1. The Knowledge Spillover Theory of Entrepreneurship & Economic Growth
David B. Audretsch

2. 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

3. 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

4. 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

5. 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 / …)

6. Globalization Impact
De-linking Competitiveness of Firms from Competitiveness of Standort

8. German Industries
Change in Employment in Germany and Foreign Subsidiaries ( )
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

9. Stuttgart Region

10. German Manufacturing Employment

11. U.S. Manufacturing Employment

12. Rise in European Unemployment

13. 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)

14. 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

15. 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

16. 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

17. 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.

18. 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.

19. 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.

21. Entrepreneurship & GrowthD
Survival Trajectory
Performance
Returns
Wages B
Incumbent Firm B A
Failure Trajectory B C
Time

22. The Role of Entrepreneurship Capital

23. 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'”.

24. 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“

25. 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

26. 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)

27. 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.

28. Entrepreneurship in German Regions

29. Estimation of Production Function Model for German Regions
(1)
(2)
(3)
(4)
(5)
Constant
-2.755***
-2.305***
-1.822***
-1.810***
-1.474***
( )
(-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

30. Testing the Knowledge Spillover Theory
Dependent Variable: Entrepreneurship
General
High Tech
ICT
Low Tech
Constant
***
(-22.86)
***
(-25.28)
***
(-24.13)
***
(-22.32)
Growth
0.2765*
(1.81)
0.7999***
(3.51)
0.6481***
(3.05)
0.2061
(1.27)
Investment
***
(-4.28)
***
(-4.24)
***
(-4.33)
***
(-3.78)
Unemployment
0.0010
(0.18)
***
(-4.04)
***
(-3.72)
0.0064
(1.15)
Agglomeration
(1.05)
0.0002***
(3.98)
0.0001***
(3.38)
(0.40)
Standard Attractiveness
0.0648
(0.65)
(-0.42)
0.1759
0.0597
(0.57)
Social Diversity
0.0495
(0.35)
1.0475***
(4.90)
0.4013**
(2.03)
(-0.34)
Policy
(-0.83) **
(-2.52)
(-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)
(-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

31. 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***
( )
( )
(-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

32. 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

33. 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

34. 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

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

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

37. 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