The Knowledge Spillover Theory of Entrepreneurship in an Endogenous Growth Model Zoltan Acs George Mason University Imperial College Mark Sanders Utrecht School of Economics 9-10 May 2013 Charlotteville

Motivation “economic leadership (entrepreneurship) in particular must hence be distinguished from “invention.” As long as they are not carried into practice, inventions are economically irrelevant… …It is, therefore, not advisable, and it may be misleading, to stress the element of invention as much as many writers do.” Schumpeter (1911) p. 88

Motivation Producers of n intermediate goods Producers of final good C Consumers of final good C New EntryR&D Upstream Knowledge Spillovers Intertemporal Spillovers Intertemporal Spillovers Downstream Knowledge Spillovers

Motivation Growth and Ideas; the basic model structure Consumers Producers/Intermediates Invention, Innovation and Growth Spillovers inter- and intratemporal Spillovers automatic externality Schumpeter and Endogenous Growth Theory Innovation vs. Invention Who gets rents? Opportunities vs. Ideas The source of vs. the bottlenecks in innovation Does it all matter?

This Paper Contributions We combine in a general equilibrium setting: 1. Endogenous Commercialization (Schumpeter) 2. Endogenous Opportunity Creation (Romer) 3. Interplay and resulting growth dynamics (Acs and Sanders) Implications 1. Monopoly Rents reward Entrepreneurs (Schumpeter) 2. Opportunity Creation is suboptimal in DC-E (Romer) 3. Commercialization is suboptimal in DC-E (Acs and Sanders)

The Model Producers of final good C Consumers of final good C Producers of n intermediate goods Capital Market Labor Market Knowledge Flows

The Model Externalities… Knowledge flows that are not appropriated: 1. From R&D to Entrepreneurs 2. From past Entrepreneurs to present Entrepreneurs 3. From Entrepreneurs to R&D Knowledge flows that are appropriated: 1. From past R&D to present R&D …working in different directions.

The Model Propositions*: 1.More knowledge intensive economy allocates too much effort to R&D. 2.More diversified economy allocates too much effort to E’ship. 3.Less competitive intermediate sector allocates too much effort to E’ship. 4.Strong downstream spillovers allocate too much effort to R&D. 5.Strong upstream spillover allocate too much effort to E’ship. *too much relative to the alternative activity

Entrepreneurial Growth Theory New Features: Captures spin-out/off Captures upstream spillovers (specialization) Captures downstream spillovers (opportunities) Innovation rents motivate commercialization Productivity gains motivate R&D Results in line with new growth theory: Growth is Sub-Optimal Case for R&D subsidy Results adding to new growth theory: Case for Entrepreneurship policy Open R&D labs vs. strict IPR Other sources of opportunity may be considered Distinguishing entrepreneurs from inventors… …matters qualitatively for results.

Conclusion In the tradition of Schumpeter we: …separate commercialization and invention, …allocate the residual rents to the entrepreneur, …assume opportunity to be an intra temporal spillover. In the tradition of Romer we: …rationalize knowledge creation, …and allow for inter temporal spillover, …and we show it all in an analytically closed GE-model.

Our Model Consumers (standard dynamic optimization) Where μ(t) is the shadow price (in period 0 utils) of assets. There is positive and growing demand for final goods

Our Model Final Goods Producers There is positive demand for labor and all intermediate goods

Our Model Final Goods Producers (R&D) Final Goods Producers do R&D to increase Firm Specific Knowledge

Our Model Intermediate Goods Producers (Entry) Entry-Arbitrage: Monopoly profits motivate and finance new firm entry

Our Model Equilibrium in the educated labor market:

Our Model Equilibrium A/n 1 A/n*

Our Model Equilibrium Steady State: Stable Unique Positive Growth Steady State Exists