David Audretsch Max Planck Institute of Economics, Jena Germany and Mark Sanders Utrecht School of Economics, Utrecht, Netherlands Max Planck Institute of Economics, Jena, Germany Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 1 of 15 Globalization and the Rise of the Entrepreneurial Economy

Motivation Coinciding trends: -Rise of the Entrepreneurial Society e.g. Audretsch (2006) -Strong Growth in BIRC and beyond Rapid Industrialization of South-East Asia -Globalization and Trade Political Revolutions A New General Purpose Technology ICT and Internet Motivation Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 2 of 15

Motivation This paper develops a framework for analysis in which: Entrepreneurship drives trade patterns… … and comparative advantage drives entrepreneurship… … and the interaction explains... …observed trade and labour market trends in North(West) and South(East). Motivation Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 3 of 15

The Model nNHnNH nNLnNL nSLnSL North South InnovationDevelopmentOutsourcing LNH(wNH)LNH(wNH) LSL(wSL)LSL(wSL)LNL(wNL)LNL(wNL) EIEI EOEO EDED The Model Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 4 of 15

The Basic Model Basic Demand Structure as in Krugman (1979) and Grossman and Helpman (1991) Consumers: Identical CIES=>Savings Identical LOV=>Iso-Elastic Demand The Model Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 5 of 15

The Basic Model Basic Production Structure as in Grossman and Helpman (1991) Producers: Monopolistic Competition+Linear Production Function in L Price is set as fixed mark-up over wage Profits are positive Not 2 (G&H, 1991) but 3 different types of labor, L N H, L N L and L S L  not 2 but 3 wage, price and profit levels The Model Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 6 of 15

The Static Equilibrium wNHwNH wNLwNL LNH*LNH* LNL*LNL* wSLwSL LSL*LSL* LSLLSL LNLLNL LNHLNH The Model Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 7 of 15

The Dynamic Model How do Entrepreneurs move products over the life cycle? Entrepreneurs Invent, Develop and Outsource according to: The Model Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 8 of 15

The Dynamic Model Entrepreneurs Invent, Develop and Outsource to gain: Why do Entrepreneurs move products over the life cycle? The Model Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 9 of 15

The Dynamic Model EE wEwE G* EOEO EDED EIEI EOEO EDED EIEI E* wE*wE* The Model Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 10 of 15

The Basic Model The Steady State: The Model There is a steady state in which all ranges expand at a common rate, G*. That rate determines the rate of economic growth. That rate is exogenous. But the within and between country income/wage distribution depends on the relative steady state size of n N H, n N L and n S L. Which in turn depends on the steady state allocation of northern entrepreneurial talent over innovation, development and outsourcing. Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 11 of 15

The Dynamic Model Comparative Statics: Higher L S L (Globalization) 1.Reduces wages in South 2.Increases income/profits in South 3.Re-allocates Entrepreneurs towards outsourcing 4.Increases rate of outsourcing 5.Causes higher SS size of foreign sector 6.Reduces low skilled wages/employment in North 7.Reduces wages in South 8.Increases returns to Entrepreneurship The Shocks Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 12 of 15

The Dynamic Model Comparative Statics: Higher n A or g (General Purpose Technology) 1.Increases productivity of Innovators 2.Re-allocates Entrepreneurs towards innovating 3.Increases rate of innovation 4.Causes larger SS size of „new“ sector 5.Increases high skilled wages/employment in North 6.Increases intra- and international income inequality 7.Increases returns to Entrepreneurship The Shocks Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 13 of 15

The Dynamic Model Comparative Statics: Higher Ψ (Reduction in Risk) 1.Reduces discount rate for outsourcing 2.Re-allocates Entrepreneurs towards outsourcing 3.Increases rate of outsourcing 4.Causes higher SS size of foreign sector 5.Decreases low skilled wages/employment in North 6.Increases wages in South 7.Increases returns to Entrepreneurship The Shocks Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 14 of 15

Concluding Remarks Entrepreneurial Activity is not just the engine of Regional Development, but rather it is also the driver. Entrepreneurial Activity has become increasingly rewarding in recent decades because of two fundamental shocks to the global economic system. Entrepreneurial activity brings the economy to a new steady state, so it is both equilibrium seeking and upsetting. We have not considered long run dynamics. When BIRC wages rise to OECD levels the northern outsourcing entrepreneurs will seek other destinations, turn back to development or innovation (or employment). When ICT matures entrepreneurs will jump on the next GPT, turn back to development and outsourcing (or employment). Conclusions Mark Sanders RENT XXII- Entrepreneurship as an Engine for Regional Development Covilha, PortugalNovember 21, 2008slide 15 of 15