The Knowledge Spillover Theory of Entrepreneurship & Economic Growth David B. Audretsch www.davidaudretsch.com

What Is Entrepreneurship? "Entrepreneurial behavior involves the activities of individuals who are associated with creating new organizations rather than the activities of individuals who are involved with maintaining or changing the operations of on-going established organizations." Gartner and Carter, Handbook of Entrepreneurship Research, 2003    "An entrepreurial opportunity consists of a set of ideas, beliefs and actions that enable the creation of future goods and services in the absence of current markets for them." Sarasvathy, Dew, Velamuri and Venkataraman, Handbook of Entrepreneurship Research, 2003 www.davidaudretsch.com

Where Do Opportunities Come From? Economics: Model of the Knowledge Production Function -- firms exist exogenously and then endogenously seek out and apply knowledge inputs to endogenously generate innovative output, Zvi Griliches, Rand Journal of Economics, 1978 Entrepreneurship Theory: Individual Discovery -- Environment Exogenous but Endowment of Entrepreneurial Characteristics across Individuals Varies “Entrepreneurship involves the process of opportunity discovery... Some actors are more likely to discover a given opportunity than others.” Shane and Eckhardt, Handbook of Entrepreneurship, 2003 www.davidaudretsch.com

Where Do Opportunities Come From? Knowledge Spillover Theory of Entrepreneurship: Knowledge embedded in economic agents is exogenous, and in an effort to appropriate the returns from that knowledge, the spillover of knowledge involves endogenously creating a new firm www.davidaudretsch.com

Why Does it Matter? The EU Lisbon Proclamation “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 Why not “Evolving from Physical Capital...“ (Moving / Shifting / …) www.davidaudretsch.com

Globalization Impact De-linking Competitiveness of Firms from Competitiveness of Standort www.davidaudretsch.com

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German Industries Change in Employment in Germany and Foreign Subsidiaries (1991-1995) Mfg. Chemical Electrical Eng Autos Mechanical Eng Textiles Foreign +189,000 +14,000 -17,000 +30,000 +16,000 -6,000 Domestic -1,307,000 -80,000 -198,000 -161,000 -217,000 -68,000 www.davidaudretsch.com

Stuttgart Region www.davidaudretsch.com

German Manufacturing Employment www.davidaudretsch.com

U.S. Manufacturing Employment www.davidaudretsch.com

Rise in European Unemployment www.davidaudretsch.com

Is Knowledge the Development Policy Panacea? The European (Knowledge) Paradox “Why have European countries rich in knowledge (high R&D & Patents) exhibited such low growth rates?” Romano Prodi President of the European Union (2001) www.davidaudretsch.com

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, 1978 www.davidaudretsch.com

How is Knowledge Different? Non-excludable & non-exhaustive Hyper uncertainty, asymmetries & transactions cost The Knowledge Filter impedes investments in knowledge from spilling over and being commercialized www.davidaudretsch.com

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 www.davidaudretsch.com

Endogenous Entrepreneurship Hypothesis 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. www.davidaudretsch.com

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. www.davidaudretsch.com

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. www.davidaudretsch.com

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Entrepreneurship & Growth D Survival Trajectory Performance Returns Wages B Incumbent Firm B A Failure Trajectory B C Time www.davidaudretsch.com

The Role of Entrepreneurship Capital www.davidaudretsch.com

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'”. www.davidaudretsch.com

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“ www.davidaudretsch.com

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 www.davidaudretsch.com

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) www.davidaudretsch.com

Measurement Issues -- 5 Entrepreneurship Capital 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. www.davidaudretsch.com

Entrepreneurship in German Regions www.davidaudretsch.com

Estimation of Production Function Model for German Regions (1) (2) (3) (4) (5) Constant -2.755*** -2.305*** -1.822*** -1.810*** -1.474*** (-10.749) (-7.807) (-4.866) (-4.363) (-3.804) Capital 0.270*** 0.279*** 0.276*** 0.294*** 0.287*** (5.312) (5.366) (5.333) (5.587) (5.603) Labor 0.805*** 0.736*** 0.748*** 0.715*** 0.734*** (13.241) (11.410) (11.606) (10.897) (11.554) Knowledge 0.030** 0.022 0.027** 0.014 (2.199) (1.540) (1.987) (0.954) Entrepreneurship 0.112** (2.078) High-Tech 0.043* (1.694) ICT 0.104*** (3.244) R2 0.911 0.908 0.910 0.909 Table 3: Results of Estimation of the Production Function Model for German Regions www.davidaudretsch.com

Testing the Knowledge Spillover Theory   Dependent Variable: Entrepreneurship General High Tech ICT Low Tech Constant -5.9748*** (-22.86) -9.7557*** (-25.28) -8.6529*** (-24.13) -6.1225*** (-22.32) Growth 0.2765* (1.81) 0.7999*** (3.51) 0.6481*** (3.05) 0.2061 (1.27) Investment -0.0034*** (-4.28) -0.0049*** (-4.24) -0.0047*** (-4.33) -0.0031*** (-3.78) Unemployment 0.0010 (0.18) -0.0320*** (-4.04) -0.0277*** (-3.72) 0.0064 (1.15) Agglomeration 0.00003 (1.05) 0.0002*** (3.98) 0.0001*** (3.38) 0.00001 (0.40) Standard Attractiveness 0.0648 (0.65) -0.0617 (-0.42) 0.1759 0.0597 (0.57) Social Diversity 0.0495 (0.35) 1.0475*** (4.90) 0.4013** (2.03) -0.0508 (-0.34) Policy -0.00003 (-0.83) -0.00004 -0.0001** (-2.52) -0.00002 (-0.62) Taxes 0.0007*** (4.30) 0.0008*** (3.78) (4.05) (4.02) Knowledge 0.3293 (1.59) 1.0435*** (3.45) 0.7908*** (2.77) 0.1581 (0.73) Human Capital Diversity 0.1264 (0.44) 0.5968 (1.40) -0.4222 (-1.06) 0.0997 (0.33) Industry Diversity 0.7544*** (4.98) 0.7385*** (3.36) 0.8147*** (3.94) 0.8016*** (5.02) R2 0.3024 0.5248 0.4253 0.2423 www.davidaudretsch.com

Estimation of Regional Labor Productivity Table 4: Results of Estimation of the Model of Labor Productivity in German Regions (1) (2) (3) (4) (5) Constant 1.888*** -2.175*** -1.645*** -1.730*** -1.299*** (-19.235) (-16.683) (-5.566) (-6.060) Capital Intensity 0.332*** 0.283*** 0.296*** 0.293*** (6.814) (5.535) (5.551) (5.747) (5.807) Knowledge 0.035*** 0.030*** 0.021** (3.673) (3.028) (3.005) (2.032) Entrepreneurship 0.107** (1.993) High-Tech 0.044* (1.747) ICT 0.102*** (3.203) R2 0.125 0.169 0.179 0.177 0.195 www.davidaudretsch.com

Why Unique and Insightful? Prevailing Innovation Theories firm exogenous, investment in knowledge to endogenously innovate Knowledge Spillover Theory of Entrepreneurship knowledge exogenous and embodied in workers, new firm endogenously created in effort to appropriate value of knowledge endowment www.davidaudretsch.com

Regional Differences by Growth High Growth Regions High knowledge investments Low knowledge filter High level of Entrepreneurship Capital Low Growth Regions Low Knowledge Investments High knowledge filter Low level of Entrepreneurship Capital www.davidaudretsch.com

Schumpeter Was Wrong Entrepreneurship as Creative Construction The EU -- Lisbon Proclamation 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 www.davidaudretsch.com

Entrepreneurship Policy Managed Economy Constraining Centralized at National Level Public Ownership, Regulation Entrepreneurial Economy Enabling Decentralized at Local Level Creation & Commercialization of Knowledge www.davidaudretsch.com

Conclusions Entrepreneurship Endogenous Response to Knowledge Investments Entrepreneurship matters for growth Interpretation of new enabling entrepreneurship policies www.davidaudretsch.com

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 www.davidaudretsch.com