The Knowledge Spillover Theory of Entrepreneurship

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The Knowledge Spillover Theory of
Entrepreneurship Economic Growth

• David Audretsch

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The Policy Mandate for Entrepreneurship to
Promote Economic Policy

• 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
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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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German Industries
Change in Employment in Germany and Foreign
Subsidiaries (1991-1995)
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Stuttgart Region
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German Manufacturing Employment(Millionen)
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Rise in European Unemployment
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The Romer Model
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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 regulationsWhat 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 RD 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)
• Hyper 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
• ? Kc /K Knowledge Filter
• ? E/K Missing Link

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Entrepreneurial Opportunity

• E (p w) Entrepreneurial Choice
• E (p(g) w) Traditional Entrepreneurshi
  p
• E (p(K, ?) w) Endogenous Entrepreneurs
  hip

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Knowledge Spillover Theory of Entrepreneurship

• E (1/ß)(p(K, ?) w) Endogenous
  Entrepreneurship
• E E E
• E (1/ß)(p(g,K, ?) 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, Gibrats 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

D

Survival Trajectory

• Performance
• Returns
• Wages

B
Incumbent Firm
B
Failure Trajectory
A
B
C
Time
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The Role of Entrepreneurship Capital
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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 p9 and a mean age of q14.
  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 RD 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
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Estimating Entrepreneurship and Economic
PerformanceGrowth of West German Regions 3SLS
Estimation
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Testing the Knowledge Spillover Theory 3SLS
Estimation

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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

• Managed 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

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• Es ist nicht genug zu wissen, man muss es auch
  anwenden es ist nicht genug zu wollen, man muss
  es auch tun.
• Johann Wolfgang von Goethe