1.4 Entrepreneurship and Economic Growth

Question 1

What are important results from studies on Entrepreneurship, Innovation and Growth especially wrt production fcts.

Answer 1

1) innovations lead to lower production costs –> if PC are lower and it has nothing to do with factor costs: innovations (Schumpeter)
2) New firms introduce new production functions and innovations bring new leaders (Schumpeter)
3) Innovations destroy and bring new equilibria_ new equilibrium –> higher national product, new prod fct., different price level –> remaining benefit is transfered to the consumer –> higher real net income (Schumpeter)
4) entrepreneurs see opportunities and brings capital together –> organisational skills –>rate of tech progress depends on number and ability of entrepreneurs (Higgins)
5) E. have more efficient production –> demanders benefit from less expensive products (see 3.)

Question 2

How can the shift towards innovation be explained historically?

Answer 2

1) Oil Crisis –> Stagflation
2) in combination with high unemployment in the 1980s and 90s –> new interest ecomomic growth –> attention on new businesses
3) 1988: small business employment growth in Europe is higher than for large businesses

Question 3

What are the main explanations for the shift towards smaller firms?

Answer 3

1) fundamental changes in the world economy since 1970: higher competition, market fragmentation and uncertainty
2) technological progress: specialistion replaces mass production –> diseconomies of scale
Other reasons:
- increasing labour supply, changes in consumer taste, reduced entry barriers and transaction costs etc…

Question 4

What are the main consequences of the shift towards smaller firms?

Answer 4

small firms …

• bring new ideas and innovation: agents of change
• stimulate industry evolution
• create a share of new jobs
• create additional output

Question 5

How does entrepreneurship fit into the “old” neoclassical growth theory?

Answer 5

• The theory decomposes growth into its factors : labour, capital formation, knowledge…
• everything else is residual and assigned to technological change (exogenous) –> unaccounted for
• doesn`t capture the causes of growth
• model assumes perfect competition and general equilibrium

Question 6

How does entrepreneurship fit the “new” endogenous growth model?

Answer 6

• entrepreneurship is seen as an endogenous variable that influences productivity growth,
• productivity growth in return influences entrepreneurship –> continuous feedback process
• E. as missing link between investments in new knowledge and economic growth –> Economic agents want to invest in new knowledge and exploit its value

Question 7

What are knowledge spillover effects according to the Entrepreneurship Hypothesis by Audritsch?

Answer 7

Knowledge Spillover means, that founding new businesses is more likely when there are more knowledge sources around –> e.g. more universities or more other entrepreneurs and therefore ideas.

Question 8

What is entrepreneurship capital acc. to Audritsch?

Answer 8

Legal, institutional and social factors that help the founding of new businesses: e.g
- entrepreneurial networks, activity of venture capitalists, people willing to deal with risk, other institutions

Question 9

How can demand influence innovation?

Answer 9

Demand-pull: more demand –> more investments and people engaged in prod. –> more innovation

Question 10

What are strategies of firms to cope with uncertainies regarding RnD investments?

Answer 10

• delay the start of an expensive Project until costs have decreased/ profits can be expected
• go next step if previous resolved uncertainty
• start several approaches simultaneously

Question 11

How does technological progress influence innovation?

Answer 11

• technology push: technological progress and new possibilities increases amount of innovations

Question 12

How does patenting increase with firm-size and why?

Answer 12

• Schumpeter: more than proportionate growth with corporate bigness bc of more effective incentives
• intensity is highest in very small and very large firms

Question 13

What does the concentration approach on the relationship of innovation and firm size say?

Answer 13

small firms: difference between inventive input and output:

• sales volume is more concentrated among large frms than RnD expenditures –> increas less than proportionate
• smaller firms have higher relative share of inventive activity than sales

Question 14

What impact can diversification have on innovative activity?

Answer 14

Diversification stimmulates innovation:

• increased chances, that RnD is profitable as innovation can also be meaningful for other fields
• diversified firms have greater opportunity to ectract all profits from the innovation and market it in more fields
• higher probability that firm operates in a progressive industry