How are creativity innovation and entrepreneurship related

how innovation is important for entrepreneurship and how can value innovation help entrepreneurship
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Dr.ThorasRyder,Hong Kong,Researcher
Published Date:07-07-2017
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WORKIN G PAPER 20 1 0:02 Entrepreneurship, Innovation and Economic Growth Past experiences, current knowledge and policy implications Pontus Braunerhjelm         Working Papers Series from Swedish Entrepreneurship Forum In  2009  Swedish  Entrepreneurship  Forum  started  publishing  a  new  series  of  Working  Papers.     These  are  available  for  download  on  www.entreprenorskapsforum.se,  and  are  part  of  our   ambition  to  make  quality  research  available  to  a  wider  audience,  not  only  within  the  academic   world.     Scholars  from  different  disciplines  are  invited  to  publish  academic  work  with  the  common   denominator  that  the  work  has    policy  relevance  within  the  field  of  entrepreneurship,   innovation  and  SMEs.     The  working  papers  published  in  this  series  have  all  been  discussed  at  academic  seminars  at  the   research  institution  of  the  author.     ABOUT SWEDISH ENTREPRENEURSHIP FORUM Swedish  Entrepreneurship  Forum  is  the  leading  Swedish  network  organization  for  generating   and  transferring  policy  relevant  research  in  the  field  of  entrepreneurship  and  small  enterprise   development.     Swedish  Entrepreneurship  Forum  is  a  network  organization  with  the  aim   • to  serve  as  a  bridge  between  the  small  business  research  community  and  all  agents   active  in  development  of  new  and  small  enterprises.   • to  initiate  and  disseminate  research  relevant  to  policy  in  the  fields  of  entrepreneurship,   innovation  and  SME.   • to  offer  entrepreneurship  researchers  a  forum  for  idea  sharing,  to  build  national  and   international  networks  in  the  field  and  to  bridge  the  gap  between  research  and  practical   application.     Find  out  more  on  www.entreprenorskapsforum.se               INDEX   1  .Introduction   3   2.  Entrepreneurship  –Definition,  measure  and  origin   7   3.  Entrepreneurship,  opportunities  and  innovation   19   4.  Entrepreneurship  and  growth   27   5.  The  geography  of  entrepreneurship,  innovation  and  growth   34   6.    Implications  for  economic  policies   39   7.  Conclusion   44     1           Working  Paper  2010:02           Entrepreneurship, Innovation and Economic Growth 1 PAST EXPERIENCES, CURRENT KNOW LEDG E AND POLICY IMPLICATIONS February  2010   Pontus  Braunerhjelm   2 Swedish  Entrepreneurship  Forum  and  the  Royal  Institute  of  Technology   Abstract   Considerable  advances,  even  breakthroughs,  have  been  made  during  the  last  decades  in  our  understanding   of  the  relationship  between  knowledge  and  growth  on  one  hand,  and  entrepreneurship  and  growth  on  the   other.  Similarly,  more  profound  insights  have  also  been  gained  as  to  how  entrepreneurship,  innovation  and   knowledge  are  interrelated.  Yet,  a  comprehensive  understanding  is  still  lacking  concerning  the  interface  of   all  of  those  variables:  knowledge,  innovation,  entrepreneurship  and  growth.  The  link  between  the  micro-­‐ economic  origin  of  growth  and  the  macro-­‐economic  outcome  is  still  too  rudimentary  modeled  to  grasp  the   full  width  of  these  complex  and  intersecting  forces.    The  main  objective  of  this  paper  is  hence  to  shed  light   on  recent  advances  in  our  understanding  of  the  forces  that  underpin  the  creation  of  knowledge,  its  diffusion   and  commercialization  through  innovation,  and  the  role  of  the  entrepreneur  in  the  growth  process.  The   policy  implications  of  recent  research  findings  conclude  this  survey.  Particularly  important  policy  implications   refer  to  the  design  of  regulation  influencing  knowledge  production,  ownership,  entry  barriers,  labor  mobility   and  (inefficient)  financial  markets.  They  all  have  implication  for  the  efficient  diffusion  of  knowledge  through   entry.  Knowledge  creation  has  to  be  matched  by  incentives  that  induce  mechanisms  to  convert  knowledge   into  societal  and  useful  needs.   Keywords:  Entrepreneurs,  knowledge,  innovation,  growth,  policy                                                                                                                             1  Swedish  Entreprenurship  Forum,  Södra  Kungstornet,  Kungsgatan  33,  111  56  Stockholm  ,   pontus.braunerhjelmentreprenorskapsforum.se,  and  Department  of  Transport  and  Economics,  Royal  Institute  of  Technology,  100  44   Stockholm,  SWEDEN,  pontusbabe.kth.se.    This  paper  partly  draws  on  the  survey  in  Braunerhjelm  (2008).         2       Working  Paper  2010:02       “The  greatest  danger  for  most  of  us  is  not  that  our  aim  is  too  high  and  we  miss  it  but  that  it  is  too  low     and  we  reach  it  “  (Michelangelo)   1 .Introduction   Considerable  advances,  even  breakthroughs,  have  undoubtedly  been  made  during  the  last  decades  in  our   understanding  of  the  relationship  between  knowledge  and  growth  on  one  hand,  and  entrepreneurship  and   growth  on  the  other.  Similarly,  more  profound  insights  have  also  been  gained  as  to  how  entrepreneurship,   innovation  and  knowledge  are  interrelated.  Yet,  a  comprehensive  understanding  is  still  lacking  concerning   the  interface  of  all  of  those  variables:  knowledge,  innovation,  entrepreneurship  and  growth.  The  knowledge-­‐ innovation-­‐entrepreneurship-­‐growth  nexus  is  intricate  and  influenced  by  forces  that  are  likely  to   simultaneously  affect  all  variables,  at  least  partially,  while  others  can  be  expected  to  have  a  unidirectional   impact  or  affect  only  a  few  of  these  variables.  The  link  between  the  micro-­‐economic  origin  of  growth  and  the   macro-­‐economic  outcome  is  still  too  rudimentary  modelled  to  grasp  the  full  width  of  these  complex  and   intersecting  forces.   Growth  can  basically  be  attributed  the  following  fundamental  forces:  an  increase  in  factors  of  production,   improvements  in  the  efficiency  of  allocation  across  economic  activities,  knowledge  and  the  rate  of   innovation.  Given  full  employment  and  efficient  allocation,  growth  is  thus  driven  by  knowledge  accumulation   and  innovation.  The  process  of  innovation  is  typically  modeled  as  a  function  of  the  incentive  structure,  i.e.   institutions,  assumed  access  to  existing  knowledge,  and  a  more  systemic  part.  Innovation  also  implies  that   the  stock  of  (economically)  useful  knowledge  increases.  In  other  words,  innovation  is  one  vehicle  that   diffuses  and  upgrades  already  existing  knowledge,  thereby  serving  as  a  conduit  for  realizing  knowledge   spillovers.  The  process  of  innovation  is  consequently  considered  to  be  one  of  the  critical  issues  in   comprehending  growth.     Irrespective  of  the  advances  made  in  this  vein  of  economics,  a  number  of  basic  questions  related  to  the   dynamics  of  the  growth  process,  and  the  ensuing  normative  conclusions,  are  only  fragmentally  understood   and  just  partially  explored.  Even  quite  basic  issues,  as  the  definition  of  the  concept  innovation  are  clearly  not   settled,  not  to  mention  how  they  come  about  and  by  whom,  i.e.  the  connection  to  entrepreneurial  activities.   Moreover,  in  precisely  what  way  does  innovation  contribute  to  new  knowledge  (through  scientific/technical   discoveries  or  through  a  much  broader  view  on  innovation?)  and  which  knowledge  bases  and  cognitive   abilities  are  critically  important  for  innovation  to  take  place?  Exactly  how  does  innovation  substantiate  into   growth  and  how  are  the  effects  spatially  diffused?  And  which  policy  measures  should  be  taken  in  order  to   boost  the  probability  of  sustained  knowledge  based  growth?    Those  are  the  questions  that  will  be  focussed   on  in  this  paper  through  a  selected  survey  of  the  literature.   The  lack  of  detailed  insight  into  these  issues  implies  that  our  knowledge  concerning  the  microeconomic   foundations  of  growth  is  at  best  partial,  but  could  potentially  also  be  quite  flawed.  Without  accurate   microeconomic  specification  of  the  growth  model  there  is  also  an  obvious  risk  that  the  derived  policy   implications  are  incorrect.  The  recipes  for  growth  are  likely  to  be  inconsistent  over  time  and  also  vary  over   different  stages  of  economic  development.  Today’s  developing  countries  may  learn  from  policies  previously     3       Working  Paper  2010:02       pursued  by  the  developed  countries,  while  developed  countries  themselves  confront  a  more  difficult  task  in   carving  out  growth  policies  for  the  future.  Hence,  the  relationship  between  the  level  of  development,   entrepreneurship,  innovation  and  growth  will  also  be  considered.     Background   Despite  the  enhanced  understanding  of  the  building  blocks  of  dynamic  processes,  economics-­‐based  theories   and  models  largely  fall  short  of  addressing  the  influence  of  the  independent  innovator  or  entrepreneur  to   important  economic  outcomes.  The  accumulation  of  factors  of  production,  i.e.,  knowledge,  human  and/or   physical  capital,  cannot  alone  explain  economic  development.  Innovation  and  entrepreneurship  are  needed   to  transform  these  inputs  in  profitable  ways,  an  insight  forwarded  already  by  Adam  Smith  (Andersson  and   Tollison  1982).     At  the  same  time  there  seem  to  be  preconceived  perceptions  at  policy  level  concerning  the  effects  of   activities  by  entrepreneurs  and  entrepreneurial  firms.  For  instance,  it  is  more  or  less  taken  for  granted  that   setting  up  a  new  company,  or  the  performance  of  new  ventures,  automatically  translate  into  societal   benefits.  However,  this  is  an  oversimplification;  entrepreneurship  may  under  certain  conditions  reduce   rather  than  enhance  economic  progress.  This  would  be  the  case  for  illegal  enterprising,  but  also  when   entrepreneurial  talent  is  spent  on  rent  seeking  activities  such  as  litigation,  or  whenever  the  Coasian   transaction  costs  arguments  for  internalizing  economic  activities  are  violated  through  policy  induced   incentives.  In  other  words,  it  is  fully  conceivable  for  successful  new  enterprise  at  the  micro  level  to  translate   into  economic  regress  at  the  societal  level  and  for  a  failed  entrepreneurship  at  the  micro  level  to  contribute   to  economic  development.  The  societal  implications  of  the  actions  of  individual  entrepreneurs,  i.e.  how  that   translates  into  growth  and  prosperity,  is  thus  not  fully  considered.   In  connecting  knowledge,  innovation  and  entrepreneurship,  it  is  essential  to  emphasize  the  non-­‐routine   processes  that  are  conspicuous  phenomena  of  the  dynamics  of  economic  development.  Knowledge  driving   innovation  is  frequently  thought  of  as  a  linear  process,  being  an  outcome  of  activities  labeled  R&D.   Obviously  a  set  of  other  processes,  such  as  learning-­‐by  doing,  cognitive  abilities,  networking,  combinatorial   insights,  etc.,  also  fuse  societal  knowledge.  Uncertainty,  search  and  experiments  are  crucial  parts  of  the   innovative  process.  The  knowledge  generating  activities  of  entrepreneurs  and  small  firms  have  been  shown   to  be  spread  across  a  number  of  different  functional  areas.  Disregarding  these  aspects  means  that  several   studies  neglect  a  substantial  share  of  the  knowledge  creation  relevant  to  innovation  and  economic  growth.     Consequently,  despite  making  small  investments  in  R&D  and  other  formal  knowledge  generating  activities,   entrepreneurs  and  small  firms  may  still  substantially  contribute  to  aggregate  innovation,  thanks  to  their   entrepreneurial  abilities.  Still,  there  is  no  guarantee  that  new  knowledge  with  commercial  potential  is   immediately  transformed  into  entrepreneurial  initiatives;  these  effects  could  fail  to  show  up  at  all,  or  appear   with  a  time  lag.     Because  entrepreneurship  entails  the  actions  and  activities  of  individuals  working  within  firms  or  for   themselves,  incentives  that  encourage  the  risky  endeavor  of  entrepreneurial  activity  seems  essential,  as  is   the  infrastructure  allowing  the  transfer  of  knowledge  from  knowledge  generating  actors  to  knowledge   exploiting  entrepreneurs.  In  addition,  firms  and  entrepreneurs  have  to  develop  strategies  to  balance  slow   knowledge  development  processes  with  fleeting  windows  of  opportunity  and  find  ways  of  speeding  up     4       Working  Paper  2010:02       knowledge  generation  and  exploitation.  Here  the  financial  system,  by  evaluating  prospective  entrepreneurs,   mobilizing  and  channeling  savings  to  finance  the  most  productivity-­‐enhancing  activities,  diversifying  risks,   etc.,  play  a  vital  role.  Thus,  the  design  of  financial  systems  influences  growth  by  increasing  the  probabilities   of  successful  innovation  (King  and  Levine  1993).  The  question  is  how  that  is  accounted  for  in  standard   knowledge  driven  growth  models.   The  view  that  entrepreneurship  could  play  an  important  role  in  a  knowledge-­‐based  economy  seems  to   contrast  much  of  the  conventional  wisdom.  According  to  for  instance  Gailbraith  (1967),  Williamson  (1968)   and  Chandler  (1977),  it  seemed  inevitable  that  exploitation  of  economies  of  scale  by  large  corporations   would  become  the  main  engine  of  innovation  and  technical  change.  But  also  the  “late”  Joseph  Schumpeter   (1942)  shared  these  views,  albeit  with    considerably  more  skepticism  about  the  beneficial  outcome  than  his   colleagues.    Rather,  Schumpeter  feared  that  the  replacement  of  small  and  medium  sized  enterprise  by  large   firms  would  negatively  influence  entrepreneurial  values,  innovation  and  technological  change.  Despite  these   early  prophecies  of  prominent  scholar,  there  is  ample  empirical  evidence  that  the  development  has  actually   reversed  since  the  early  1970s  for  most  industrialized  countries.  The  tide  has  turned;  the  risk  prone   entrepreneur  has  experienced  a  virtual  renaissance  and  is  increasingly  seen  as  indispensable  to  economic   development.   Theoretical  advances  and  empirical  research  seem  to  support  the  view  that  knowledge  generation,   innovation  and  entrepreneurship  processes  are  localized  processes.  Irrespective  of  knowledge  flows  largely   being  bounded  in  space,  it  is  however  also  possible  to  observe  how  knowledge,  innovations  and   entrepreneurial  initiatives  flow  between  functional  urban  regions  and  even  countries.  Thus,  even  though   regions  are  characterized  by  their  varying  internal  economic  and  infrastructure  networks,  they  are  also   connected  by  a  multitude  of  such  networks.  It  is  obvious  that  there  is  an  important  interplay  between   localized  processes  of  knowledge  generation,  innovation  and  entrepreneurship,  but  current  insights  are   basically  lacking  concerning  the  relative  importance  of  interregional  and  international  networks.  An   increasingly  global  knowledge  base  serve  to  enhance  and  diversify  the  local  knowledge  base,  i.e.  what  has   been  coined  “local  buzz  and  global  pipelines”.   In  terms  of  policy,  it  is  a  well-­‐established  result  that  market  economies  normally  do  not  generate  a  socially   optimal  volume  of  knowledge  creation,  innovation  and  entrepreneurship.  However,  there  is  no  consensus   concerning  what  institutional  frameworks  and  policy  measures  that  might  generate  such  a  social  optimum   given  the  imperfections  of  both  the  economic  and  the  political  markets.  This  has  not  stopped  policy-­‐makers   from  launching  a  large  number  of  institutional  changes  and  policy  measures  to  stimulate  knowledge   creation,  innovation  and  entrepreneurship.  Nevertheless,  the  number  of  carefully  carried  through  policy   evaluations  is  rather  limited,  which  implies  that  there  is  a  huge  knowledge  gap  concerning  which  policies   actually  work  and  whether  they  are  worth  their  costs.   The  main  objective  of  this  paper  is  hence  to  shed  light  on  recent  advances  in  our  understanding  of  the  forces   that  underpin  the  creation  of  knowledge,  its  diffusion  and  commercialization  through  innovation,  and  the   role  of  the  entrepreneur  in  the  growth  process.  The  following  section  2  discusses  the  definition,  origin  and   measurement  of  entrepreneurship,  and  how  it  relates  to  knowledge  production,  while  section  3  is  devoted   to  innovation  and  the  innovation  process.  Section  4  presents  how  these  components  have  been  integrated   into  a  growth  context,  and  discusses  the  weak  links  in  current  models  of  growth.  In  the  subsequent  section  5     5       Working  Paper  2010:02       the  regional  aspects  of  entrepreneurship,  knowledge  extraction  and  growth  are  highlighted.  The  paper  is   concluded  by  a  policy  discussion  (section  6),  and  a  summary  of  the  main  findings,  together  with  suggestions   for  future  research  (section  7).               6       Working  Paper  2010:02         2. Entrepreneurship –Definition, measure and origin Why  do  individuals  engage  in  entrepreneurial  ventures  with  uncertain  and  risky  outcomes?     The  earlier  entrepreneurship  literature  suggests  a  plethora  of  different  reasons  as  to  why  individuals  become   entrepreneurs,  albeit  institutions  are  always  at  the  heart  of  the  matter  when  the  extent  of  entrepreneurial   activities  is  explained.  The  alleged  explanations  of  entrepreneurship  comprise  a  mix  of  clear-­‐cut  economic   explanations,  specific  attributes  that  are  claimed  to  characterize  entrepreneurs,  as  well  as  forces  related  to   culture  and  path-­‐dependency.  Sometimes  they  are  classified  according  to  the  level  of  aggregation,  starting  at   the  macro-­‐level  and  working  their  way  down  to  industry-­‐related  factors,  micro-­‐economic  incentive   structures  and  cognitive  abilities  of  individuals.  Alternatively,  similar  forces  triggering  entrepreneurship  is   presented  in  a  supply  and  demand  taxonomy.  In  this  section  I  will  briefly  survey  the  most  frequent   explanations  to  entrepreneurial  activities,  zeroing  in  at  the  empirical  findings  concerning  the  role  of   institutions  and  access  to  knowledge.  The  idiosyncrasies  pertaining  to  the  definition  and  production  of   1 knowledge  are  likewise  addressed.       The  Austrian  heritage   Within  the  last  decades  we  have  witnessed  an  Austrian  renaissance  in  economics  -­‐  putting  the  entrepreneur,   structural  change  and  creative  destruction  in  the  forefront  -­‐  both  from  an  academic  point  of  view  as  well  as   in  policymaking.  Most  contemporary  theories  of  entrepreneurship,  and  the  implications  of   entrepreneurship,  thus  build  on  the  seminal  contributions  by  particularly  Schumpeter  (1911/1934).  He   stressed  the  importance  of  innovative  entrepreneurs  as  the  main  vehicle  to  move  an  economy  forward  from   2 static  equilibrium,  based  on  the  combinatorial  capabilities  of  entrepreneurial  individuals.  In  his  own  words:    “Whatever  the  type,  everyone  is  an  entrepreneur  only  when  he  actually  carries  out  new  combinations  and   loses  that  character  as  soon  as  he  has  built  up  his  business,  when  he  settles  down  to  running  it  as  other   people  run  their  business”  (Schumpeter  1911/1934,  p78).    “And  what  have  they  done:  they  have  not  accumulated  any  kind  of  goods,  they  have  created  no  original   means  of  production,  but  have  employed  means  of  production  differently,  more  advantageously.  They  have   carried  out  new  combinations  They  are  the  entrepreneurs.  And  their  profit,  the  surplus  to  which  no  liability   corresponds,  is  the  entrepreneurial  profit.”  (Schumpeter  1911/1934,  p.  132).   Schumpeter  viewed  the  creation  of  technological  opportunity  as  being  basically  outside  the  domain  of  the   entrepreneur.  Rather,  the  identification  and  exploitation  of  such  opportunities  is  what  distinguishes                                                                                                                             1  The  following  section  includes  a  brief  and  partial  presentation  of  some  of  the  most  influential  thoughts  as  regards  entrepreneurs.   For  a  more  thorough  survey,  see  Sexton  and  Landström  (2000),  Acs  and  Audrestch  (2003)  and  Braunerhjelm  (2008).   2  Olsson  (2000)  and  Olsson  and  Frey  (2002)  presents  a  theoretical  model  of  entrepreneurs  as  undertakers  of  new  combinations  of   ideas.     7       Working  Paper  2010:02       entrepreneurs,  i.e.  innovation.  Also  in  this  respect  Schumpeter’s  original  thoughts  on  entrepreneurial   opportunity  has  had  a  considerable  influence  on  the  succeeding  generation  of  entrepreneurship  researchers.   Nor  did  Schumpeter  view  entrepreneurs  as  risk-­‐takers,  even  though  he  did  not  completely  dismiss  the  idea,   and  was  aware  that  innovation  contains  elements  of  risk  also  for  the  entrepreneur.  But  basically  that  task   was  attributed  the  capitalists  who  financed  entrepreneurial  ventures.     A  decade  later,  Knight  (1921)  proposed  the  role  of  the  entrepreneur  as  someone  who  transforms   uncertainty  into  a  calculable  risk.  Schumpeter’s  model  was  thereby  complemented  by  the  explicit   introduction  of  cognitive  abilities  as  an  explanation  of  entrepreneurial  activity.  Somewhat  later,  the   definition  of  the  entrepreneur  as  someone  who  moved  the  economy  towards  equilibrium  (partly  contrasting   Schumpeter),  by  taking  advantage  of  arbitrage  possibilities,  was  forwarded  by  Kirzner’s  (1973,  1996,  1997).   The  Austrian  heritage  can  be  traced  even  further  back.  Menger  (1871)  stressed  the  uncertainties  and   subjectivities  that  he  claimed  must  be  inherent  phenomena  in  economies  characterized  by  extensively   1 distributed  and  fragmented  economic  activities.  These  ideas  were  further  elaborated  by  von  Hayek  (1945).   Thus,  there  seems  to  be  a  rather  clear  connection  between  Menger’s  view  on  the  subjective  economy,  von   Hayek’s  ideas  about  the  distribution  of  knowledge,  and  Kirzner’s  arbitraging  entrepreneur,  which  in  turn   basically  links  well  with  Schumpeter’s  definition  of  the  entrepreneur’s  innovative  capacity,  including  the   2 detection  of  new  markets.        More  recently,  the  research  field  of  entrepreneurship  has  been  defined  as  analyses  of  “how,  by  whom  and   with  what  consequences  opportunities  to  produce  future  goods  and  services  are  discovered,  evaluated  and   exploited”  (Shane  and  Venkataraman  2000).  As  regards  by  “whom”,  an  eclectic  definition  of  the   entrepreneur,  that  has  become  increasingly  accepted,  is  suggested  by  Wennekers  and  Thurik  (1999).  The   entrepreneur:  i)  is  innovative,  i.e.  perceives  and  creates  new  opportunities;  ii)  operates  under  uncertainty   and  introduces  products  to  the  market,  decides  on  location,  and  the  form  and  use  of  resources;  and  iii)   manages  his  business  and  competes  with  others  for  a  share  of  the  market.    Apparently,  this  definition  can  be   linked  to  all  three  contributions  referred  to  above.  Note  that  invention  is  not  explicitly  mentioned  (albeit   creation  of  opportunity  is)  in  this  definition,  nor  excluded  from  the  interpretation  of  entrepreneurship.  A   summary  of  different  definitions  of  entrepreneurs  over  time  is  presented  in  Table  1.                                                                                                                             1  Menger  did  however  not  define  or  include  the  entrepreneur  in  his  work.  Von  Mises  (1949)  did,  though  much  later,  define   entrepreneurs  in  terms  of  unevenly  distributed  talent.     2  Schumpeter  defined  five  different  types  of  innovation:  the  recognition  of  a  new  good/quality,  a  new  method/process,  a  new   market,  a  new  source  of  supply  or  a  new  way  of  organizing  the  firm/production.     8       Working  Paper  2010:02         1 Table  1.  Some  definitions  and  characteristics  of  entrepreneurship,  1755  to  2001.   R.  Cantillon  (1755)   -­‐  Entrepreneurs  is  defined  as  self-­‐employed   -­‐  Self-­‐employed  deals  with  additional  uncertainty   -­‐Entrepreneurs  should  balance  their  activities  to  market  demand     J.B.  Say  (1803)   -­‐  Entrepreneurs  shifts  economic  resources  from  low  to  high   productivity  areas  with  higher  yield   -­‐  Entrepreneurship  implies  many  obstacles  and  uncertainties   A.Marshall  (1890)   -­‐  Entrepreneurs  and  managers  have  different  but  complementing   characteristics   J.  Schumpeter  (1911)   -­‐  Entrepreneurship  are  the  main  vehicle  to  move  an    economy  forward  from  static  equilibrium,  based  on  the   combinatorial  capabilities  of  entrepreneurial  individuals   -­‐  Combinatorial  capabilities  results  in  recognition  of  a  new   good/quality,  a  new  method/process,  a  new  market,  a  new  source  of   supply  or  a  new  way  of  organizing  the    firm/production     -­‐  Entrepreneurs’  role  is  distinctly  separated  from  the  role  of   inventors   F.  Knight  (1921)   -­‐  Entrepreneurs  are  a  special  social  class  who  direct  economic   activity   -­‐  Uncertainty  is  the  primary  aspect  of  entrepreneurship   E.  Penrose  (1950)   -­‐  Entrepreneurial  and  managerial  abilities  should  be  distinguished   -­‐  Detecting  and  exploiting  opportunities  for  smaller  firms  is  the  basic   aspect  of  entrepreneurship     H.  Liebenstein  (1968)   -­‐  Entrepreneurial  activity  mainly  implies  decreasing  organizational   inefficiencies  and  reversing  organizational  entropy   -­‐  There  are  two  types  of  entrepreneurs:  a  managerial  who  allocates   inputs  into  the  production  process  in  an  effective  manner,  and  a                                                                                                                             1 Table 1 partly builds on Salgado-Banda (2005).   9       Working  Paper  2010:02       Schumpeterian  who  fills  obserbed  market  gaps  by  introducing  new   products  or  processes     I.Kirzner  (1973,  1997)   -­‐  Entrepreneurial  activity  moves  the  market  towards  equilibrium  as   entrepreneurs  discover  profitable  arbitrage  possibilities.   M.  Casson  (1982)   -­‐  Entrepreneurs  specialize  in  taking  judgmental  decisions  about  the   coordination  of  scarce  resources     W.  Gartner  (1985),  H.  Aldrich   -­‐  Entrepreneurship  is  the  outcome  of  actions  of  individuals  that  act   and  C.  Zimmer  (1986)     in  and  are  influenced  by  the  organizational  and  regional   environment  in  which  they  live  and  work.   W.  Baumol  (1990)   -­‐  Entrepreneurial  activity  crucial  for  (radical)  innovation  and  growth.   -­‐  Institutions  decide  the  allocation  of  entrepreneurial  activity   between  productive  (innovation)  and  unproductive  activities  (rent   seeking,  organized  crime,  etc.).   R.  Holcombe  (1998)   -­‐  Entrepreneurs  promote  a  more  productive  economy  due  to  more   efficient  and  innovative  ways  of  production,  it  is  the  foundation  for   economic  growth   OECD  (1998)   -­‐  Entrepreneurs  represents  the  ability  to  marshal  resources  to  seize   new  business  opportunities,  defined  broadly  they  are  central  to   economic  growth   S.  Wennekers  and  R.  Thurik   -­‐  Entrepreneurs  have  multi-­‐task  abilities.   (1999)   -­‐  Entrepreneurs  perceive  and  creates  new  opportunities,  operate   under  uncertainty  and  introduce  products  to  the  market,  decide  on   location  and  the  form  and  use  of  resources,  and,  finally  manage  their   business  and  compete  with  others  for  a  share  of  the  market.       H.  Aldrich  and  M.Martinez   -­‐  Entrepreneurial  activity  not  necessarily  synonoumos  with   (2001)   innovation  since  entrepreneurial  activities  also  involve  imitation.   -­‐  Support  the  distinction  between  innovation  and  reproduction  in   entrepreneurial  activities.           10       Working  Paper  2010:02         Many  explanations  but  few  theories   The  above  brief  and,  of  course,  incomplete  presentation  theorize  and  describe  the  perceived  characteristics   believed  being  possessed  by  the  entrepreneur.  Even  though  explanations  as  to  why  entrepreneurial   activities  are  embarked  upon  can  be  inferred  from  those  entrepreneurial  characteristics,  this  is  far  from   presenting  a  rigorous  theoretical  model  of  entrepreneurship.  There  exists,  few,  if  any  compelling  theoretical   model  of  entrepreneurial  behavior,  which  stems  from  the  heterogeneity  and  stochastic  elements  that  seems   to  be  an  undisputable  part  of  entrepreneurship.  The  closest  contemporary  attempt  to  model  on   entrepreneurship  is  probably  the  occupational  choice  models  (Evans  and  Leighton  1989,  Banerjee  and   Newman  1993,  van  Praag  and  Cramer  2001).  Still,  the  distinction  between  these  and  other  models  of  profit   maximizing  agents  based  on  perfect  information  is  thin.  Instead  entrepreneurship  models  are  based  on   1 processes  driven  by  stochastically  distributed  abilities  and  learning  capacities.     For  instance,  in  Jovanovic’s  (1982)  model  new  firms,  or  entrepreneurs,  face  costs  that  are  not  only  random   but  also  differ  across  heterogeneous  firms.  A  central  feature  of  the  model  is  that  new  firms  do  not  know   their  cost  functions,  that  is,  their  relative  efficiency,  which  is  discovered  through  the  process  of  learning  from   its  actual  post-­‐entry  performance  once  the  business  is  established.  Hence,  entry  per  se  is  not  important  and   dynamics  is  characterized  by  a  noisy  selection  process  where  performance  is  partly  exogenous.  Jovanic  and   Lach  (1989),  present  a  modified  version  of  the  1982  model  which  also  builds  on  learning  by  doing,  and   generates  a  S-­‐shaped  diffusion  pattern  of  innovation  (and  entry)  over  time.     Neither  of  these  approaches  is  particularly  satisfactory  and  whether  they  can  offer  insights  more  valuable   than  an  eclectic  approach  based  on  empirical  observations  is  questionable.  We  therefore  restrict  the   remaining  presentation  to  an  overview  of  the  most  common  empirical  regularities  as  to  why   entrepreneurship  occurs.       Empirical  explanations  of  entrepreneurship   According  to  the  literature  the  fundamental  source  of  economic  development,  dynamism  and  changes  can   be  ascribed  the  institutional  setting  in  which  agents  operate.  Even  though  needs  may  drive  individual   actions,  the  way  those  needs  are  fulfilled  and  the  efficiency  in  accomplishing  them,  depends  on  institutions.   Hence,  at  an  overarching  level,  the  extent  and  type  of  entrepreneurship  can  always  be  attributed   2 institutions,  formal  and  informal  (de  Soto  1989,  2000,  Baumol  1990,  North  1990,  1994,  Henrekson  2005).   Institutions  also  appear  at  all  levels  of  economic  activities:  the  macroeconomic  framework,  industrial   policies,  knowledge  creation,  attitudes  and  individual  incentives.     In  the  following  we  will  classify  the  empirical  explanations  to  entrepreneurship  on  the  different  factors  and   levels  of  aggregations  that  have  been  presented  in  the  literature.  These  will  also  be  briefly  related  to  other                                                                                                                             1  See  Shane  (2003)   2  Baumol  (1990)  emphasize  the  role  of  institutions  for  the  allocation  between  productive  (innovation)  and  unproductive  activities   (rent  seeking,  organized  crime,  etc).       11       Working  Paper  2010:02       contextual  concepts,  such  as  push  and  pull  factors,  and  the  demand  and  supply  of  entrepreneurs.    The   section  is  concluded  with  some  observation  as  regards  the  definition,  role  and  production  of  knowledge.   However,  before  excavating  into  the  observed  empirical  regularities  in  explaining  entrepreneurship,  the   measurement  problems  related  to  entrepreneurship  will  be  considered.           Measuring  entrepreneurship   Rather  than  being  synonymous  with  starting  a  new  venture,  entrepreneurship  refers  to  a  set  of  abilities   embodied  within  an  individual.  Adequately  capturing  such  abilities  in  data  that  are  comparable  over   individuals,  not  to  mention  comparisons  across  regions  or  nations  are  simply  not  possible.  Thus,  the   measures  of  entrepreneurship  will  always  be  partly  erroneous  and  subject  to  criticism  since  empirical  studies   have  to  rely  on  proxies  which  (hopefully)  are  correlated  with  entrepreneurship.     A  considerable  share  of  studies  on  entrepreneurship  relies  on  self-­‐employment  data.  One  obvious  reason  is   that  those  were  simply  available  for  a  large  number  of  regions  and  countries  (Evans  and  Leighton  1989,   Blanchflower  and  Oswald  1998,  Georgelis  et  al  2000,  OECD  2000,  Audretsch  and  Thurik  2001,  Blanchflower   et  al  2001,  Bruce  and  Holtz-­‐Eakin  2001,  Fonseca  et  al  2001).  Yet,  as  noted  by  Blanchlower  (2000)  and  Earle   and  Sakova  (2000),  self-­‐employed  consists  of  a  very  heterogeneous  group  more  or  less  involved  in   productive  entrepreneurial  activities,  it  could  just  as  well  represent  employment  push  factors.   Alternative  but  related  measures  of  entrepreneurship  are  the  number  of  establishments  (Beck  and  Levine   2001),  density  of  firms  (Klapper  et  al  2008),  or  business  ownership  (Carré,  van  Stel  and  Thurik  2002).  As   pointed  out  above,  self-­‐employed  less  likely  to  capture  productive  entrepreneurship,  it  could  just  as  well   represent  entrepreneurial  pull  as  unemployment  push.  Net  birth  rate  (entry  less  exits)  has  also  been   suggested  as  an  indicator  of  entrepreneurship,  in  addition  to  tracing  structural  industrial  changes  (Dejardin   2008).  Firm  demography  is  however  quite  different  between  industries  implying  that  sectorally  adjusted   indicators  are  needed  to  capture  structural  changes  using  net  birth  rates  (Geroski  1995,  Caves  1998).  But   also  turbulence  (entry  plus  exits)  have  been  advocated  as  an  approximation  of  entrepreneurship  (Fritsch   1996).       A  relatively  new  set  of  data  has  been  compiled  by  the  Global  Entrepreneurship  Monitor  (GEM).  These  data   are  based  on  questionnaires  designed  to  capture  both  potential  entrepreneurs  and  other  respondents.  The   data  also  contain  additional  information,  such  as  motives  for  embarking  on  entrepreneurial  activity,  etc.   Comparison  with  other  datasets,  for  instance  those  collected  by  Eurostat  (Flash  Eurobarometer)  and  the   World  Bank,  reveal  a  high  degree  of  correlation  (Reynolds  et  al  2005).  That  they  catch  about  the  same   phenomena  does  not  however  mean  that  they  are  good  indicators  of  entrepreneurial  activity.     Entrepreneurship  is  often  categorized  as  opportunity-­‐  or  necessity-­‐based  ventures.  The  former  represents  a   profitable  opportunity  as  perceived  by  an  individual,  while  the  latter  is  associated  with  entrepreneurship  as  a   last  resort,  i.e.,  due  to  impossibility  of  finding  other  sources  of  income.  The  distinction  between  opportunity     12       Working  Paper  2010:02       and  necessity  based  entrepreneurs  could  also  be  interpreted  as  the  separation  between  self-­‐employed  and   1 high-­‐growth  entrepreneurship  (Glaeser  and  Kerr  2009).   Macro-­‐level  explanations  of  entrepreneurship   The  most  commonly  defined  determinants  of  entrepreneurship  at  the  macro-­‐level  in  the  literature  are  the   level  and  growth  of  GDP,  together  with  (un)employment,  investments,  cost  levels,  inflation  and  the  interest   rate  level  (Highfield  and  Smiley  1987,  Bosma  et  al  2005,  Wang  2006).  Also  factors  like  government  spending   on  education,  infrastructure  and  health  seem  to  be  positively  correlated  with  startups  (Reynolds  and  Storey   1993).   Some  of  these  factors  relate  to  the  business  cycle  –  i.e.  there  may  be  a  cyclical  component  in   entrepreneurship  activity  –  while  other,  albeit  less  explained,  can  be  associated  with  long  waves  influencing   2 economic  activity,  innovation  and  entrepreneurship  (Schumpeter  1939).  See  also  Fritsch  (1996)  who  shows   that  entry  and  exit  varies  during  the  product  cycle,  i.e.  it  is  particularly  high  in  the  earlier  stages.   Regions,  industry  and  firm  level  factors   One  strand  of  entrepreneurial  economics  looks  at  how  differences  in  regional  characteristics  and   preconditions  influence  entrepreneurship.  Low  transportation  costs,  concentration  of  human  capital  and   extensive  research  and  development  activities  together  with  availability  to  financial  capital,  seems  to  be  the   3 most  critical  factors.  Also  population  (demand),  employment  and  income  growth  turns  out  to  be  important   determinants  of  entrepreneurship  (Acs  and  Armington  2002).  We  will  further  elaborate  on  the  regional   dimension  of  entrepreneurship  in  section  5.   On  the  industry  level  the  most  prominent  factors  that  have  been  identified  to  impact  entrepreneurship  are   the  level  of  profits,  entry  barriers,  level  of  demand,  and  the  extent  of  agglomerated  or  urbanized  production   4 structures  (Reynolds  1992,  Reynolds  and  Storey  1993).  The  determinants  of  entrepreneurship  thus  relate  to   variables  derived  in  the  industrial  organization,  economic  geography  and  standard  micro-­‐economic  theories   of  economics.      There  are  mixed  results  for  different  variables  in  different  countries  but  basically  profits,   industry  growth  and  industry  size  are  positively  related  to  startups  while  increasing  capital  requirements  and   need  for  product  differentiation  seem  to  negatively  impact  entrepreneurship.     Disaggregating  to  the  firm  level,  human  capital  (education)  shows  up  as  one  of  the  fundamental  variables   explaining  entrepreneurship  (Evans  and  Leighton  1990,  Kim  et  al  2006).  Overall,  the  likelihood  of  becoming   an  entrepreneur  is  strongest  for  skilled  individuals,  particularly  for  entrepreneurs  seeking  to  exploit  an                                                                                                                             1  We  will  not  consider  explanations  related  to  the  sociological  disciplines  (teams,  networks,  etc.),  nor  those  related  to  nascent   entrepreneurship,  “combinators”,  etc.       2 An  alternative  approach  is  represented  by  the  long  wave  literature,  see  e.g.  Kitchin  (1923,  long  waves  appear  due  to  investments   cyscles),  Juglar  (1862,  investments  in  machinery,  Kuznets  (1971,  investments  in  real  estate)  and  Kondratieff  (1925/1935)  who  simply   conclude  that  long  waves  of  economic  activity  seems  to  be  a  fact.   3  See  Bartik  (1989),  Evans  and  Jovanovic  (1989),  Reynolds  et  al  (1994),  Dunn  and  Holtz-­‐Eakin  (1995),  (2000),  Quadrini  (2000)  and  Acs   et  al  (2007).   4  The  demand  variable  goes  back  to  Adam  Smith’s  argument  about  the  size  of  the  market  and  the  scope  for  specialization.     13       Working  Paper  2010:02       opportunity.    Human  capital  signals  quality,  works  as  a  sorting  mechanism,  helps  overcoming  barriers  in   1 obtaining  credit/equity,  as  well  as  improving  network  forming.  Social  networks  can  in  turn  be  expected  to   reduce  transaction  costs  (Williamson  1971),  which  also  has  gained  empirical  support,  particularly  for   2 opportunity  based  entrepreneurship.     Regulation  as  such  has  been  shown  to  influence  entrepreneurship  and  size  of  startups  (Ciccone  and   3 Papaionnou  2006,  Ardagna  and  Lusardi  2009).  Particularly  detrimental  effects  are  attributed  high  startup   costs  (Fonseca  et  al  2001,  2007).  Glaeser  and  Kerr  (2009)  presents  (regional)  evidence  that  cost  levels  are   one  of  the  major  impediments  to  entrepreneurship,  while  Gordon  (1998),  and  Cullen  and  Gordon  (2007),   conclude  that  higher  taxes  has  a  distinct  and  significant  negative  impact  on  entrepreneurship.  Moreover,   indirect  effects  have  been  reported  through  the  effects  of  taxes  on  wealth  formation  (Evans  and  Jovanovic   1989,  Banerjee  and  Newman  1993).  Individual  wealth  has  been  shown  to  be  a  robust  predictor  of  the   probability  of  starting  a  firm.     At  the  individual  level  progressive  marginal  tax  rates  seem  to  negatively  impact  entry,  even  though  the   magnitude  depends  on  the  difference  between  taxes  on  wages  and  taxes  on  profits  (Gentry  and  Hubbard   2000,  Hansson  2008).  It  is  also  noteworthy  that  individuals  in  either  the  highest  or  the  lowest  income   brackets  are  most  likely  to  start  a  firm,  which  probably  mirrors  that  individual  abilities  govern  whether   opportunity-­‐  or  necessity-­‐based  entrepreneurial  ventures  is  embarked  upon.   Norms  and  culture     4 A  number  of  studies  find  that  social  norms,  or  entrepreneurial  culture,  do  influence  entrepreneurship.  An   obvious  indicator  of  this  is  the  parent  effect,  that  is,  the  likelihood  of  becoming  a  firm-­‐owner  or  starting  a   new  firm  increases  if  the  parents  had  their  own  firms  (Dunn  and  Holtz-­‐Eakin  2000,  Davidsson  and  Honig   2003,  Gianetti  and  Simonov  2004).    There  also  seem  to  be  the  case  that  an  environment  dominated  by   smaller  and  independent  firms  become  more  conducive  to  entrepreneurship  than  environments  hosting   larger  firms  (Glaeser  et  al  2009,  Glaeser  and  Kerr  2009).  Holding  an  industry’s  establishment  size  constant   (or/and  city),  entrepreneurs  increase  when  the  surrounding  city  has  a  greater  number  of  small   establishments.  In  addition,  there  is  a  remarkably  strong  correlation  between  average  establishment  size   and  subsequent  employment  growth  through  startups,  particularly  in  manufacturing  (see  also  Rosenthal  and   Strange  2009).  Growth  of  new  start-­‐ups  is  thus  correlated  to  the  number  of  existing  establishments  in  the   area.  The  direction  of  causality  is  however  not  clear.   Glaeser  and  Kerr  (2009)  also  finds  that  higher  amenities  (defined  as  exogenous  regional  differences  in   climate  factors)  tend  to  drive  up  the  price  of  land  which  attract  low  fixed  cost  industries  that  tend  to  have  a                                                                                                                             1  Though,  as  argued  by  Leff  (1979),  capital  market  imperfections  should  not  be  enough  to  explain  entrepreneurial  differences,  since  it   could  be  argued  that  overcoming  such  difficulties  constitutes  parts  of  entrepreneurial  abilities.     2  See  Ardagan  and  Lusardi  (2008)  where  it  is  shown  that  knowing  someone  with  entrepreneurial  experience  increases  the  likelihood   of  becoming  an  entrepreneur  by  three  percent.  See  also  Djankov  et  al  (2006),  Guiso  et  al  (2004),  Nanda  and  Sorenson    (2007).     3  Gordon  (2004)    and  Bosma  and  Harding  (2007)  claim  that  institutional  differences  explains  the  growth  differences  between  Europe   and  the  US.   4  An  exception,  based  on  US  data,  is  Kim  (2006).     14       Working  Paper  2010:02       higher  share  of  entrepreneurship.  Hence,  high  amenity  places  attract  people  and  firms,  labor  intensive   1 industries,  thereby  inducing  a  positive  impact  on  entrepreneurship.  A  related  observation  is  that  the   fraction  of  entrepreneurs  that  are  active  in  the  region  where  they  were  born  is  significantly  higher  than  the   corresponding  fraction  for  workers.  This  local  preference  is  strongest  in  developed  regions  with  well   developed  financial  sectors.  In  addition,  Michalecci  and  Silva  (2006)  show  that  firms  created  by  locals  are   more  valuable,  bigger,  more  capital  intensive  and  obtain  more  financing  per  unit  of  capital  invested.       Individual  and  cognitive  factors   A  considerable  part  of  the  literature  is  pre-­‐occupied  with  the  cognitive  processes  by  which  individuals   discover  opportunities  and  take  the  decision  to  start  a  new  firm  (Braunerhjelm  2008).  These  studies  confer   that  a  number  of  individual  abilities  and  cognitive  capabilities  are  characteristic  for  entrepreneurs.  For   instance,  risk  acceptance  (Knighterian  uncertainly)  is  claimed  to  distinguished  entrepreneurs  from  other   individual,  as  is  their  tolerance  for  ambiguity.  They  are  also  claimed  to  have  a  stronger  need  to  achieve,  for   2 self-­‐efficacy  as  well  as  preferences  for  autonomy.  In  some  studies  such  individual  characteristics  are  broken   down  at  the  regional  level  in  order  to  capture  how  variations  in  social  capital,  creativity  and  tolerance  may   influence  entrepreneurship  (Coleman  1988,  1990,  Putnam  1993,  Lee  et  al  2004,  Florida  2002,  Florida  et  al   3 2008).   In  a  recent  empirical  analysis,  Sutter  (2009)  sets  out  to  test  the  impact  of  a  composite  factor  defined  as   “psychological  capital”.  Compared  to  previous  studies,  Sutter’s  embrace  a  more  varied  set  of  individually   defined  characteristics,  such  as  those  related  to  enjoying  other  people’s  and  one’s  own  life,  ability  to  control   emotions,  capability  to  enthusiasm  other  people,  etc.,  which  are  all  incorporated  in  a  “psychological  capital”   index.  Controlling  for  other  individual  factors  related  to  access  to  opportunities,  education,  social  capital,   creativity  and  trust,  the  empirical  analysis  conclude  that  the  psychological  index  is  an  important  determinant   of  entrepreneurial  endeavor.     Demand  and  supply  side  explanations  of  entrepreneurship   In  the  previous  literature  there  are  frequent  references  to  demand-­‐  and  supply  side  determinants  of   4 entrepreneurship.  I  am  not  convinced  that  this  is  the  path  forward  to  a  better  understanding  of   entrepreneurship  and  its  effects.  Empirically  it  also  seems  hard  to  pin  down  whether  entrepreneurial   activities  descend  from  the  demand  or  supply  factors,  some  places  just  seem  to  have  greater  supply  of   entrepreneurs  (cf.  Chinitiz  1961,  Sassens  2006,  Glaeser  and  Kerr  2009).  Such  regional  differences  are  likely  to   be  a  consequence  of  local  norms,  traditions,  serendipitous  events,  i.e.  a  residual  of  “unmeasurables”.                                                                                                                             1  Compare  the  studies  by  Black  et  al  (1996),  Hurst  and  Lusardi  (2004)  and  Nanda  (2009),  where  it  is  shown  how  higher  real  estate   process  ease  liquidity  constraints  and  positively  influences  entrepreneurship.   2 See  McClelland  1961,  Williamson  1971,  Timmons  1976,  Kihlstrom  and  Laffont  1979,  Brockhaus  1980,  Budner  1982,  Schere  1982,   Chell  1986,  Begley  and  Boyd  1987,  Chen  et  al  1998,  Zucker  et  al  1998,  van  Praag  and  Cramer  2001,  Markman  et  al  2002,  Agrawal  et  al   2006,  Sorenson  and  Singh  2007,  Benz  and  Frey  2008.   3 Note  the  analogy  to  successful  organizations,  where  psychological  capital  has  been  defined  as  one  important  explanatory  factor   (Luthans  et  al  2007  and  Luthans  and  Youssef  2007).   4  See  for  instance  Fritsch  Mueller  (2007),  Koster  and  Karlsson  (2009).     15       Working  Paper  2010:02       Moreover,  in  some  cases  the  distribution  between  supply  side  and  demand  side  forces  seem  somewhat   ambiguous.  Is,  for  instance,  unemployment  a  variable  that  can  be  derived  from  the  demand  or  the  supply   side  of  the  economy?       Framing  the  sources  as  entrepreneurship  in  terms  of  demand  and  supply  implicitly  also  seems  to  suggest   that  equilibrium  could  be  attained,  i.e.  a  stationary  point  exists  where  either  entries  equal  exits  or  that   dynamics  cease.  That  is  of  course  quite  contradictory  when  one  is  discussing  phenomena  featured  by   extensive  dynamics,  non-­‐linear  behavior  and  experimentally  organized  processes.     Notwithstanding  that  the  distinction  between  demand  and  supply  side  factors  may  be  imprecise,  previous   research  seem  to  allot  most  explanatory  power  to  the  latter.  Among  those  are  knowledge,  broadly  defined,   1 and  how  it  ties  in  with  human  capital  and  knowledge  resources  for  production,  most  important.   Knowledge,  its  organization  and  entrepreneurship   Knowledge   It  could  be  argued  that  there  is  a  dividing  line  in  economics  where  knowledge  is  defined  as  either  an  object   or  a  process.  Preceding  that  discussion  is  the  question  how  information  and  knowledge  are  related  to  each   other.  Sometimes  information  is  defined  as  data  that  can  be  easily  codified,  transmitted,  received,   transferred  and  stored.  Knowledge,  on  the  other  hand,  is  seen  as  consisting  of  structured  information  that  is   difficult  to  codify  and  interpret  due  to  its  intrinsic  indivisibility.  Hence,  it  is  embodied  in  individuals  and   organizations.  Even  though  the  ability  to  indulge  knowledge  relate  to  human  cognitive  abilities  to  absorb  and   select  among  available  information,  individual  competence  may  have  little  or  no  value  in  isolation,  but   combined  with  other  competencies  in  an  organization  it  may  constitute  an  important  part  of  the   organization’s  knowledge  capital.  Part  of  knowledge  is  likely  to  always  remain  “tacit”  and  thus  non-­‐codifiable   (Polyani,  1966).     In  contrast  to  information  that  may  be  interpreted  as  factual,  knowledge  may  be  considered  as  establishing   generalizations  and  correlations  between  variables.  Knowledge  is  also  cumulative  in  the  sense  that  the   better  known  a  field,  the  easier  it  is  to  assimilate  new  pieces  of  knowledge  within  this  field.  Generally,   knowledge  can  be  described  somewhere  between  the  completely  tacit  and  the  completely  codified.  Tacit,   sticky  or  complex  knowledge,  i.e.  highly  contextual  and  uncertain  knowledge,  seems  best  transferred  via   face-­‐to-­‐face  interactions  (von  Hippel  1988).  Proximity  thus  matters  since  knowledge  developed  for  any   particular  application  can  easily  spill  over  and  find  additional  applications.   There  will  always  be  limitations  in  accessing  knowledge.  Measures  concerning  access  and  level  of  knowledge   tend  likewise  to  be  partial.  Indeed,  even  if  the  total  stock  of  knowledge  were  freely  available,  knowledge   about  its  existence  would  not  necessarily  be.  The  knowledge  space  is  in  itself  unbounded,  implying  that   decisions  are  made  under  “bounded  rationality”  (Simon  1959).  Hence,  partiality  and  subjectivity  tend  to                                                                                                                             1  Globalization  is  claimed  to  influence  both  the  demand  (lower  transport  costs,  expansion  of  markets,  etc.)  and  supply  side  factors   (migration,  FDI,  spin-­‐offs,  etc.)  of  entrepreneurship  (Karlsson  et  al  2009).           16       Working  Paper  2010:02       influence  decisions.  Building  on  these  insights,  Hayek  (1945)  concluded  that  a  key  feature  of  a  market   economy  is  the  distribution  of  knowledge  across  a  large  number  of  individuals.  Consequently,  divergence  in   the  valuation  of  new  ideas  across  economic  agents,  or  between  economic  agents  and  decision-­‐making   hierarchies  of  incumbent  enterprises,  can  also  be  expected.  That  constitutes  one  fundamental  source  of   entrepreneurial  opportunity  and  also  implies  a  market  structures  dominated  by  imperfect  information  and   imperfect  competition.   Another  typical  characteristic  of  knowledge  is  its  non-­‐excludability,  implying  that  only  part  can  be   appropriated  by  the  “owner”  while  part  of  knowledge  diffuse  to  an  indefinite  number  of  users.  Low  costs  in   transmitting  codified  knowledge,  together  with  considerable  fixed  costs  in  acquiring  and  compiling   knowledge,  points  to  the  difficulties  in  knowledge  producing  activities.     Organization  of  knowledge  production  and  entrepreneurship   The  way  knowledge  production  is  organized  has  shifted  over  the  years  and  distinct  differences  can  also  be   observed  between  Europe  and  the  US  (Carlsson  et  al  2009).  Furthermore,  its  organization  is  shown  to  have   th influenced  the  rate  of  entry  of  new  firms.  In  the  19  century  an  interdependence  emerged  between  the   needs  of  the  growing  US  economy  and  the  contemporary  rise  of  university  education  –  what  Rosenberg   (1985)  has  called  “endogenous  institutions”.  In  Europe  the  role  of  the  universities  was  more  oriented   towards  independent  and  basic  research,  as  manifested  by  the  Humboldt  University  in  1809.  The  difference   in  knowledge  production  seems  to  have  given  the  US  a  technological  lead  in  the  20th  century,  even  though   basic  science  was  weak  in  the  US  until  the  1930s/40s.  The  research  university  in  the  US  was  a  post  world  war   two  institution,  basically  designed  as  a  modified  version  of  the  Humboldt  system,  where  competition  and   pluralism  was  kept.   To  develop  and  improve  the  findings/inventions  that  were  the  base  of  the  2nd  industrial  revolution  in  the   th th late  19  century,  the  beginning  of  the  20  century  saw  the  development  of  corporate  lab,  where  also  basic   research  was  conducted  (the  first  corporate  lab  was  set  up  in  Germany  in  the  1870s).  The  close  links   between  industry  and  science,  characterized  by  collaborative  research  and  two-­‐way  knowledge  flows,  were   thus  reinforced.  Within  firm  research  was  much  higher  in  the  US  than  in  Europe,  employment  of  scientists   and  engineers  grew  tenfold  in  the  US  between  1921  and  1940.     During  the  1940s  there  was  a  huge  increase  in  R&D-­‐spending  driven  by  the  war,  while  the  following  decades   saw  a  decrease  in  R&D  relative  to  GDP.  Basic  research  diminished,  but  also  firms  cut  down  on  their  R&D   spending.  As  a  result,  firms  seemed  to  lose  touch  with  their  knowledge  base,  spin-­‐offs  declined  and  there   was  also  less  growth  in  large  firms.   In  the  beginning  of  the  1980s  the  situation  switched  again,  propelled  by  a  number  of  institutional  reforms   directed  towards  intellectual  property  rights,  pension  capital  and  taxes.  That  was  paired  with  a  partly  new   set-­‐up  of  organizations,  such  as  SBIR  where  2,5  percent  of  federal  agencies  research  funding  must  go  the   SMEs,  and  deregulations  of  large  part  of  the  US  economy  that  gave  rise  to  new  entrepreneurial   opportunities.  Thus,  entrepreneurial  opportunities  were  created  through  scientific  and  technical  discoveries   which  were  paralleled  by  governmental  policies  which  inserted  a  new  dynamism  in  the  US  economy.  A  shift   followed  away  from  large  incumbent  firms  to  small,  innovative,  skilled-­‐labor  intensive  and  entrepreneurial   entities  (Carlsson  et  al  2009).       17       Working  Paper  2010:02       To  conclude  this  section,  even  though  entrepreneurship  is  shown  to  be  important  for  opportunity   recognition,  discovery  and  creation  (Shane  and  Venkatamaran  2000),  little  is  said  about  the  origin  of   opportunities  in  the  entrepreneurship  literature.  This  thread  is  taken  up  by  Acs  et  al  (2009),  suggesting  that   knowledge  endowments,  and  the  way  knowledge  spillovers  are  materialized,  constitutes  the  perhaps  most   important  source  for  entry  and  entrepreneurship.  Obviously,  new  insights  –  knowledge  –  should  be   instrumental  in  the  dynamics  described  by  Schumpeter  in  the  following  way:  “Incessantly  revolutionizes   the  economic  structure  from  within,  incessantly  destroying  the  old  one,  incessantly  creating  a  new  one”   (Schumpeter  1942,  p.  83).  How  higher  rates  of  entrepreneurship  augments  the  possibilities  of  turning   knowledge  in  to  innovations  and  set  forces  of  creative  destruction  into  motion,    will  be  further  considered  in   the  next  section.       18