lhe flrsL half of Lhe 1990s
new esLabllshmenLs accounLed for a conslderably larger share of [ob creaLlon Lhan already exlsLlng
esLabllshmenLs. As dlscussed ln a prevlous secLlon, aL more dlsaggregaLed spaLlal unlLs - l.e. a clLy, reglon or
sLaLe - Lhe emplrlcal evldence corroboraLes Lhe resulLs aL Lhe naLlonal level. 1hey also flnd LhaL new flrms
are more lmporLanL Lhan Lhe sLock of flrms ln a reglon, buL Lhe manufacLurlng secLor appears Lo be an
excepLlon. 1hls ls conslsLenL wlLh prlor research on manufacLurlng.
Slmllar resulLs are found ln sLudles by van SLel and SLorey (2004), 8apLlsLa eL al (2008) and van SLel and
Suddle (2008). ln addlLlon, lrlLsch and Muellers (2004) argue LhaL Lhese effecLs are sLrongesL ln Lhe earllesL
sLage of Lhe flrm's llfe cycle. ln a recenL paper by Claeser and kerr (2009) lL ls shown how a 10 percenL
lncrease ln Lhe number of flrms per worker lncrease employmenL growLh wlLh 9 percenL, whlle a 10 percenL
lncrease ln average slze of flrms ls clalmed Lo resulL ln a seven percenL decrease ln employmenL growLh due
Lo new sLarLups.
1
AL Lhe flrm level, sLarLups are more llkely Lo grow and creaLe new [obs (!ohnson eL al 2000, Llngelbach eL al
2006). 1he paLLern seem however Lo dlffer beLween Lhe u.S. and Lurope. 1he probable reasons Lo Lhese
dlfferences ls alloLLed Lhe lnsLlLuLlonal seL-up (SLorey 1994, uavles and Penrekson 1997).Whlle ln Lurope Lhe
maln effecL accrues Lo flrms employlng one or Lwo new persons (Wlklund 1998, Andersson and uelmar
2000), growLh ln Lhe u.S. ls clalmed Lo be domlnaLed by a small number of new enLrepreneurlal flrms
exhlblLlng exLraordlnary growLh (ºgazelles"). Cf course, gazelle effecLs also exlsL ln oLher counLrles (Wlklund
and Shepherd 2004). 1hey can also be found ln all Lypes of lndusLrles even Lhough Lhey seem Lo emerge
more frequenLly from explolLlng new knowledge (aL leasL ln Lhe u.S.). As shown by Penrekson and !ohansson
(2009), Lhe lmporLance of gazelles seems Lo have lncreased over Lhe years.
AL Lhe reglonal level numerous sLudles - whlch has Lhe advanLage of belng exposed Lo baslcally Lhe same
lnsLlLuLlonal seLup - appear where reglonal enLrepreneurshlp buL also knowledge seems slgnlflcanLly relaLed
Lo reglonal prosperlLy.
2
ulfferenL varlables have been used Lo capLure enLrepreneurlal acLlvlLles. uslng an
lndusLry Lurbulence varlable lrlLsch (1996) concluded LhaL enLry and exlLs lmpacL growLh. ue[ardln (2008),
lmplemenLlng a neL enLry varlable Lo capLure enLrepreneurshlp, found poslLlve lagged effecLs for enLry ln Lhe
servlce secLor 1982-1996 on growLh.
A recenL sLudy by SuLLer (2009) on uS daLa aLLrlbuLes 90 percenL of reglonal varlaLlon ln growLh (LoLal facLor
producLlvlLy) Lo Lhe reglonal knowledge sLock (paLenL) and reglonal new flrm formaLlon. LnLrepreneurshlp ls
1
1he resulLs are corroboraLed by MacMlllan and Woodruff (2002) and AudreLsch eL al (2006).
2
See AshcrofL and Love (1996), lrlLsch (1997), AudreLsch and lrlLsch (2002), Acs and ArmlngLon (2002), van SLel and SLorey (2002),
Carre eL al (2002) and klapper eL al (2006). A number of sLudles reporL a poslLlve correlaLlon beLween knowledge and reglonal
prosperlLy. Powever, as sLressed by several scholars, Lhese sLudles suffers from numerous problems, e.g. Lhe complex dynamlcs
beLween 8&u and lLs commerclal appllcaLlons (ulsney 2003, ScarpeLLa eL al 2002, Lrken eL al 2008), fall Lo accounL for physlcal and
human caplLal facLors/sLocks (PolLz-Lakln and kao 2003, Peden 2003, losLer eL al 2006). 1hus, much of Lhe varlaLlon ln producLlvlLles
may have llLLle Lo do wlLh dlfferences ln knowledge or Lechnology.
wotkloq lopet 2010.02
32
however clalmed Lo have an effecL on growLh LhaL ls flve Llmes larger Lhan knowledge.
1
1hus, Lhe emplrlcal
evldence hlnLs aL knowledge belng lmporLanL for sLeady-sLaLe economlc growLh slmulLaneously as lLs
commerclal lnLroducLlon Lhrough new venLures/flrms has a dramaLlcally larger lmpacL.
cooottles ot Jlffeteot level of ecooomlc Jevelopmeot
uo Lhe effecLs of enLrepreneurshlp on growLh and producLlvlLy dlffer wlLh respecL Lo counLrles' level of
developmenL? We Lake 8osLow (1960) as our polnL of deparLure, who suggesLed LhaL counLrles go Lhrough
flve dlfferenL sLages of economlc growLh ln as Lhey develop, endlng ln a sLage labeled Lhe age of hlgh mass-
consumpLlon. lollowlng LhaL Lhread, ÞorLer eL al (2002) presenLed a growLh cycle conslsLlng of Lhree sLages:
Lhe facLor drlven, Lhe efflclency drlven and Lhe lnnovaLlon drlven. Pence, counLrles aL dlfferenL level of
developmenL can be expecLed Lo dlsplay noL only dlverglng producLlon sLrucLures, buL also when lL comes Lo
smaller flrms and enLrepreneurs (Acs and Szerb 2009).
ln a neo-SchumpeLerlan growLh model conLexL, lnnovaLlve enLrepreneurshlp ls clalmed Lo be Lhe speclflc
mechanlsm Lhrough whlch producLlvlLy growLh ls lnLroduced ln advanced economlcs, conLrasLlng less
developed counLrles where dlffuslon of prevlous lnnovaLlons and prevlously developed Lechnology spur
producLlvlLy growLh (Acemouglu eL al 2006). Pence, Lechnologlcal lnnovaLlon ls broughL abouL Lhrough Lhe
creaLlon of new knowledge made manlfesL ln producLlon by enLrepreneurs ln developed economles, whlle
dlffuslon Lo a larger exLenL ls drlven by caplLal lnvesLmenL channeled Lhrough esLabllshed flrms (LrLur and
koch 2008). 1he presence of Lechnologlcal lnLerdependence beLween counLrles ls clalmed Lo faclllLaLe Lhe
dlffuslon of Lechnologles from leadlng Lo lagglng economles, Lhereby speedlng up producLlvlLy among
laggards.
1he causes of sLrucLural change Lhus dlffer beLween economles aL dlfferenL level of developmenL (nelson
and Þack 1999, Crles and naude 2008, 2010). ln developlng counLrles wlLh advanLageous cosL sLrucLures,
enLrepreneurshlp based on lmlLaLlon LogeLher wlLh lnflows of forelgn flrms and lnvesLmenLs by large
lncumbenLs, serve Lo achleve Lhls end (8odrlk 2007). ln more advanced economles lnnovaLlon and sLrucLural
change ls more llkely Lo Lake place Lhrough Lhe comblned efforLs by enLrepreneurlal small venLures and large
lnnovaLlve flrms (organlzed 8&u), complemenLlng each oLher (nooLeboom 1994, 8aumol 2002).
Some emplrlcal supporL for Lhe dlfferenL klnd of Lechnology dlffuslon and dynamlcs ls provlded by SLam and
van SLel (2009). 1hey pool mlcroeconomlcs daLa (CLM) wlLh more aggregaLe daLa and flnd LhaL
enLrepreneurshlp has no growLh effecL ln low lncome counLrles.
2
ln hlgh lncome and LranslLlon counLrles Lhe
opposlLe prevalls, parLlcularly wlLh regard Lo opporLunlLy based enLrepreneurshlp. 1he poslLlve effecLs are
mosL pronounced ln Lhe LranslLlon economles whlch ls aLLrlbuLed ample enLrepreneurlal opporLunlLles, a
1
See also Claeser eL al (1992), Mlracky (1993), 8eynolds eL al (1994), Acs and ArmlngLon (2006), SLam (2006) Claeser (2007) and
naude eL al (2008) for analyses on Lhe relaLlonshlp beLween enLrepreneurshlp and growLh, Lhe producL cycle, Lechnologlcal progress
and compeLlLlon.
2
SlmulLaneously as Lhe average enLrepreneurshlp raLe ls shown Lo be much hlgher ln low- and mlddle lncome counLrles Lhan ln hlgh-
lncome counLrles (Ardagna and Lusardl 2008). ln addlLlon, ln Lhe former Lwo caLegorles of counLrles, necesslLy enLrepreneurshlp
accounLs for abouL Lwo Lhlrds of sLarLups, whlle LhaL drops Lo 22 percenL ln hlgh-lncome counLrles. Lu has Lhe lowesL raLe of
enLrepreneurlal acLlvlLy. 1hls complemenLs Wennekers (2003) u-shape model, where hlgher enLrepreneurlal acLlvlLles are expecLed
ln low- and hlgh-lncome counLrles, by sLresslng Lhe Lype of enLrepreneurshlp.
wotkloq lopet 2010.02
33
hlghly educaLed people and quallfled enLrepreneurs LhaL are well connecLed Lo local neLworks. ln addlLlon,
opporLunlLy cosLs are low for poLenLlal enLranLs slnce alLernaLlve occupaLlons are sparse.
1o summarlze secLlon 4, LheoreLlcal advances, supporLed by emplrlcal flndlngs, clearly polnL Lo an lncreaslng
role for enLrepreneurs ln Lhe growLh process. SlmulLaneously, Lhere are conslderable gaps ln our
undersLandlng of Lhe sLrucLure and worklng of Lhe mlcroeconomlc mechanlsms ln Lhe growLh process.
wotkloq lopet 2010.02
34
5. The geography of entrepreneurship, innovation and growth
1he followlng secLlon ls devoLed Lo a brlef exploraLlon of some of Lhe domlnanL explanaLlons as regards Lhe
spaLlal dlsLrlbuLlon, more preclsely, Lhe lumplness of enLrepreneurshlp and knowledge, whlch seems Lo be a
dlsLlncL feaLure of Lhe economlc landscape. We wlll also Louch upon Lhe expecLed, and acLual, consequences
of geographlcally concenLraLed sLrucLures of economlc acLlvlLles. 1he mechanlsms LhaL have been ldenLlfled
Lend Lo generaLe geographlcally concenLraLed producLlon sLrucLures more generally ls however beyond Lhe
scope of Lhe currenL presenLaLlon. 8aLher, Lhe amblLlon ls Lo hlghllghL some aspecLs of parLlcular lnLeresL
when lL comes Lo Lhe lnLer-locus of enLrepreneurs and knowledge on one hand, and geographlc proxlmlLy
and growLh, on Lhe oLher.
1
Why |s geograph|ca| prox|m|ty |mportant?
1he modellng plllars of Lhe geographlcal dlsLrlbuLlon of economlc acLlvlLles are LransporL and Lrade cosLs
LogeLher wlLh pecunlary and non-pecunlary exLernallLles. 1he former Lype of exLernallLy refers Lo demand-
and supply-llnkages whlle Lhe laLLer has Lo do wlLh knowledge splllovers. lf Lrade and LransporL cosLs are
hlgh, economlc producLlon sLrucLures wlll be dlspersed wlLh no or llLLle Lrade. Cn Lhe oLher hand, lf Lhey are
very low or even zero, Lhen locaLlon of economlc acLlvlLy ls arblLrary.
2
lL ls somewhere ln beLween where Lhe
largesL consequences for Lhe spaLlal dlsLrlbuLlon of producLlon can be expecLed. Changlng Lrade cosLs could
Lhus lnduce an endogenous change ln Lhe locaLlon of producLlon.
3
Cnce a crlLlcal mass has been esLabllshed,
self-relnforclng and cenLrlpeLal forces seL lnLo moLlon. 1he counLer effecLs, l.e. Lhose LhaL hlnders all
economlc acLlvlLles from belng locaLed ln one place, are assoclaLed wlLh congesLlon cosLs and rlslng cosLs of
locally flxed producLlon facLors.
SerendlplLy ls also lnvolved when lL comes Lo explalnlng spaLlal dlfferences, parLlcularly ln Lhe lnlLlal sLages of
Lhe emergence of a clusLer or agglomeraLed producLlon mllleu (ChlnlLz 1961, kenney and ÞaLLon 2006, ScoLL
2006, Claeser and kerr 2009). Cne frequenLly clLed example ls Lhe move by Wllllam Schockley's
semlconducLor buslness from Lhe easL coasL Lo San lranclsco. lL was noL Lhe abnormal - lf any - dlfference ln
reLurns LhaL made Schockley relocaLe, buL Lhe facL LhaL hls slck moLher llved close Lo San lranclsco.
íottepteoeotsblp
When lL comes Lo enLrepreneurshlp and flrm locaLlon, Lhere ls a large llLeraLure polnLlng Lo a poslLlve effecL
of geographlcally concenLraLed envlronmenL on Lhe locaLlon of flrms and enLrepreneurs. lor lnsLance, access
1
lor more general surveys of economlc geography models, see lu[lLa eL al (1999), lu[lLa and 1hlsse (2002), 1hlsse and Penderson
(2004) and 8raunerh[elm and leldman (2006).
2
lor elecLronlcally LransmlLLed producLs, Lrade and LransporLs cosLs approaches zero.
3
noLe LhaL Lhe Luropean economy has a conslderably more geographlcally dlspersed producLlon Lhan Lhe uS, whlch ls explalned by
hlgher LransporL and Lrade cosLs (8raunerh[elm eL al 2000). As Lhose cosLs become lower due Lo Luropean lnLegraLlon, a reshuffllng
of producLlon and sLronger geographlc concenLraLlon can be expecLed. 1haL wlll have lmpllcaLlons aL Lhe reglonal level.
wotkloq lopet 2010.02
33
Lo flnance and servlces, hlgher flow of ldeas, larger markeLs and less swlngs ln demand, LogeLher wlLh lower
enLry cosLs, are among Lhe mosL commonly clLed advanLages of agglomeraLed economlc mllleus.
1
A
LheoreLlcal model of reglonal dlfferences ln sLarLups has been presenLed by Crels and naude (2008), where,
amongsL oLher dynamlc feaLures, enLrepreneurs can ldenLlfy and explolL reglon speclflc opporLunlLles, elLher
Lhrough lmlLaLlon or lnnovaLlon. 1hey supply lnLermedlaLes Lo flnal goods producers, whlch llnk
enLrepreneurs Lo quallLaLlve and sLrucLural change, and lncreased numbers of sLarLups lmply more of
dlverslLy and hlgher reglonal growLh.
lL ls also clalmed LhaL envlronmenLs characLerlzed by small flrm's causes more enLrepreneurshlp by lowerlng
Lhe effecLlve cosL of enLry Lhrough Lhe developmenL of lndependenL suppllers, LogeLher wlLh a larger and a
more dlverslfled supply of venLure caplLal where rlsk caplLal lnvesLors more easlly can spread rlsks.
2
Crek eL
al (2009) argues LhaL Lhe lmpacL of reglonal slze (local and exLernal accesslblllLy Lo gross reglonal producL) ls
found Lo poslLlvely lnfluence enLrepreneurshlp (lmplemenLlng several varlables) ln Lhe servlce secLor,
whereas a negaLlve lnfluence of enLrepreneurshlp seems Lo prevall ln manufacLurlng and prlmary secLors.
verheul eL al (2001) presenLs an overvlew of how declslon aL lndlvldual level are lnfluenced by reglonal
characLerlsLlcs, lncludlng culLure buL also oLher reglon-speclflc lnsLlLuLlons as well as demand and supply
facLors, generaLlng dlfferences ln reglonal enLrepreneurshlp.
1he reglonal economlc mllleu as manlfesLed ln culLure, knowledge base and buslness aLLlLude, ls also
reporLed Lo be lmporLanL for reglonal success and enLrepreneurshlp (Camagnl 1991). nl[kamp (2003) clalms
LhaL access Lo knowledge, skllls, denslLy, opporLunlLles, neLworks offers more favorable condlLlons for
lnnovaLlve enLrepreneurshlp. ln addlLlon, new flrms are frequenLly bullL around producL knowledge LhaL ls
geographlcally bounded (Wong eL al 2003, kosLer 2006). van CrL and SLam (2007) argue LhaL agglomeraLlon
effecLs have a sLronger lmpacL on enLrepreneurshlp Lhan on growLh of lncumbenLs (examlnlng Lhe
lnformaLlon and communlcaLlon lndusLry). 1he reasons are alleged spaLlally more dlsLrlbuLed organlzaLlons
of large lncumbenLs and a propenslLy Lo lnLernallze Lhelr knowledge base.
An lnLeresLlng emplrlcal observaLlon ls LhaL once enLrepreneurs have esLabllshed Lhemselves l a reglon, Lhey
rarely move (SLam 2007), whlch seems Lo be parLlcularly prevalenL ln hlgh Lech flrms (Cooper and lolLa
2000). LnLrepreneurs are also more llkely Lo be from Lhe reglon of blrLh Lhan workers and Lhey operaLe
sLronger buslnesses Lhan moved ln enLrepreneurs (klepper 2001, llguelredo eL al 2002, Mlchelaccl and Sllva
2007). 1hese flndlngs suggesL LhaL aL leasL seml-permanenL dlfferences and paLh-dependence exlsL ln Lhe
spaLlal dlsLrlbuLlon of enLrepreneurs.
1he dynamlcs due Lo enLry may dlffer over Llme.
3
ln Lhe shorL-run enLry may yleld prlce compeLlLlon whlch ln
Lurn Lends Lo lncrease purchaslng power and over Llme also boosL proflLs and dlverslLy. lL could also aLLracL
1
See for lnsLance ChlnlLz (1961), !acobs (1970), Mllls and PamllLon (1984), Pansen (1987), Saxenlan (1994), Culmarães, llguelredo
and Woodward (2000, 2002) and 8raunerh[elm and leldman (2006).
2
See 1hornLon and llynne (2003), 8ackman (2009) and Claeser (2009).
3
AnoLher dynamlc feaLure ls Lhe expecLed correlaLlon beLween reglonal enLry and exlL (keeble and Walker 1994, 8eynolds, SLorey
and WesLhead 1994). A more dense envlronmenL Lend Lo lower survlval raLe buL also lmplles hlgher growLh prospecLs for survlvors
(lrlLsch eL al 2006, Weyh 2006).
wotkloq lopet 2010.02
36
purchaslng power from ouLslde Lhe reglon and overall make Lhe reglon more aLLracLlve.
1
1he reglon may
Lhan galn from boLh a pull on ouLslde cusLomers, leadlng Lo an lncrease ln LoLal reglonal expendlLure,
slmulLaneously as Lhere ls modesL leakage of demand Lo oLher reglons due Lo more varled and quallLaLlve
supply. ln longer run, or lf Lhere are credlble lnnovaLlons-based enLry (see prevlous secLlons) LhreaLs ln Lhe
shorL-run, lnnovaLlve acLlvlLles can be expecLed Lo follow sulL. 1hus, enLry and expanslon of new lndusLrles
can be expecLed Lo sLrengLhen reglonal aLLracLlveness.
koowleJqe
Also wlLh regard Lo knowledge producLlon, a number of advanLages of geographlcally concenLraLed
sLrucLures have been observed. ÞroxlmlLy advanLages presenL Lhemselves ln faclllLaLlng knowledge dlffuslon
and creaLlng proxlmlLy-based communlcaLlons exLernallLles. 1he lmporLance of proxlmlLy Lo speclflc
knowledge nodes, such as unlverslLles, has also been lnvesLlgaLed. lL ls shown LhaL Lhe lnnovaLlveness ls
subsLanLlal and lncreaslng ln Lhe presence of unlverslLles.
2
1he effecL ls aLLrlbuLed Lo knowledge splllovers.
1here ls a vlrLual consensus LhaL splllovers are locally bounded. 1he dlsLance decay effecL has also been
esLabllshed ln a large number of sLudles.
3
knowledge splllovers Lend Lo be sLronger for more Lechnologlcally
sophlsLlcaLed producLlon, and ln more fluld and early sLages of producLlon of new knowledge. lnnovaLlve
processes assessed by elLher paLenLs, or quallLy ad[usLed measure of paLenLs, lndlcaLe LhaL lnnovaLlon ls
more concenLraLed Lhan lnvenLlve or producLlon acLlvlLles (Þacl and usal 1999, L[ermo 2009).
ConsequenLly, lnnovaLlon processes and enLrepreneurlal acLlvlLy are Lo a hlgh exLenL locallzed processes,
one reason belng LhaL lnnovaLlon frequenLly lnvolves Lhe exchange of complex knowledge whlch malnly
Lakes place wlLhln Lhe borders of a reglon. lnnovaLlon processes are Lhus governed by lnLerdependencles,
complemenLarlLles and neLworklng beLween Lhe dlfferenL acLors. Pence, lnnovaLlon capablllLles seem Lo
sLem from Lhe lnLerplay beLween generlc knowledge and learnlng processes ´LhaL are hlghly ºlocallzed" and
embedded ln Lhe knowledge and markeL envlronmenL of each reglon.
4
keqloool qtowtb
ApparenLly Lhere ls ample emplrlcal evldence of Lhe lmporLance of geographlcal proxlmlLy for knowledge
splllovers and lnnovaLlveness. 8uL Lo whaL exLenL ls LhaL reflecLed ln dlfferences ln reglonal producLlvlLy? As
shown ln 8raunerh[elm (2008), a large number of emplrlcal sLudles coverlng dlfferenL geographlcal unlLs and
1
1he effecL ls known as 8ellly's Law (1931).
2
1he reader ls referred Lo 8raunerh[elm (2008) for a more deLalled descrlpLlon of Lhe sLudles regardlng Lhe proxlmlLy Lo unlverslLles,
splllovers and growLh.
3
1hls llLeraLure goes way back. lor more conLemporary conLrlbuLlons, see for lnsLance Poover and vernon (1939), vernon (1962),
Þred (1977), Leone and SLruyck (1976), Acs eL al. (1994), Acs (1996), AudreLsch and vlvarelll (1996), Anselln eL al (1997), Claeser
(1999), leldman and AudreLsch (1999), Anselln eL al (2000), keller (2002), llscher and varga (2003), 8oLLazl and Þerl (2003), and Lhe
refences ln Lhose arLlcles.
4
1hough 8reschl and Llssonl (2001) argues ln a crlLlcal arLlcle LhaL a careful scruLlny reveals LhaL splllovers are more of a pecunlary,
markeL based naLure raLher Lhan relaLed Lo knowledge splllovers.
wotkloq lopet 2010.02
37
lndusLrles, reach Lhe concluslon LhaL geographlcal concenLraLlon of enLrepreneurshlp and knowledge ls
assoclaLed wlLh hlgher producLlvlLy.
Cne of Lhe flrsL sLudles on reglonal producLlvlLy was underLaken Clccone and Pall (1996). 1hey underLook a
cross secLlonal sLudy, based on u.S. daLa from 1988, on labor producLlvlLy and concenLraLlon aL Lhe counLy
level. ConLrolllng for knowledge (as measured by educaLlon levels) and caplLal-lnLenslLy, Lhey found LhaL Lhe
ma[or explanaLory power could be aLLrlbuLed reglonal employmenL denslLy. ln facL, accordlng Lo Lhelr
esLlmaLlons, doubllng Lhe employmenL denslLy aL Lhe counLy level lncreased labor producLlvlLy by slx
percenL. SLlll, Lhe lssues addressed focused on denslLy and knowledge whlle Lhe lmpacL of enLrepreneurs was
noL lncluded ln Lhe analysls. ln a subsequenL analysls (Clccone, 2002) on Luropean reglons slmllar resulLs
were obLalned.
WlLhln Lhe lasL decade Lhere have been several aLLempLs Lo pln down Lhe relaLlonshlp beLween
enLrepreneurshlp and reglonal growLh. 8eynold's (1999) sLudy lndlcaLed a poslLlve relaLlonshlp for Lhe
unlLed SLaLes, as dld PolLz-Lakln and kao (2003) analysls of Lhe lmpacL of enLrepreneurshlp on producLlvlLy
change over Llme. lL ls shown LhaL varlaLlons ln Lhe blrLh raLe and Lhe deaLh raLe for flrms are relaLed Lo
poslLlve changes ln producLlvlLy. Correspondlng analyses on Luropean daLa coverlng roughly Lhe same Llme
perlod reporL more amblguous resulLs. lor lnsLance, AudreLsch and lrlLsch (1996) and lrlLsch (1997),
lmplemenLed daLa on Cermany from Lhe 1980s and beglnnlng of Lhe 1990s, falled Lo deLecL any slgns of
enLrepreneurshlp augmenLlng growLh. Powever, rerunnlng Lhelr esLlmaLlons for a laLer Llme perlod,
AudreLsch and lrlLsch (2002) found LhaL reglons wlLh a hlgher sLarLup raLe exhlblLed hlgher growLh raLes.
1helr lnLerpreLaLlon was LhaL Cermany had changed over Llme, lmplylng LhaL Lhe englne of growLh was
shlfLlng Lowards enLrepreneurshlp.
Calle[on and Segarra (1999) used a daLa seL of Spanlsh manufacLurlng lndusLrles beLween 1980-1992 Lo llnk
new-flrm blrLh raLes and deaLh raLes, whlch Laken LogeLher consLlLuLe a measure of Lurbulence, Lo LoLal
facLor producLlvlLy growLh ln lndusLrles and reglons. 1hey adopL a model based on a vlnLage caplLal
framework ln whlch new enLranLs embody Lhe edge Lechnologles avallable and exlLlng buslnesses represenL
marglnal obsoleLe planLs. 1hey flnd LhaL boLh new-flrm sLarLup raLes and exlL raLes conLrlbuLe poslLlvely Lo
Lhe growLh of LoLal facLor producLlvlLy ln reglons as well as lndusLrles. Slmllar resulLs are reporLed by 8osma
and nleuwenhul[sen (2002), looklng aL 40 reglons ln neLherlands 1988 Lo 1996 and separaLlng beLween
servlce and manufacLurlng secLor. ÞoslLlve LoLal facLor producLlvlLy effecLs were observed for Lhe servlce
secLor. 1he analysls ls exLended Lo Lhe 2002 ln 8osma eL al (2008).
1he poslLlve relaLlonshlp beLween enLrepreneurshlp and growLh aL Lhe reglonal level has also been
concluded Lo prevall ln Sweden. lor example, lölsLer (2000) and 8raunerh[elm and 8orgman (2004), flnd
slmllar effecLs uslng Swedlsh daLa. lölsLer (2000) examlnes noL [usL Lhe employmenL lmpacL wlLhln new and
small flrms buL Lhe overall llnk beLween lncreases ln self-employmenL and LoLal employmenL ln Sweden
beLween 1976-1993. 8y uslng a Layard-nlckell framework, he provldes a llnk beLween mlcro behavlor and
macroeconomlc performance, and shows LhaL lncreased self-employmenL shares have had a poslLlve lmpacL
on reglonal employmenL raLes ln Sweden. 8raunerh[elm and 8orgman (2004) esLabllshed a poslLlve lmpacL
of enLrepreneurs on reglonal growLh measured as labor producLlvlLy. 1hey also found LhaL Lhe effecL was
mosL pronounced for knowledge-lnLenslve lndusLrles.
wotkloq lopet 2010.02
38
8eglonal performance may also be affecLed by Lhe composlLlon of lndusLrles (klepper 2002, 8osenLhal and
SLrange 2003). Lven Lhough a conslderable number of sLudles have shown how lnnovaLlve acLlvlLles and
growLh seem Lo be hlgher ln more dlverslfled reglons (Claeser eL al. 1992, leldman and AudreLsch 1999,
Penderson and 1hlsse 2004), Lhe lssue of dlverslLy versus speclallzaLlon ln reglonal composlLlon of lndusLrles
has been examlned by poollng reglonal daLa wlLh lnformaLlon on lnnovaLlve acLlvlLles. 1he emplrlcal
evldence as Lo wheLher knowledge exLernallLles occur beLween lndusLrles (!acoblan exLernallLles) or wlLhln
lndusLrles (Marshall-Arrow-8omer exLernallLles), ls lnconcluslve (8raunerh[elm 2008).
8omanelll and leldman (2006) looklng aL bloLechnology clusLers ln Lhe u.S. conclude LhaL Lhree lngredlenLs
are parLlcularly declslve for reglonal developmenL. llrsL, Lhelr sLudy reveals LhaL abouL Lwo Lhlrds of Lhe
clusLers were founded by local enLrepreneurs and lnvesLors. Second, reglons LhaL exhlblLed susLalned
growLh revealed a hlgher degree of spln-offs from local, l.e. flrsL generaLlon, flrms. 1hlrd, a qulLe slzeable
share (one Lhlrd) of Lhe enLrepreneurs relocaLed from one meLropollLan reglon Lo anoLher Lo found new
flrms. 1he concluslon ls LhaL enLrepreneurs are scannlng aLLracLlve locaLlons Lo whlch Lhey relocaLe. 1hese
resulLs corroboraLe Lhe flndlngs of klepper (1996, 2002).
More recenLly LeSage and llscher (2008) and LeSage and Þace (2009), assess Lhe lmpacL of reglonal
knowledge sLocks on reglonal LoLal facLor producLlvlLy (1lÞ), reached Lhe concluslon LhaL spaLlal facLors musL
be Laken lnLo accounL. 8oLh spaLlal and Lechnologlcal proxlmlLy are found Lo be lmporLanL when examlnlng
Lhe exLenL of reglonal splllovers. 1hey lmplemenL an exLended verslon of reglonal knowledge sLocks Lo fully
grasp avallable reglonal Lechnlcal knowledge.
SuLLer (2009), shows LhaL enLrepreneurshlp ls clusLered ln space, and LhaL Lhere are laLenL unobservable and
reglon-speclflc sources of varlaLlon ln enLrepreneurlal acLlvlLles whlch have an lmporLanL lnfluence on
enLrepreneurlal acLlvlLy. CrowLh ln hlgh-Lech ouLpuL as a share of reglonal ouLpuL, per caplLa lncome and
LoLal prlvaLe employmenL were Lhe mosL lmporLanL sLrucLural economlc varlables ln deLermlnlng reglonal
enLrepreneurshlp, suggesLlng paLh dependency ln Lhe hlgh-Lechnology. Also SuLLer, lmplemenLlng recenL
lmprovemenLs ln spaLlal economeLrlc Lechnlques, concludes LhaL knowledge and enLrepreneurshlp poslLlvely
lnfluence reglonal LoLal facLor producLlvlLy. ln addlLlon, dlsLance Lo Lhe Lechnologlcal fronLlers seems Lo have
no or modesL lmpacL on Lhe conLrlbuLlon by enLrepreneurs Lo LoLal facLor producLlvlLy. ulscovery and
explolLaLlon of opporLunlLles seem allled Lo boLh lndlvlduals and place (Schoonhoven and 8omanelll 2003).
1o conclude, a larger number of sLudles conflrm LhaL enLrepreneurshlp, agglomeraLed knowledge sLrucLures
and reglonal growLh are lnLerconnecLed ln a complex way, buL LhaL Lhe domlnanL share of splllovers seems
Lo have a local orlgln.
wotkloq lopet 2010.02
39
6. Implications for economic policies
1he prevlous secLlons generaLe some general observaLlons. llrsL, Lo achleve susLalnable growLh, pollcles
have Lo embrace dlfferenL buL complemenLary parLs of an economy. ApparenLly, economlc performance
cannoL be dlsenLangled from Lhe legal and lnsLlLuLlonal conLexL of an economy (norLh and 1homas 1973,
8osenberg and 8lrdzell, 1986).
1
ln addlLlon, a dlscrepancy beLween economlc pollcles aL Lhe macro- and Lhe
mlcro-level may lead Lo a subopLlmal growLh paLh. A subopLlmal pollcy mlx as regards Lhe condlLlons for
dlffuslon of knowledge, as compared Lo accumulaLlng knowledge, could lmpede counLrles and reglons from
reachlng Lhelr poLenLlal growLh Lra[ecLorles (!ovanovlc 2004, Mlccelachl 2004).
1hus, lrrespecLlve of facL LhaL Lhe macro-economlc seLLlng has lmproved over Lhe lasL decade (seL aslde Lhe
presenL macroeconomlc Lurmoll), whlch has been palred by Lhe amblLlon Lo augmenL counLrles' knowledge
base, Lhe leverage on Lhose changes may Lurn ouL Lo be qulLe dlsappolnLlng lf Loo llLLle aLLenLlon ls dlrecLed
Lowards Lhe mlcro-economlc condlLlons for knowledge based growLh.
Second, desplLe Lechnologlcal advances ln Lerms of faclllLaLlng lnformaLlon flows and communlcaLlon
channels, proxlmlLy sLlll seem Lo maLLer. CosLs of communlcaLlon Lhus remaln lmporLanL, as do lnsLlLuLlonal
and culLural barrlers beLween counLrles (PofsLede 2001). 1haL also holds aL a flner geographlcal level [udglng
from Lhe more ample splllovers wlLhln reglons.
1hlrd, an emerglng emplrlcal llLeraLure where mlcro-level daLa ls pooled wlLh counLry-daLa, provldes
sLaLlsLlcal supporL for a negaLlve relaLlonshlp beLween regulaLlon and aggregaLe lncome, whlle Lhe opposlLe
seems Lo prevall as regards ownershlp rlghLs and enLry of new flrms (Loayza eL al 2004). A couple of sLudles
also suggesL LhaL hlgh-Lech flrms and knowledge lnLenslve sLarL-ups seems Lo play ma[or role ln lnfluenclng
growLh (AudreLsch and kellbach 2004, Mueller 2007).
AlLogeLher Lhese observaLlons carry lnLeresLlng lmpllcaLlons for Lhe deslgn of pollcles. ÞarLlcularly lmporLanL
componenLs ln Lhe mlcro-economlc seLLlng refer Lo Lhe deslgn of regulaLlon effecLlng knowledge producLlon,
ownershlp, enLry barrlers, labor moblllLy and lnefflclenL flnanclal markeLs. 1hese all refer Lo Lhe dlffuslon of
knowledge Lhrough enLry. knowledge creaLlon has Lo be maLched by lncenLlves Lo explolL knowledge.
2
Þo||cy |mp||cat|ons
koowleJqe ptoJoctloo, owoetsblp ooJ eotty
1he uS unlverslLy research sysLem seems Lo be more plurallsLlc and decenLrallzed as compared Lo Lhe
Lurope's (Carlsson eL al 2009). lL has been argued Lurope's unlverslLles achleved organlzaLlonal raLlonallLy
1
1he remarkable growLh ln Sweden beLween 1870 and 1930 was preceded by a number of lmporLanL lnsLlLuLlonal changes,
compulsory schoollng was lnlLlaLed ln 1842, local monopolles (gullds) were abollshed ln 1846, whereas a new law for flrms wlLh
llmlLed llablllLles was passed ln 1847, followed 1862 by freedom of Lrade. Pence, Lhe Swedlsh case lllusLraLes Lhe slgnlflcance of Lhe
lnsLlLuLlonal seL-up (8raunerh[elm 2003).
2
1heoreLlcally dlfferenL vlews on regulaLlon van be found ln Lhe publlc cholce (8uchanan and 1ullock 1962) and publlc lnLeresL (Þlgou
1938) Lheorles. 1he former clalm LhaL publlc lnLervenLlon hlnders dynamlcs and economlc developmenL whlle Lhe laLLer argue LhaL
lnLervenLlons are necessary Lo proLecL Lhe lnLeresL of Lhe publlc.
wotkloq lopet 2010.02
40
and bureaucraLlc efflclency aL Lhe expense of compeLlLlon and lnnovaLlon. 1he degree Lo whlch unlverslLles
should be auLonomous, governed ln an alLernaLlve and more exposed Lo compeLlLlon, ls wldely debaLed
(8raunerh[elm 2009). 1he uS sysLem seems however Lo have beLLer llnks Lo Lhe commerclal secLor and a
more rapld pace of commerclallzlng of new knowledge. 1haL ls llkely Lo enLall lessons for Lhe Luropean
unlverslLy sysLem.
lL would however be a mlsLake Lo conclude LhaL Lhese dlfferences predomlnanLly can be aLLrlbuLed Lhe
changes ln Lhe lnLellecLual properLy rlghLs (lÞ8s) LhaL resulLed due Lo 8ayh-uole AcL (1980), l.e. where lÞ8s
were Lransferred Lo unlverslLles. WlLhouL pollcles LhaL promoLe enLrepreneurlal acLlvlLy, commerclallzaLlon
of new knowledge ls less llkely Lo be aLLalned. lf we belleve LhaL growLh and economlc developmenL ls drlven
by lnnovaLlon and creaLlve desLrucLlon processes, leadlng Lo Lemporary monopolles, a balanced deslgn of
lÞ8s can be expecLed Lo yleld such an ouLcome. Also Lhls vlew has, however, been debaLed. SLlll, wlLhouL
havlng Lhe legal rlghLs Lo approprlaLe Lhe reLurns from lnnovaLlons Lhe lncenLlves Lo engage ln such hlgh-rlsk
acLlvlLles are llkely Lo decllne.
ln addlLlon, legal proLecLlon of lnvesLors has been shown Lo enhance access Lo credlL for poLenLlal
enLrepreneurs and faclllLaLe enLry (Ardagna and Lusardl 2008). ln general, conLracL enforcemenL regulaLlon
whlch affecLs Lhe efflclency of Lhe legal sysLem Lends Lo lmprove Lhe posslblllLles for enLry and enhance
lnnovaLlon (u[ankov 2008, La ÞorLa 2008, Aldls eL al 2009). u[ankov (2008) shows LhaL Lhe dlfferences ln
enLry beLween counLrles wlLh llLLle regulaLlon as compared Lo Lhe mosL heavlly regulaLed, lnfluences enLry
raLe by flve percenL annually. 1hus, well-deflned and credlble ownershlp lnsLlLuLlons should have a poslLlve
lmpacL on Lhe raLe of lnnovaLlon and enLry.
keqolotloo of eotty
ln general Lerms regulaLlon ls shown Lo deLer growLh, buL exacLly how ls less clear, albelL Lhe negaLlve effecL
lncurred on enLrepreneurshlp ls one suggesLed mechanlsm, LogeLher wlLh Laxes and llquldlLy consLralnLs.
1
Clccone and Þapaloannou (2006) provlde evldence LhaL enLry regulaLlon can delay lnLroducLlon of new
varleLles/goods ln lndusLrles LhaL experlence expanslonary global demand and/or Lechnology shocks.
1he exLenL of regulaLlon has lnLeresLlng lndlrecL effecLs LhaL lnfluence enLry. As shown by Ardagna and
Lusardl (2008), Lhe poslLlve effecL assoclaLed wlLh skllls (educaLlon) dlmlnlshes conslderably ln more
regulaLed counLrles, parLlcularly for opporLunlLy-based enLrepreneurshlp. ln addlLlon, lL slgnlflcanLly reduces
Lhe propenslLy for marglnallzed groups Lo sLarL up flrms. Slmllarly, Lhe poslLlve effecLs of knowlng people
who are enLrepreneurs, run Lhelr own flrms, l.e. neLwork and belongs Lo an enLrepreneurlal culLure, ls
curbed.
2
1he resulLs comply wlLh earller flndlngs of klapper eL al (2006) and also of Clccone and Þapaloannou
(2006), referred Lo above.
1
See Lvans and !ovanovlc (1989), PursL and Lusardl (2004), Aleslna eL al (2003), u[ankov eL al (2007), llorl eL al (2007), CenLry and
Pubbard (2000), nlcoleLLl and ScarpeLLa (2003), u[ankov (2008) and Arnold eL al (2008). uelmar and Wennberg (2010) dlscuss Lhe
need for a mulLl-level (lndlvldual, flrm, lndusLry) pollcy approach. La ÞorLa (2008) clalms LhaL a lrench legal orlgln (clvll law) Lends Lo
weaken Lhe effecL of lnnovaLlon on growLh as compared Lo an anglosaxlan (common law).
2
1hese effecLs are quanLlfled by Ardagna and Lusardl (2008). lor example, Lhe poslLlve neLwork effecLs are reduced by more Lhan
Lwo Lhlrds.
wotkloq lopet 2010.02
41
1he resulLs by Aglon eL al (2006) of enLry on lnnovaLlon lmply LhaL enLry barrlers may reduce Lhe lnnovaLlon
raLe, producLlvlLy and growLh. ÞuL dlfferenLly, more of employees ln forelgn flrms may spur producLlvlLy
growLh ln lncumbenLs. Cpenness Lo encourage an lnflux of flrms, workers and poLenLlal enLrepreneurs ls
consequenLly lmporLanL. lnLernaLlonallzed flrms are also observed Lo be mosL lnnovaLlve (Suddle and Pessels
2007).
keqolotloo of lobot motkets ooJ eotty
1he lmpacL of regulaLed labor markeLs ls somewhaL more mlxed. Powever, Mlcco and Þages (2006), AuLhor
eL al (2007) and kugler and Þlca (2008) all reporL a slgnlflcanL negaLlve lmpacL on enLry of hlgher regulaLed
labor markeLs, as well as a slower resLrucLurlng of Lhe economy. Slmllarly, sLudles on Lhe deLermlnanLs of
forelgn dlrecL lnvesLmenLs flnd a negaLlve effecLs of regulaLed labor markeLs (!arvorclk eL al 2006, Cross and
8yan 2008). ln addlLlon, producLlvlLy seems Lo decrease as labor markeL regulaLlons become more severe
(8assanlnl and venn 2007, MarLlns 2009), and Lhe number of fasL growlng flrms - gazelles - seems Lo be
negaLlvely lmpacLed (llgure 1).
I|gure 1. Str|ctness of emp|oyment protect|on (2004) and h|gh-expectat|on of ear|y-stage
entrepreneursh|p 2004-2009.
"#$%&'( )#*+, ,-. /'01' 23445 "#$%&'( )#*+, ,-. /'01' 234456
wotkloq lopet 2010.02
42
Clccone and Þapaloannou (2006) reporL several lnLeresLlng resulLs lnLeracLlng dlfferenL varlables, l.e.
regulaLed labor markeL negaLlvely lnfluence enLry by lowerlng Lhe soclal neLwork facLor dlscussed above,
parLlcularly for opporLunlLy based enLrepreneurshlp. ln addlLlon, more regulaLed labor markeLs lmply LhaL
lndlvlduals rlsk Laklng aLLlLudes become more lmporLanL. Pence, Lhe percelved Lhreshold Lo cllmb before
Laklng Lhe sLep Lo become an enLrepreneur lncreases. Ardagna and Lusardl (2008) conclude LhaL labor
markeL regulaLlon has lLs sLrongesL lmpacL on opporLunlLy based enLrepreneurshlp whlle Caballero and
Pammour (2000) sLress LhaL "consLralned conLracLual capablllLles" aL labor markeLs (and ln Lhe flnanclal
sysLem) may hamper Lhe process of creaLlve desLrucLlon.
1
1oxes ooJ eotty
1here ls an exLenslve llLeraLure on Lhe effecL of Laxes on enLrepreneurshlp embraclng Lhe sLrucLure of Laxes,
Lhe overall Lax pressure and marglnal Lax raLes. MosL of Lhe emplrlcal sLudles are based on Amerlcan, or
anglosaxlan, daLa. 1he resulLs are a blL lnconcluslve, buL Lhe overall concluslon of Lhese sLudles seems Lo be
LhaL Lhe level of lndlvldual Laxes ls amblguous (and even poslLlve), whlle lncreased marglnal raLes have a
clearly dlscerned negaLlve effecLs on Lhe propenslLy Lo become enLrepreneur. 1he lmpacL on
enLrepreneurshlp ls however senslLlve for Lhe posslblllLles Lo arblLrage beLween Lax bases (CenLry and
Pubbard 2000, Þarker and 8obson 2003, Cullen and Cordon 2007). 1axes LhaL lower Lhe posslblllLles for
lndlvldual wealLh, Lhereby addlng Lo flnanclal consLralnLs are also reporLed Lo have a negaLlve effecL on
enLrepreneurshlp (Pansson 2008). noLe also LhaL Lhe admlnlsLraLlve burden assoclaLed wlLh Laxes only
affecLs enLrepreneurs negaLlvely (u[ankov eL al 2008).
2
ln a recenL sLudy by u[ankov eL al (2008), looklng aL effecLlve corporaLe Laxes ln 83 counLrles 2004 for a
sLandardlzed flrm, a large negaLlve lmpacL ls found on lnvesLmenLs (by lncumbenLs and forelgn dlrecL
lnvesLmenLs) and on enLrepreneurlal acLlvlLy. A 10 percenL lncrease ln corporaLe Lax ls shown Lo reduces
aggregaLe lnvesLmenL ln relaLlon Lo CuÞ by Lwo percenL and reduce enLry wlLh beLween Lwo and flve
percenL. A Lax ralse ls also negaLlvely correlaLed wlLh growLh buL poslLlvely assoclaLed wlLh growLh of Lhe
lnformal secLor.
3
AnoLher sLaLlsLlcally slgnlflcanL resulL ls LhaL corporaLe debL of flrms ls much hlgher (lower
solldlLy) ln counLrles wlLh hlgher corporaLe Laxes , l.e. debL flnanclng more ls common Lhan equlLy flnanclng.
5ectots ooJ tbe stoqe of fltms´ llfe cycle
uependlng on Lhe sLage of Lhe flrm's llfe cycle, dlfferenL seL of pollcles are concelvable. ln Lhe very early
phases of an enLrepreneurlal venLure, lndlvlduals' economlc sLaLus may be hard Lo dlsenLangle from Lhelr
flrms (AuLlo and Wennberg 2009). ln general, Lhere ls llLLle pollcy aLLenLlon looklng aL Lhe [olnL lmpllcaLlon of
publlc pollcles aL dlfferenL sLages of new flrm evoluLlon such as enLry, growLh and exlL. ln addlLlon, flrms
grow aL dlfferenL pace and Lhe requlremenLs of slow-growlng flrms and gazelles may be qulLe dlfferenL. 1he
1
See also u[ankov eL al (2002), uesal eL al (2003) and La ÞorLa eL al (1998, 2000).
2
See Pansson (2008) for a survey. La ÞorLa (2008) reach Lhe concluslon LhaL Lhe Lax burden ls subsLanLlally hlgher ln clvll law
counLrles and Lhe Lax raLe hlgher.
3
1he emplrlcal analysls conLrols for oLher Laxes (vA1, personal, eLc).
wotkloq lopet 2010.02
43
lmporLance of gazelles for [ob creaLlon seems Lo have lncreased over Llme. All ln all, lL ls llkely LhaL pollcy
varlables lnfluenclng growLh dlffer over flrms' evoluLlonary sLages.
ln addlLlon, Lhere are also secLoral dlfferences. lor lnsLance, removlng enLry barrlers may noL lncrease
producLlvlLy and growLh ln all lndusLrles. Pence, removlng enLry barrlers should be complemenLed wlLh
means LhaL faclllLaLes Lhe reallocaLlon of resources Lowards secLors LhaL reacL poslLlvely Lo enLry, Lhereby
releaslng resources Lo be employed ln expandlng secLors. LxlLs are ofLen neglecLed, buL consLlLuLe a pollcy
area (bankrupLcy lnsLlLuLlons eLc.) as lmporLanL as pollcles geared Lowards enLry.
level of ecooomlc Jevelopmeot
1he deslgn of pollcles may also vary wlLh level of economlc developmenL of counLrles. As dlscussed above,
Lhe mechanlsm for sLrucLural changes and lmplemenLaLlon of new Lechnology looks dlfferenL ln developlng
and developed counLrles large. 8ulldlng lnsLlLuLlons LhaL fosLer prlvaLe secLor developmenL and provlde
credlble enforcemenL Lo proLecL prlvaLe ownershlp, encourage educaLlon and aLLracL forelgn dlrecL
lnvesLmenLs and lmlLaLlve enLrepreneurshlp, should be hlgh-prlorlLy lssues ln developlng counLrles(van SLel
2003, Saxenlan 2006, 8odrlk 2007). ln more developed economles aLLenLlon should Lo a larger exLenL be
dlrecLed producLlon and dlffuslon of knowledge, LogeLher wlLh well funcLlonlng and experlmenLally
organlzed lnnovaLlon processes.
1he polnL emphaslzed ln Lhls secLlon ls LhaL a supplemenLary seL of pollcles focuslng on sLrengLhenlng Lhe
condulLs of knowledge splll-over also plays a cenLral role ln promoLlng economlc growLh. WlLhouL Lhe
approprlaLe lncenLlve sLrucLure for labor, enLrepreneurs and lnvesLors, Lhe poLenLlal beneflclal effecL of
approprlaLely deslgned pollcles wlll noL be aLLalned. 1herefore pollcles LhaL alm Lo seL economles on Lhelr
poLenLlally long-run susLalnable growLh Lra[ecLory, musL lmplemenL coherenL sLraLegles LhaL embrace boLh
Lhe macro- and mlcro-level. 1he dlfferenL pollcy areas musL be coordlnaLed and addressed slmulLaneously. lf
enLry barrlers are reduced buL exlL posslblllLles are lnferlor and properLy rlghL weak, Lhe resulL ln Lerm of
sLarLups, knowledge dlffuslon and producLlvlLy may be modesL.
wotkloq lopet 2010.02
44
7. Conclusion
A socleLy's ablllLy Lo lncrease lLs wealLh and welfare over Llme crlLlcally hlnges on lLs poLenLlal Lo develop,
explolL and dlffuse knowledge, Lhereby lnfluenclng growLh. 1he more pronounced sLep ln Lhe evoluLlon of
manklnd has been preceded by dlsconLlnuous, or lumpy, augmenLaLlons of knowledge and Lechnlcal
progress. As knowledge has advanced and reached new levels, perlods followed of economlc developmenL
characLerlzed by uncerLalnLy, markeL experlmenLs, redlsLrlbuLlon of wealLh, and Lhe generaLlon of new
sLrucLures and lndusLrles. 1hls paLLern mlrrors Lhe evoluLlon durlng Lhe flrsL and second lndusLrlal revoluLlon
ln Lhe 18Lh and 19Lh cenLurles, and ls also a consplcuous feaLure of Lhe ºLhlrd", and sLlll ongolng, dlglLal
revoluLlon.
uesplLe Lhe facL LhaL Lhere ls a general presumpLlon wlLhln Lhe economlc dlsclpllnes LhaL mlcro-level
processes play a vlLal role ln Lhe dlffuslon of knowledge, and Lhus Lhe growLh process, Lhere ls a lack of
sLrlngenL LheoreLlcal framework buL also of emplrlcal analyses Lo supporL Lhls allegaLlon. 1he economlc
varlables knowledge, enLrepreneurshlp, lnnovaLlon hang LogeLher ln a complex manner buL are LreaLed as
dlfferenL and separaLe enLlLles, or reduced Lo a consLanL or a sLochasLlc process. lL ls noL unLll Lhe lasL 10-13
years LhaL a llLeraLure has emerged LhaL alms aL lnLegraLlng Lhese economlc concepLs lnLo a coherenL
framework.
1hus, knowledge concernlng Lhe mlcroeconomlc processes LhaL leads Lo growLh ls sLlll lncompleLe. ln Lhe
neoclasslcal growLh models producLlon of knowledge was exogenous - Lhe Lechnlcal resldual - whereas Lhe
dlffuslon of knowledge ls elLher exogenous, sLochasLlc or alloLLed large flrms LhaL more resembles Lhe
pharmaceuLlcal companles where research deparLmenLs Lrles Lo come up wlLh nexL comblnaLlon of
molecules LhaL wlll be Lurned lnLo Lhe nexL block-busLer. 8uL knowledge ls developed, applled and dlffused ln
many oLher ways, ofLen Lhrough smaller lnnovaLlve flrms and by enLrepreneurs. 1he uncerLalnLy,
asymmeLrles and hlgh LransacLlon cosLs lnherenL ln knowledge also generaLe a dlvergence ln Lhe assessmenL
and evaluaLlon of Lhe expecLed value of new ldeas. 1hls dlvergence ln valuaLlon of knowledge across
economlc agenLs and wlLhln Lhe declslon-maklng process of lncumbenL flrms can lnduce agenLs Lo sLarL new
flrms as a mechanlsm Lo approprlaLe Lhe (expecLed) value of Lhelr knowledge. 1hls would suggesL LhaL
enLrepreneurshlp faclllLaLes Lhe splllover of knowledge ln Lhe form of sLarLlng a new flrm.
Pow do we accounL for LhaL klnd of dynamlcs ln Lhe presenL growLh models? 1o whaL exLenL are lagged
effecLs and lnLeracLlon effecLs lncluded ln an approprlaLe way? And whaL ls acLually endogenlzed Lhrough
knowledge accumulaLlon? Should knowledge be seen as Lhe englne of growLh, or ls lL a beLLer meLaphor Lo
vlew knowledge as fuel LhaL feeds lnLo Lhe mechanlsm LhaL converLs knowledge lnLo growLh, e.g.
enLrepreneurs, lnnovaLlon, labor moblllLy, eLc? Pas, lndeed, Lhe Solowlan Lechnlcal resldual been
Lransformed Lo an enLrepreneurlal resldual?
1hls paper has sLrlved Lo lllusLraLe Lhe relaLlonshlp beLween knowledge, enLrepreneurshlp and lnnovaLlon on
Lhe one hand, and how LhaL relaLes Lo growLh on Lhe oLher. 8ased on a (parLlal) survey of recenL and
prevlous LheoreLlcal and emplrlcal conLrlbuLlons ln Lhls veln of research, Lhe amblLlon has been Lo plnpolnL
some of Lhe weak spoLs ln our currenL undersLandlng of growLh, and Lo provlde some recenL lnslghL Lo Lhe
growLh process. ln addlLlon, pollcy areas of lmporLance for Lhe mlcroeconomlc foundaLlons for growLh have
wotkloq lopet 2010.02
43
also been dlscussed, sLresslng Lhe lmporLance of a hollsLlc approach lmplylng LhaL a mulLlLude of measures
and lnsLrumenLs has Lo be consldered Lo aLLaln susLalnable economlc developmenL.
1o paraphrase volLalre: ºuoubL ls noL a pleasanL condlLlon buL cerLalnLy ls absurd" and we can be assured
LhaL we do noL yeL fully comprehend Lhe mlcro-economlc mechanlsms of growLh. 1hus, Lhe challenges are
sLlll Lhere - leL us deal wlLh Lhem!
wotkloq lopet 2010.02
46
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wotkloq lopet 2010.02
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Append|x. Lndogenous growth w|th know|edge exp|o|t|ng entrepreneurs
1
8esearch deparLmenLs wlLhln lncumbenL flrms employ labor ( ) as Lhe only producLlon facLor, and
research acLlvlLles are lnfluenced by Lhe avallable sLock of knowledge (A) and an efflclency parameLer ( )
relaLed Lo research acLlvlLles.
1he producLlon funcLlon can be wrlLLen as,
(1)
where research producLlon ls poslLlvely lnfluenced by a larger knowledge sLock and hlgher efflclency.
ln order Lo lnclude Lhe SchumpeLerlan enLrepreneur, we flrsL assume LhaL enLrepreneurlal ablllLy ls
embodled ln labour buL ln conLrasL Lo raw labour lL ls dlsLrlbuLed unevenly across Lhe populaLlon. 1hus,
enLrepreneurlal acLlvlLles are assumed characLerlzed by decreaslng reLurns Lo scale ( ). 1he producLlon
funcLlon for enLrepreneurlal acLlvlLles Lakes Lhe followlng form,
. (2)
Pence, slmllar Lo 8&u-workers, Lhe represenLaLlve enLrepreneur Lakes advanLage of exlsLlng knowledge. Cn
Lhe oLher hand, Lhe producLlon Lechnology dlffers (decreaslng reLurns Lo scale) and Lhey do noL engage ln
research. 8aLher, Lhey comblne Lhelr enLrepreneurlal ablllLy wlLh Lhe exlsLlng sLock of knowledge Lo
lnLroduce new producLs and buslness models. 1he dlfferenL varleLles of caplLal goods ( ) produced by
enLrepreneurs and researchers ls employed ln Lhe flnal goods (?) secLor LogeLher wlLh labor,
(3)
where • (0‚•‚1) represenLs Lhe scale parameLer. Clven LhaL Lhe demand for all varleLles ln equlllbrlum ls
symmeLrlc, l.e. for all , we rewrlLe equaLlon 6 as
(4)
Assume LhaL caplLal goods (k) are produced wlLh Lhe same Lechnology as flnal goods and LhaL lL Lakes
unlLs of caplLal goods Lo produce one unlL of caplLal. 1hen lL can be shown LhaL,
(3)
SubsLlLuLlng equaLlon 3 lnLo 4 glves,
(6)
1
See also Braunerhjelm et al (2009).
wotkloq lopet 2010.02
73
1hus, Lhe economy employs Lhree facLors of producLlon, l.e. raw labor (produclng flnals), LogeLher wlLh
researchers and enLrepreneurs LhaL produces varleLles of caplLal goods. Labor markeL equlllbrlum ls aLLalned
when employmenL ln 8&u, enLrepreneurshlp and flnal producLlon equals LoLal supply,
(7)
As a slde effecL of Lhelr efforLs, researchers and enLrepreneurs produce new knowledge LhaL wlll be publlcly
avallable for use ln fuLure caplLal good developmenL, poslLlvely lnfluenclng comlng generaLlons of research
and enLrepreneurlal acLlvlLles. LquaLlon 8 descrlbes Lhe producLlon of new knowledge, l.e. Lhe evoluLlon of
Lhe sLock of knowledge, ln relaLlon Lo Lhe amounL of labor channelled lnLo 8&u ( ) and enLrepreneurlal
acLlvlLy ( ),
(8)
SubsLlLuLlng from equaLlon 1 and 2,
(9)
where, agaln, Lhe represenLs Lhe knowledge efflclency ln lnvenLlon acLlvlLles (8&u) and lnnovaLlon
(enLrepreneurshlp), whereas A ls Lhe sLock of avallable knowledge aL a glven polnL ln Llme. 1he raLe of
Lechnologlcal progress ls Lhus an lncreaslng funcLlon ln 8&u, enLrepreneurshlp and Lhe efflclency of Lhese
Lwo acLlvlLles.
Assumlng LhaL demand ls governed by consumer preferences characLerlzed by consLanL lnLerLemporal
elasLlclLy of subsLlLuLlon ( ) Lhe maxlmlzaLlon problem can be expressed ln followlng way:
(10)
sub[ecL Lo Lhe law of moLlons for knowledge and caplLal.
(11)
. (12)
1he currenL value PamllLonlan for Lhe represenLaLlve consumer ls Lhen
(13)
1he flrsL order condlLlons for maxlmum, leLLlng , are as follows:
wotkloq lopet 2010.02
74
,
(14)
(13)
(16)
Comblnlng equaLlons 13 and 16 glves
(17)
1hus, on a balanced growLh paLh, where boLh 8&u and enLrepreneurshlp ls proflLable, Lhe amounL of
resources engaged ln enLrepreneurlal acLlvlLles ls lndependenL of consumer preferences ( ). As ls less
Lhan 1, enLry lnLo enLrepreneurshlp ls lncreaslng ln and decreaslng ln .
1he maxlmlzaLlon of equaLlon 13 also glves Lhe equaLlons of moLlon for Lhe shadow prlces of caplLal (k) and
knowledge (A) as
,
(18)
,
(19)
(20)
(21)
wotkloq lopet 2010.02
73
A balanced growLh paLh, l.e. where , requlres LhaL . lrom (14) and Lhe law of
moLlon for knowledge (11),
(22)
Lquallzlng equaLlons 18 and 19, uslng equaLlon 22, ylelds Lhe followlng expresslon,
(23)
Solvlng for employmenL ln Lhe research secLor glves
(24)
lnserLlng Lhe expresslons for equlllbrlum employmenL ln Lhe enLrepreneurlal (17) and research secLors (24)
lnLo Lhe law of moLlon for knowledge, Lhe sLeady sLaLe growLh raLe (q) can be derlved as,
(23)
noLe LhaL some enLrepreneurlal acLlvlLy (equaLlon 17) wlll always be proflLable - l.e. - as long as Lhe
sLock of knowledge exceeds zero ( ), whlch does noL however always apply Lo 8&u acLlvlLles (equaLlon
24).
wotkloq lopet 2010.02
76
1
1he model shares a number of characLerlsLlcs wlLh prevlous models, e.g. growLh ls decreaslng ln Lhe
dlscounL facLor ( ) and lncreaslng ln a larger labour force.
1
This depends in a non-trivial way on a range of parameters. The degree of entrepreneurial activity is, for instance,
decreasing in the productivity of R&D as long as R&D is profitable. Thus, R&D and entrepreneurship are to some extent
substitutes. If R&D is not sufficiently profitable, then we cannot combine equations 14, 15, 18 and 19 to derive the
reduced-form growth. The resulting expression provides little insight and is not shown here.
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