David Audretsch Max Planck Institute of Economics, Jena Germany and Mark Sanders Max Planck Institute of Economics, Jena, Germany Utrecht School of Economics, Utrecht, Netherlands Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 1 of 15 Globalization and the Rise of the Entrepreneurial Economy

Motivation Cause and Effect?: -Globalization and Technology Political and Technological Revolutions Rising Skill Premia in OECD e.g. Katz&Autor (1999), Nickell&Bell (1992) -Increasing importance of Outsourcing e.g. Feenstra&Hanson (1999, 2001) -Rise of the „Entrepreneurial Society“ e.g. Audretsch (2006) Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 2 of 15 Motivation

This paper develops a framework for analysis in which: Technology drives trade patterns… … and comparative advantage drives technical change… … and the interaction explains observed trade and labour market trends in North(West) and South(East). Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 3 of 15 Motivation

The Model nNHnNH nNLnNL nSLnSL North South InventionDevelopmentOutsourcing LNH(wNH)LNH(wNH) LSL(wSL)LSL(wSL)LNL(wNL)LNL(wNL) EIEI EOEO EDED Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 4 of 15 The Model

The Basic Model Basic Demand Structure as in Krugman (1979) and Grossman and Helpman (1991) Consumers: Identical CIES Savings Identical LOV Iso-Elastic Demand Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 5 of 15 The Model

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  not 1 but 2 potential binding price constraints  not 2 but 4 constellations of price, wage and profit levels Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 6 of 15 The Model

The Static Equilibrium wNHwNH wNLwNL LNH*LNH* LNL*LNL* wSLwSL LSL*LSL* LSLLSL LNLLNL LNHLNH Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 7 of 15 The Model

The Dynamic Model How do Entrepreneurs move products over the life cycle? Entrepreneurs Invent, Develop and Outsource according to: Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 8 of 15 The Model

The Dynamic Model Entrepreneurs Invent, Develop and Outsource to gain: Why do Entrepreneurs move products over the life cycle? Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 9 of 15 The Model

The Dynamic Model EE wTwT G* EOEO EDED EIEI EOEO EDED EIEI E* wT*wT* Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 10 of 15 The Model

The Dynamic Model Comparative Statics: Higher L S L (Globalisation) 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 Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 11 of 15 The Shocks

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 higher 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 Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 12 of 15 The Shocks

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 Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 13 of 15 The Shocks

Policy Implications Income Inequality vs Wage Inequality Impact of Entrepreneurship and R&D Policy Intranational vs International Wage Inequality The Entrepreneurial vs Industrial Economy Comparative Advantages in Entrepreneurship Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 14 of 15 Policy Issues

Concluding Remarks Managing globalization poses the biggest 21st century challenge to policy makers. Western politicians should focus on entrepreneurship policies, not only to maximise growth at home but also to moderate wage divergence and build comparative advantage. Smart redistribution is necessary to make globalization a pareto-improvement. Mark SandersPresentation for the 37 th EISB-conference Ljubliana, SloveniaSeptember 13, 2007slide 15 of 15 Policy Implications