Entreprneurship and
Globalization
David Audretsch
1
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)
2
What Determines Growth?
The Solow Model


Q  K L
3
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
4
Employment in Large German Firms
0
50000
100000 150000 200000 250000 300000
VW 1984
1994
Hoechst 1984
1994
Foreign
Domestic
Bayer 1984
1994
5
German Industries
Change 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
6
Stuttgart Region
Manufacturing Employees in Stuttgart
500000
450000
400000
350000
300000
1976
1986
1991
1996
1997
1998
1999
7
German Manufacturing
Employment(Millionen)
10
9.8
9.5
Anteil an den
Gesamtbeschäftigen
9
Deutschland
1992: 26,7%
2005: 19,8%
8.5
8
7.5
7.5
7
1992
1993
1994
1995
1996
1997
1998
1999
Jahr
2000
2001
2002
2003
2004
2005
8
The Romer Model



Q  K L R
9
The European Paradox
Why have European countries rich in
knowledge exhibited such low growth
rates?
Romano Prodi, European Union
10
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
11
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
12
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
13
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
14
Knowledge Filter & Missing
Link

Qi = h(t)f (Ci, Li, Ki)
Economic Growth

K = Kc

θ = Kc /K
Romer Spillover
Assumption
Knowledge Filter

λ = E*/K
Missing Link
15
Entrepreneurial Opportunity

E = (π* – w)

Ē = (π*(g) – w)

E* = (π*(K, θ) – w)
Entrepreneurial
Choice
Traditional
Entrepreneurship
Endogenous
Entrepreneurship
16
Knowledge Spillover Theory of
Entrepreneurship

E* = (1/β)(π*(K, θ) – w)

E = Ē + E*

E = (1/β)(π*(g,K, θ) – w) Total
Entrepreneurship
Endogenous
Entrepreneurship
17
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.
18
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.
19
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.
20
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
21
Theory of Noisy Learning &
Selection



Jovanovic, Boyan, 1982, "Selection and Evolution
of Industry," Econometrica
Richard Ericson and Ariel Pakes, 1995, “MarkovPerfect 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
22
Entrepreneurship & Growth D
Performance
Survival Trajectory
- Returns
- Wages
B
Incumbent Firm
B
A
B
Failure Trajectory
C
Time
23
The Role of Entrepreneurship
Capital
Qi




 K L R E
i
i
i
i
24
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'”.
25
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.
26
Entrepreneurship in German
Regions
27
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“
28
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
29
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)
30
Estimation of Regional Labor
Productivity
Table 4: Results of Estimation of the Model of Labor Productivity in German Regions
Constant
Capital Intensity
(1)
(2)
(3)
(4)
(5)
1.888***
-2.175***
-1.645***
-1.730***
-1.299***
(-19.235)
(-16.683)
(-5.566)
(-6.060)
(-6.060)
0.332***
0.283***
0.283***
0.296***
0.293***
(6.814)
(5.535)
(5.551)
(5.747)
(5.807)
0.035***
0.030***
0.030***
0.021**
(3.673)
(3.028)
(3.005)
(2.032)
Knowledge
Entrepreneurship
0.107**
(1.993)
High-Tech
Entrepreneurship
0.044*
(1.747)
ICT
Entrepreneurship
R2
0.102***
(3.203)
0.125
0.169
0.179
0.177
0.195
31
Estimating Entrepreneurship and Economic Performance—
Growth of West German Regions 3SLS Estimation
Dependent Variable: Regional Output
1.0003***
(3.00)
0.5316*
(1.73)
0.645*
(1.94)
1.0061***
(2.79)
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)
Constant
Capital
.2496***
(6.38)
High Tech
Entrepreneurship
.2767***
(5.85)
ICT Entrepreneurship
.5078***
(6.33)
Low Tech
Entrepreneurship
R2
.9336
.9453
.9402
.9326
32
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)
Growth
0.2765*
(1.81)
0.7999***
(3.51)
0.6481***
(3.05)
0.2061
(1.27)
-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)
0.7544***
(4.98)
0.7385***
(3.36)
0.8147***
(3.94)
0.8016***
(5.02)
0.3024
0.5248
0.4253
0.2423
Investment
Industry Diversity
R2
33
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)
34
Entrepreneurship Policy
Solow Economy
 Constraining
 Centralized at National
Level
 Public Ownership,
Regulation
Entrepreneurial Economy
 Enabling
 Decentralized at Local
Level
 Creation &
Commercialization of
Knowledge
35
Conclusions



Knowledge Spillover Theory of
Entrepreneurship
Entrepreneurship as Missing Link for
Economic Growth – Penetrates Knowledge
Filter
Interpretation of new enabling
entrepreneurship policies
36