1. Globalisation, Entrepreneurship and the Product Life Cycle David Audretsch and Mark Sanders* Max Planck Institute of Economics Entrepreneurship, Economic Growth and Public Policy Kahlaische Strasse 10 D-07745, Jena, Germany sanders@econ.uu.nl Mark Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 1 of 15

2. Motivation Stylized Facts: -Rising Skill Premia in OECD Katz&Autor (1999), Nickell&Bell (1992) etc. -Increasing importance of Outsourcing Feenstra&Hanson (1999, 2001) -Shift to „Knowledge Economy“ -Spectacular performance India-China -Shifting International Trade Pattern Mark Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 2 of 15

3. Motivation A unified framework for analysis in which: Technology drives trade patterns… … and comparative advantage drives technical change… … and their interaction explains observed trade and labour market trends in North and South. Mark Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 3 of 15

4. The Model nNHnNH nNLnNL nSLnSL North South InventionDevelopmentOutsourcing LNH(wNH)LNH(wNH) LSL(wSL)LSL(wSL)LNL(wNL)LNL(wNL) EIEI EOEO EDED Mark Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 4 of 15

5. 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 Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 5 of 15

6. 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

7. Mark Sanders, Max Planck Institute for Research on Economic Systems First Indo-German Workshop on Development and Entrepreneurship, March 16, 2006 slide 7 of 15 The Static Equilibrium wNHwNH wNLwNL LNH*LNH* LNL*LNL* wSLwSL LSL*LSL* LSLLSL LNLLNL LNHLNH

8. The Dynamic Model How do Entrepreneurs move products over the life cycle? Entrepreneurs Invent, Develop and Outsource according to: Mark Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 8 of 15

9. The Dynamic Model Entrepreneurs Invent, Develop and Outsource to gain: Why do Entrepreneurs move products over the life cycle? Mark Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 9 of 15

10. The Dynamic Model EE wTwT G* EOEO EDED EIEI EOEO EDED EIEI E* wT*wT* Mark Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 10 of 15

11. The Dynamic Model Comparative Statics: Higher L S L (Globalisation) 1.Reduces wages in South 2.Increases 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 Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 11 of 15

12. The Dynamic Model Comparative Statics: Higher n A or g (General Purpose Tecnology) 1.Increases productivity of Innovators 2.Re-allocates Entrepreneurs towards innovating 3.Increases rate of innovating 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 Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 12 of 15

13. 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 Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 13 of 15

14. Policy Implications Income Inequality vs Wage Inequality Impact of Entrepreneurship and R&D Policy Intranational vs International Wage Inequality The Knowledge Economy vs Industrial Economy Comparative Advantages in Entrepreneurship Mark Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 14 of 15

15. Concluding Remarks Managing globalisation 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 globalisation a pareto-improvement. Mark Sanders Max Planck Institute of Economics The First Annual Max Planck India Workshop on Entrepreneurship, Innovation and Economic Growth March 16, 2006 slide 15 of 15