1.4: Entrepreneurship and Economic Growth Flashcards
What is an innovation in terms of inputs and costs?
If we do not change factor inputs but the form of the production function, we may talk about an innovation. Or if, at any given point in time, a certain output leads to lower production costs, we may talk about an innovation if factor costs itself are not responsible.
How are innovations tied to entrepreneurs?
We assume that new production functions are introduced into the system by new ventures that are founded for this purpose. Innovations are coming hand in hand with the rise of new persons to leadership.
Why does progress destroys economic equilibrium, and what does that say about the continuity of development?
We have to realize that economic development is always discontinuous. Progress is a cyclic process. Entrepreneurial acts destroy the system‘s equilibrium (Schumpeter), and since marketing new products forces the development of disequilibria, a revision of all system elements’ values becomes necessary, and in turn, we get fluctuations and trials to adapt to the new conditions.
When is an equilibrium point reached again when considering production, income, interest rates, and prices?
A new (close to) equilibrium point will be characterized by a greater national product, new production functions, the same total sum of monetary incomes, a very low (close to zero) interest rate, no loans, no profits, a different price system and price level; whereby the lower price level implies that all remaining benefits of the innovation have eventually been transferred to the consumers in the form of higher real net incomes.
Why is it important to study entrepreneurship?
Despite the importance of entrepreneurship, economic theory has yet to adequately explain either the process by which entrepreneurship springs fourth or the results of entrepreneurial activity in stimulating growth.
Why is important to have entrepreneurs?
In any society, the rate of technological progress and thus of economic development depends greatly on the number and the ability of entrepreneurs available to it.
Entrepreneurs provide technological modifications which help to prevent delimitations of growth by finite resources.
What are the four main reasons behind a shift towards small firms since the 1970s, and what is the degree of this shift?
- The share of the 500 largest American firms (Fortune 500) in total employment dropped from 20% in 1970 to 8.5% in 1996.
- Fundamental changes in the world economy from 1970 onwards: higher global competition, increasing uncertainty, and growth in market fragmentation
- Technological progress: flexible specialization replaced mass production and led to vast diseconomies of scale
- Relaxation of entry regulations
- Reduction of transaction costs
What are the consequences of the shift towards small firms?
– Small firms serve as agents of change (because they provide an essential source of new ideas and experimentation that otherwise would remain untapped in the economy)
– They are the source of considerable innovative activity
– They stimulate industry evolution
– They create an important share of the newly generated jobs, especially with large firms cutting labour costs
What is the old neo-classical growth theory, and how does the entrepreneur fit in this system?
–Decomposition of growth according to its factors: labour input, capital formation, economies of scale, knowledge
– All other factors represent a substantial residual (ascribed to exogenous technological change) which is unaccounted for
– This growth theory fails to capture the causes of growth
– Entrepreneurship does not fit neo-classical models due to the assumptions of perfect competition and general equilibrium. In equilibrium-based models, entry happens when the firms in the industry earn supranormal profits. The new entrants depress prices and restore profits to their long run equilibrium levels.
What is the new endogenous growth theory, and how does the entrepreneur fit in this system?
– Human capital investment, education, entrepreneurship and investment in innovations are endogenous variables influencing productivity growth, which, in turn, influences the value of these variables in a continuous feedback process
– Economic agents possess new knowledge and want to exploit the opportunities and appropriate the value of this knowledge by starting a new firm
– In this theory, entrepreneurship is seen as the missing link between investments in new knowledge and economic growth
What is the Entrepreneurial Performance Hypothesis of entrepreneurship?
- The performance of knowledge-based start-ups should be superior when they are able to access knowledge spillovers through geographic proximity to knowledge sources, such as universities, when compared to their counterparts without a close geographic proximity to a knowledge source.
What is the Growth Hypothesis of entrepreneurship?
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.
What are the factors of the capital hypothesis of entrepreneurs, and what was the result of Audretsch et al. (2006) regarding these factors?
– A number of different legal, institutional and social factors and forces that are conducive to the creation of new firms (networks, institutions, social acceptance, individuals willing to deal with risk, activity of bankers and venture capitalists etc.)
– Audretsch et al. (2006) show evidence that economic growth is brought up by factors such as labour, capital and knowledge, but also an additional factor: entrepreneurship capital.
What are the main findings with regards to growth and survival in empirical studies of entrepreneurship?
- Growth rates are higher for smaller enterprises
- Growth rates are higher for younger enterprises
- Growth rates are even higher for small and young enterprises in knowledge-intensive industries
- The likelihood of survival is lower for smaller enterprises (mostly due to the gap between Minimum Efficient Scale and the size of the firm)
- The likelihood of survival is lower for younger enterprises
- The likelihood of survival is even lower for small and young enterprises in knowledge-intensive industries
