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1 Entreprneurship and Globalization David Audretsch.

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1 1 Entreprneurship and Globalization David Audretsch

2 2 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)

3 3 What Determines Growth? The Solow Model

4 4 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

5 5

6 6 German Industries Change in Employment in Germany and Foreign Subsidiaries ( ) Mfg. ChemicalElectrical Eng AutosMechanical Eng Textiles Foreign+189, ,000-17, , ,000-6,000 Domestic -1,307, , , , ,000-68,000

7 7 Stuttgart Region

8 8 German Manufacturing Employment(Millionen)

9 9 The Romer Model

10 10 The European Paradox Why have European countries rich in knowledge exhibited such low growth rates? Romano Prodi, European Union

11 11 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

12 12 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

13 13 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

14 14 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

15 15 Knowledge Filter & Missing Link Q i = h(t)f (C i, L i, K i )Economic Growth K = K c Romer Spillover Assumption θ = K c /KKnowledge Filter λ = E*/KMissing Link

16 16 Entrepreneurial Opportunity E = (π* – w)Entrepreneurial Choice Ē = (π*(g) – w)Traditional Entrepreneurship E* = (π*(K, θ) – w)Endogenous Entrepreneurship

17 17 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

18 18 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.

19 19 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.

20 20 Economic Growth Hypothesis Q i = h(t)f (C i, L i, K i, E i ) 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.

21 21 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

22 22 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

23 23 Entrepreneurship & Growth Incumbent Firm Performance - Returns - Wages Survival Trajectory Failure Trajectory Time A B B B C D

24 24 The Role of Entrepreneurship Capital

25 25 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'”.

26 26 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.

27 27 Entrepreneurship in German Regions

28 28 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“

29 29 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

30 30 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)

31 31 Estimation of Regional Labor Productivity Table 4: Results of Estimation of the Model of Labor Productivity in German Regions (1)(2)(3)(4)(5) Constant1.888***-2.175***-1.645***-1.730***-1.299*** ( )( )(-5.566)(-6.060) Capital Intensity0.332***0.283*** 0.296***0.293*** (6.814)(5.535)(5.551)(5.747)(5.807) Knowledge0.035***0.030*** 0.021** (3.673)(3.028)(3.005)(2.032) Entrepreneurship0.107** (1.993) High-Tech Entrepreneurship 0.044* (1.747) ICT Entrepreneurship 0.102*** (3.203) R2R

32 32 Estimating Entrepreneurship and Economic Performance— Growth of West German Regions 3SLS Estimation Dependent Variable: Regional Output Constant *** (3.00) * (1.73) 0.645* (1.94) *** (2.79) Capital (7.07) *** (7.69) *** (7.76) *** (6.52) Labor *** (18.54) *** (20.53) *** (20.06) *** (17.94) Knowledge ** (2.29) * (1.73) ** (2.13) *** (3.27) General Entrepreneurship *** (6.84) High Tech Entrepreneurship.2496*** (6.38) ICT Entrepreneurship.2767*** (5.85) Low Tech Entrepreneurship.5078*** (6.33) R

33 33 Testing the Knowledge Spillover Theory 3SLS Estimation Dependent Variable: Entrepreneurship GeneralHigh TechICTLow Tech Constant *** (-22.86) *** (-25.28) *** (-24.13) *** (-22.32) Growth * (1.81) *** (3.51) *** (3.05) (1.27) Investment *** (-4.28) *** (-4.24) *** (-4.33) *** (-3.78) Unemployment (0.18) *** (-4.04) *** (-3.72) (1.15) Agglomeration (1.05) *** (3.98) *** (3.38) (0.40) Standard Attractiveness (0.65) (-0.42) (1.27) (0.57) Social Diversity (0.35) *** (4.90) ** (2.03) (-0.34) Policy (-0.83) (-0.83) ** (-2.52) (-0.62) Taxes *** (4.30) *** (3.78) *** (4.05) *** (4.02) Knowledge (1.59) *** (3.45) *** (2.77) (0.73) Human Capital Diversity (0.44) (1.40) (-1.06) (0.33) Industry Diversity *** (4.98) *** (3.36) *** (3.94) *** (5.02) R2R

34 34 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)

35 35 Entrepreneurship Policy Solow Economy Constraining Centralized at National Level Public Ownership, Regulation Entrepreneurial Economy Enabling Decentralized at Local Level Creation & Commercialization of Knowledge

36 36 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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