Rui Baptista. Instituto Superior Técnico, Technical University of Lisbon and Max Planck Institute of Economics, Jena

Transcription

1 Entrepreneurship, Innovation and Economic Development Instituto Superior Técnico, Technical University of Lisbon and Max Planck Institute of Economics, Jena

2 Innovation Since World War II Small entrepreneurial firms Responsible for half of all innovation Credited with 95 percent of all radical/disruptive innovation 2

3 The Entrepreneurial Economy In the last two decades, industrialized regions experienced considerable industrial re-structuring, changing from traditional manufacturing towards new technologies Entrepreneurship and small firms have played a particularly important role due to greater flexibility towards radical innovation and to the fading significance of scale economies in many sectors Persistently high unemployment and limited economic growth have triggered policy-makers into turning to entrepreneurship and self-employment as ways to foster economic progress and reduce unemployment 3

4 Entrepreneurship in America What astonishes me in the US is not so much the marvelous grandeur of some undertakings as the innumerable multitude of small ones Alexis de Toqueville,

5 The case of the Personal Computer (I) The Xerox Alto (1972) The Apple I (1975) 5

6 The case of the Personal Computer (II) The Apple II (1977) The IBM PC (1981) 6

7 Disadvantages of Large Corporations in the Introduction of Radical Innovations Characteristics of large corporations in the face of radical innovation Hierarchical in structure Leadership and management from the top down Rewards/incentives for the largest (assets, budgets, etc.) Cause of downfall Slow to change archaic strategies Slow to change outdated culture Slow to recognize and incorporate entrepreneurial reasoning 7

8 Kodak and the Digital Camera

9 Technology Diffusion, S Curves and Life Cycles Decline occurs due to physical limits or emergence of new paradigms Performance Maturity/Decline Number of Users Growth Take-off Physical limits: Sailing Emergence of new paradigm: vinil records and CDs; copper and fiber optics Time 9

10 Disruptive Innovation Performance Number of Users Technological Discontinuity 10 Time

11 Spin-offs and Technological Discontinuities Start-ups that introduce disruptive technologies are often the offspring of other firms, or universities: Ford (mass production) is a spin-out from Oldsmobile Fairchild Semi-conductor was a spin-out from Schockley; Intel Gordon Moore is a spin-off from Fairchild Nike Phil Knight/Bill Bowerman is a spin-off from the University of Oregon Genentech Herbert Boyer is a spin-off from UC San Francisco IDEO (David Kelley); SUN Microsystems (Andy Bechtolsheim); Cisco (Yeager/Bosack/Lerner); Yahoo (Yang/Filo); Google (Page/Brin) all originate from Stanford University 11

12 What is an Entrepreneur? «The problem with the French is that they don't have a word for entrepreneur» George W. Bush, discussing the decline of the European economy with British Prime Minister Tony Blair Entrepreneur was originally a French word (Entreprendre) that appeared for the first time in the 1437 Dictionnaire de la langue francaise referring to a person who is active and undertakes/achieves something and who takes risks Source: Landström (2005) 12

13 The Nature of Entrepreneurship Risk: An entrepreneur is a person who operates a new enterprise or venture and assumes some accountability for the inherent risks (Richard Cantillon Essai sur la Nature du Commerce en Général, 1755; see also: Frank Knight, Risk, Uncertainty and Profit) Innovation: The entrepreneur is the agent of innovation i.e. the one who finds market applications for new inventions/technologies and converts them into new products and services (s)he is the engine of economic growth (Joseph A. Schumpeter, Theorie der Wirtschaftlichen Entwicklung, 1912) 13

14 Measuring Entrepreneurship 14 Self-employment and Business Ownership: percentage of individuals in the labor force who own their own business Start-up Rates: proportion of start-ups vis-a-vis Total firms in the economy (business stock approach) Labor force (labor market approach) Global Entrepreneurship Monitor (GEM): surveys covering adult population Total entrepreneurial activity: percentage of adults owning or actively trying to start a business Opportunity-based Entrepreneurial Activity: entrepreneurial activity to take advantage of a business opportunity Necessity-based Entrepreneurial Activity: entrepreneurial activity because there are no better choices for work

15 Greece 0,20 0,18 0,16 0,14 0,12 0,10 0,08 0,06 0,04 0,02 0,00 15 Entrepreneurship in Portugal: the Business Ownership Rate Denmark Switzerland Finland Sweden France Austria Germany Japan USA UK Netherlands Ireland Belgium Canada Iceland Spain New Zealand Portugal Australia Italy Norway Luxembourg

16 Business Ownership and Wealth Business Ownership Rates GDP per capita 16

17 Global Entrepreneurship Monitor: Total Entrepreneurial Activity per Country 17

18 Global Entrepreneurship Monitor: Opportunity Based Entrepreneurship 18

19 Global Entrepreneurship Monitor: Necessity Based Entrepreneurship 19

20 Issues in Entrepreneurship and Economic Development What is the role of entrepreneurship in generating growth? Physical capital? Human capital? Innovation? Does entrepreneurship generate more employment? New, small firms grow at an average rate above that of incumbents, but have a much larger chance of failure Excess entry may drive incumbents out of the market, leading to unemployment So, unless new entrants bring about positive indirect supply-side effects (spillovers) through innovation and increased competitiveness, higher start-up rates are unlikely to lead to employment growth 20

21 Knowledge as a(n Impure) Public Good It is not desirable (or efficient) to ration its use: the marginal cost of having one more user is irrelevant It is difficult to ration their use: once knowledge is generated and codified in the form of books or inventions, excluding individuals from recognizing it and benefitting from it requires additional costs Intellectual property protection (i.e. patents, copyright) are legal devices that convert knowledge into a trade-able good however, markets for knowledge are imperfect 21

22 Knowledge Spillovers and Externalities Knowledge Spillovers occur whenever a firm shares knowledge with other bodies performing R&D, without having to pay for that information in a market transaction R&D activities generate a positive externality in the for of a pool of knowledge available in the environment for the firm to draw upon The various sources of knowledge spillovers make for a technological infrastructure that supports innovative activity and economic growth 22

23 Entrepreneurship, Innovation and Economic Growth Neoclassical growth models (Solow 1956) looked at growth as being driven by the accumulation of physical capital, labor and exogenous waves of knowledge/technology Endogenous growth theory (Romer 1986, 1990; Lucas 1988) has provided two fundamental contributions: The formation of knowledge and human capital takes place in response to market opportunities Investment in knowledge is associated with large and persistent spillovers to other agents in the economy i.e. the marginal productivity of knowledge capital does not diminish as it becomes available to more users as knowledge is accumulated through R&D and human capital investments, growth may go on indefinitely 23

24 Main Features of Endogenous Growth Models 24 Knowledge-based growth models have three cornerstones: Knowledge is produced in one period and used as an input in subsequent periods A firm can only appropriate a portion of the knowledge it produces, so all firms benefit from spillovers originating in aggregate R&D investments Knowledge can be used by many firms simultaneously (spillovers), so R&D investments also increase R&D productivity Hence, there is scope for growth-enhancing economic policies financing R&D in order to compensate for underinvestment from the private sector

25 Knowledge Spillovers in Endogenous Growth Models The first wave of endogenous growth models treated the spillover process as exogenous, paying little attention to how spillovers occur Neo-Schumpeterian models of endogenous growth design new firm entry as an R&D race where a fraction of R&D efforts will turn into successful innovations These models predominantly address cumulative and not radical innovation, through quality improvements in existing products ( quality ladders ) and are more appropriate to depict the activities of large firms, rather than entrepreneurial efforts 25

26 Empirical Evidence Empirical evidence supporting endogenous growth models is ambiguous at best, particularly with regard to increasing returns to R&D investment: There is little evidence of a positive relationship between R&D effort and GDP growth rates Countries with very high investments in R&D and human capital (Sweden, Japan, Germany) experience persistently low growth rates Difficulties in empirical analysis of endogenous growth has been documented by, among others, Jones 1995; Aghion and Howitt

27 R&D Expenditure and Growth 27

28 Entrepreneurship and the Knowledge Filter One possible reason for the lack of empirical evidence is that spillovers do not occur automatically from R&D investments There is a filter in the transmission mechanism that determines the rate at which the knowledge stock created by R&D is converted into economically useful firm-specific knowledge In the Schumpeterian view, entrepreneurship plays a major role in the conomic exploitation of knowledge, thus providing a means to permeate this filter 28

29 Information Asymmetries in the Markets for Knowledge Adverse selection : opportunistic inventors misrepresent the economic value of their inventions because potential buyers do not know the technology as well Moral Hazard : parties in the technology transfer process shirk, i.e. do not provide all the required effort and disclosure of information because it is difficult to monitor their involvement Hold-up : since information is imperfect, technology transfer contracts are incomplete, providing scope for the parties to opportunistically renegotiate terms to take advantage of specific investments made by the other side 29

30 The Knowledge Filter and Technology Commercialization 30

31 The Role Played by Entrepreneurship in the Mechanics of Economic Growth Converting new ideas into economic growth requires turning new knowledge into commercial opportunities, and turning these into viable businesses the nexus between opportunity and enterprising individuals is crucial for economic growth Uncertainty and high transaction costs lead individuals with technological knowledge and entrepreneurial skills to start new firms as a form of appropriating the expected returns from their knowledge which are not recognized by others this, in turn, generates new spillovers that would be impossible had this knowledge not been commercially exploited 31