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Entreprneurship and Globalization

David Audretsch

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The Policy Mandate for Entrepreneurship to Promote Economic Growth

The EU -- Lisbon Mandate of 2000 „Our lacunae in the field of entrepreneurship

needs to be taken seriously because there is mounting evidence that the key to economic growth and productivity improvements lies in the entrepreneurial capacity of an economy” (Romano Prodi, 2002)

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What Determines Growth?The Solow Model

LKQ

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Purpose of Research

Link Entrepreneurship to Economic Growth Knowledge Spillover Theory of

Entrepreneurship Public Policy – Interpret emergence of

entrepreneurship policy as a bona fide economic growth policy

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Employment in Large German Firms

0 50000 100000 150000 200000 250000 300000

VW 1984

1994

Hoechst 1984

1994

Bayer 1984

1994

Foreign

Domestic

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German IndustriesChange in Employment in Germany and

Foreign Subsidiaries (1991-1995)

Mfg. Chemical Electrical Eng

Autos Mechanical Eng

Textiles

Foreign +189,000 +14,000 -17,000 +30,000 +16,000 -6,000

Domestic -1,307,000 -80,000 -198,000 -161,000 -217,000 -68,000

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Stuttgart Region

Manufacturing Employees in Stuttgart

300000

350000

400000

450000

500000

1976 1986 1991 1996 1997 1998 1999

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German Manufacturing Employment(Millionen)

7.5

9.8

7

7.5

8

8.5

9

9.5

10

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Jahr

Anteil an den

Gesamtbeschäftigen

Deutschland1992: 26,7%2005: 19,8%

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The Romer Model

RLKQ

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The European Paradox

Why have European countries rich in knowledge exhibited such low growth rates?

Romano Prodi, European Union

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The Knowledge Filter

“A wealth of scientific talent at American colleges and universities – talent responsible for the development of numerous innovative scientific breakthroughs each year – is going to waste as a result of bureaucratic red tape and illogical government regulations…What sense does it make to spend billions of dollars each year on government-supported research and then prevent new developments from benefiting the American people because of dumb bureaucratic red tape?”

U.S. Senator Birch Bayh, 1980

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Limitations of Romer Model

Empirical Paradox – Why have countries rich in knowledge (high R&D & Patents) yielded such low growth rates?

Theoretical – Assumes knowledge automatically spills over for commercialization

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How is Knowledge Different?

Non-excludable & non-exhaustive(Arrow, 1962)

High uncertainty, asymmetries & transactions cost (Arrow, 1962)

The Knowledge Filter impedes investments in knowledge from spilling over and being commercialized

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Endogenous Entrepreneurship

Appropriation Problem – Firm vs. Knowledge Agent

New firms are endogenous response to knowledge not completely & exhaustively commercialized

Knowledge exogenous and embedded in economic agents who endogenously start new firms to appropriate knowledge endowments

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Knowledge Filter & Missing Link

Qi = h(t)f (Ci, Li, Ki) Economic Growth

K = Kc Romer Spillover Assumption

θ = Kc /K Knowledge Filter

λ = E*/K Missing Link

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Entrepreneurial Opportunity

E = (π* – w) Entrepreneurial Choice

Ē = (π*(g) – w) Traditional Entrepreneurship

E* = (π*(K, θ) – w) Endogenous Entrepreneurship

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Knowledge Spillover Theory of Entrepreneurship

E* = (1/β)(π*(K, θ) – w) Endogenous Entrepreneurship

E = Ē + E*

E = (1/β)(π*(g,K, θ) – w) Total Entrepreneurship

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Knowledge Spillover Theory of Entrepreneurship

Entrepreneurship will be greater in the presence of higher investments in new knowledge, ceteris paribus. Entrepreneurial activity is an endogenous response to higher investments in new knowledge, reflecting greater entrepreneurial opportunities generated by knowledge investments.

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Localization Hypothesis

Knowledge spillover entrepreneurship will tend to be spatially located within close geographic proximity to the source of knowledge actually producing that knowledge. Thus, in order to access spillovers, new firm startups will tend to locate close to knowledge sources.

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Economic Growth Hypothesis

Qi = h(t)f (Ci, Li, Ki, Ei)

Given a level of knowledge investment and severity of the knowledge filter, higher levels of economic growth should result from greater entrepreneurial activity, since entrepreneurship serves as a mechanism facilitating the spillover and commercialization of knowledge.

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Stylized Facts of Entrepreneurship Dynamics

New Firm Survival positively related to age and size New Firm Growth negatively related to age and size Survival and Growth effects more pronounced in

knowledge industries

Caves, Richard E.,1998, “Industrial Organization and New Findings on the Turnover and Mobility of Firms,” Journal of Economic Literature

Sutton, John, 1997, “Gibrat’s Legacy,” Journal of Economic Literature

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Theory of Noisy Learning & Selection

Jovanovic, Boyan, 1982, "Selection and Evolution of Industry," Econometrica

Richard Ericson and Ariel Pakes, 1995, “Markov-Perfect Industry Dynamics: A Framework for Empirical Work,” Review of Economic Studies,

Hugo A. Hopenhayn, 1992, “Entry, Exit and Firm Dynamics in Long Run Equilibrium,” Econometrica

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Entrepreneurship & Growth

Incumbent Firm

Performance- Returns- Wages

Survival Trajectory

Failure Trajectory

Time

A

B

B

B

C

D

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The Role of Entrepreneurship Capital

iiiii ERLKQ

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Estimation Issues

Measurement Issues Output is measured as Gross Value Added

corrected for purchases of goods and services, VAT and shipping costs. Statistics are published every two years for Kreise by the Working Group of the Statistical Offices of the German Länder, under “Volkswirtschaftiche Gesamtrechnungen der Länder'”.

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Measuring Entrepreneurship

Entrepreneurship is computed as the number of startups in the respective region relative to its population, which reflects the propensity of inhabitants of a region to start a new firm. The data on startups is taken from the ZEW foundation panels that is based on data provided biannually by Creditreform, the largest German credit-rating agency. This data contains virtually all entries – hence startups – in the German Trade Register.

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Entrepreneurship in German Regions

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Measurement Issues--2 Physical Capital: The stock of capital used in the

manufacturing sector of the Kreise has been estimated using a perpetual inventory method which computes the stock of capital as a weighted sum of past investments. In the estimates we used a b-distribution with p=9 and a mean age of q=14. Type of survival function as well as these parameters have been provided by the German Federal Statistical Office in Wiesbaden. This way, we attempted to obtain maximum coherence with the estimates of the capital stock of the German producing sector as a whole as published by the Federal Statistical Office. Data on investment at the level of German Kreise is published annually by the Federal Statistical Office in the series “E I 6“

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Measurement Issues-- 3

Labor: Data on labor is published by the Federal Labor Office, Nürnberg which reports number of employees liable to social insurance by Kreise

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Measurement Issues -- 4

Knowledge Capital is expressed as number of employees engaged in R&D in the public (1992) and in the private sector (1991), consistent with Griliches (1979), Jaffe (1989)

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Estimation of Regional Labor Productivity

Table 4: Results of Estimation of the Model of Labor Productivity in German Regions

(1) (2) (3) (4) (5)

Constant 1.888*** -2.175*** -1.645*** -1.730*** -1.299***

(-19.235) (-16.683) (-5.566) (-6.060) (-6.060)

Capital Intensity 0.332*** 0.283*** 0.283*** 0.296*** 0.293***

(6.814) (5.535) (5.551) (5.747) (5.807)

Knowledge 0.035*** 0.030*** 0.030*** 0.021**

(3.673) (3.028) (3.005) (2.032)

Entrepreneurship 0.107**

(1.993)

High-TechEntrepreneurship

0.044*

(1.747)

ICTEntrepreneurship

0.102***

(3.203)

R2 0.125 0.169 0.179 0.177 0.195

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Estimating Entrepreneurship and Economic Performance—Growth of West German Regions 3SLS Estimation

Dependent Variable: Regional Output

Constant 1.0003***

(3.00)

0.5316*

(1.73)

0.645*

(1.94)

1.0061***

(2.79)

Capital 0.2001

(7.07)

0.2022***

(7.69)

0.2069***

(7.76)

0.1923***

(6.52)

Labor 0.7045***

(18.54)

0.6854***

(20.53)

0.6835***

(20.06)

0.7075***

(17.94)

Knowledge 0.0244**

(2.29)

0.0200*

(1.73)

0.0246**

(2.13)

0.0334***

(3.27)

General Entrepreneurship

0.5230***

(6.84)

High Tech Entrepreneurship

.2496***

(6.38)

ICT Entrepreneurship .2767***

(5.85)

Low Tech Entrepreneurship

.5078***

(6.33)

 R2 .9336 .9453 .9402 .9326

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Testing the Knowledge Spillover Theory 3SLS Estimation

  Dependent Variable: Entrepreneurship

  General High Tech ICT Low Tech

Constant-5.9748***(-22.86)

-9.7557***(-25.28)

-8.6529***(-24.13)

-6.1225***(-22.32)

Growth0.2765*(1.81)

0.7999***(3.51)

0.6481***(3.05)

0.2061(1.27)

Investment  

-0.0034***(-4.28)

-0.0049***(-4.24)

-0.0047***(-4.33)

-0.0031***(-3.78)

Unemployment 

0.0010(0.18)

-0.0320***(-4.04)

-0.0277***(-3.72)

0.0064(1.15)

Agglomeration 

0.00003(1.05)

0.0002***(3.98)

0.0001***(3.38)

0.00001(0.40)

Standard Attractiveness 

0.0648(0.65)

-0.0617(-0.42)

0.1759(1.27)

0.0597(0.57)

Social Diversity 

0.0495(0.35)

1.0475***(4.90)

0.4013**(2.03)

-0.0508(-0.34)

Policy  

-0.00003(-0.83)

-0.00004(-0.83)

-0.0001**(-2.52)

-0.00002(-0.62)

Taxes 

0.0007***(4.30)

0.0008***(3.78)

0.0008***(4.05)

0.0007***(4.02)

Knowledge  

0.3293(1.59)

1.0435***(3.45)

0.7908***(2.77)

0.1581(0.73)

Human Capital Diversity 

0.1264(0.44)

0.5968(1.40)

-0.4222(-1.06)

0.0997(0.33)

Industry Diversity 

0.7544***(4.98)

0.7385***(3.36)

0.8147***(3.94)

0.8016***(5.02)

R2 0.3024 0.5248 0.4253 0.2423

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Schumpeter Was Wrong: Entrepreneurship as Creative Construction

The EU -- Lisbon Mandate of 2000 „Our lacunae in the field of entrepreneurship

needs to be taken seriously because there is mounting evidence that the key to economic growth and productivity improvements lies in the entrepreneurial capacity of an economy” (Romano Prodi, 2002)

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Entrepreneurship Policy

Solow Economy Constraining Centralized at National

Level Public Ownership,

Regulation

Entrepreneurial Economy Enabling Decentralized at Local

Level Creation &

Commercialization of Knowledge

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Conclusions

Knowledge Spillover Theory of Entrepreneurship

Entrepreneurship as Missing Link for Economic Growth – Penetrates Knowledge Filter

Interpretation of new enabling entrepreneurship policies