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Journal ArticleDOI

Emergence of the entrepreneurial society

01 Sep 2009-Business Horizons (Elsevier)-Vol. 52, Iss: 5, pp 505-511

AbstractOnce dominated by a managed economy, the United States—and, eventually, the entire world—came to acknowledge the incredible power of the entrepreneurial movement of the 1990s. The entrepreneurial society refers to places where entrepreneurship has emerged as a focal point for economic growth, sustainable job creation, and competitiveness in global markets. This article explains why and how the entrepreneurial society emerged, and why it is key to taking advantage of the opportunities afforded by globalization by enhancing the innovation prowess of a nation.

Topics: Globalization (53%), Entrepreneurship (53%)

Summary (2 min read)

Max Planck Institute, Germany

  • For years, I could not wait to get to Ireland to see and to experience this great economic boom, but I guess I should have come a few years sooner.
  • Since European economies did not prosper in the 1990s, it was not surprising that at the turn of the century Europe was making efforts to try to reignite growth and to generate employment.
  • Countries with a deficiency of large corporations focused their develop - ment largely on attracting inward foreign direct investment.
  • So the purpose of this lecture and the underlying research behind it, is to try to uncover what entrepreneurship has to do with economic growth.

II A PUBLIC POLICY DILEMMA: EFFICIENCY VERSUS DECENTRALISED DECISION MAKING

  • An entire generation of scholars in the emerging field of Industrial Organisation identified the driving force of efficiency and productivity at firm and industry levels.
  • What this meant for public policy was that there seemed to be a trade-off between having the scale economics of concentrated industry and firms, on the one hand, as against the benefits of having decentralised decision makers on the other hand.
  • Countries like Sweden and France favoured concentrated ownership of industries.
  • If you look at examples in the chemical industry, say Hoechst, you can see that while total employment went down a little, employment increased outside of Germany, again leading to many fewer employees in Germany.
  • It was there I first heard the phrase ‘Swedish Paradox’, which states that if investing in knowledge is so important, like the economists say it is, why is growth and employment creation so elusive in Sweden.

IV THE KNOWLEDGE FILTER

  • Well, had European leaders looked across to the other side of the Atlantic, they would have discovered that they did not have a monopoly on this paradox.
  • The authors see this knowledge filter not just from knowledge generated in universities, as Senator Bayh was talking about, but they also see it in knowledge generated in the private sector from private companies.
  • So they went to their boss, they went to their boss’s boss and said “let us start producing this business software”.
  • They went to the three top banks in Germany.
  • The point being that I think any time you hear of a knowledge context where the asset is not physical but rather intangible, like ideas, example after example after example of what one person thinks is a good idea, another person might not.

V ENDOGENOUS ENTREPRENEURSHIP

  • So this is what leads to what the authors now call endogenous entrepreneurship, which refers to people endogenously creating a new firm to pursue and implement their ideas, dreams, and passions when they are unable to in the context of an existing firm.
  • This suggests that in order to get more innovation the authors do not just start with the firms that exist but rather start with society, people, and then ask how can these people be facilitated and enabled to pursue ideas and start companies that are going to generate growth.
  • High-growth regions have a low knowledge filter, so that knowledge is able to spillover.
  • The authors know that this is happening because of globalisation, with employment being shifted due to outsourcing and offshoring, to some degree by the companies themselves to other places.
  • I think that this is why the authors are seeing such a move towards an entrepreneurial economy and the European entrepreneurial policy response.

VII EUROPEAN ENTREPRENEURIAL POLICY RESPONSE

  • My view is that Europe has gone through a process of shifting away from the old economy or the capital-based economy characterised by the post-World War II public policy debate, towards this very different economy, what I call an entrepreneurial economy.
  • Places that do well in the European and, North American contexts have something extra over capital – they have entrepreneurship.
  • It was to create companies like General Motors, US Steel – the great manufacturing companies.
  • There was also recognition of the law of comparative advantage.
  • In the middle of the 1990s the continent of Europe really went through stagnation – low growth, and more unemployment, and it was clear that globalisation was hitting Europe.

VIII CONCLUDING REMARKS

  • To drive efficiency, you need economies of scale, but this raises the challenge when firms are not trusted to grow unabated.
  • Public ownership regulations, tended to be national policies.
  • Let me finish with a quote from Goethe which suggests that maybe this is not so new.

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The Economic and Social Review, Vol. 40, No. 3, Autumn, 2009, pp. 255–268
The Emergence of the Entrepreneurial Society*
The 2008 Geary Lecture
DAVID B. AUDRETSCH**
Max Planck Institute, Germany
I INTRODUCTION
I
t is a real honour to be here in Ireland to celebrate the founding Director of
the Institute, R.C. Geary. If I understand correctly, I am visiting on the
second anniversary of the Institute’s move into this building. It is a great
pleasure to be able to share this occasion with you as well as to participate in
a lecture series that has a long distinctive history of very interesting speakers.
This is actually my first trip to Ireland. For years, I could not wait to get to
Ireland to see and to experience this great economic boom, but I guess I should
have come a few years sooner.
The topic of my talk today is what I term the entrepreneurial society or the
emergence of the entrepreneurial society, which suggests that something has
changed. The Director and I were speaking on the way here about the fall of
the Berlin Wall which was nearly twenty years ago, in November 1989, shortly
before we first met. A lot of euphoria followed not only because Germany was
reuniting but because Europe was reuniting, and there was also the end of the
Cold War. In this euphoria people expected an economic surge to follow, freed
from the burden of supporting the Cold War military, but also the related
255
* This article is an edited version of the Geary Lecture delivered by Professor David B. Audretsch
at The Economic and Social Research Institute in Dublin, on 13 November 2008.
** David B. Audretsch is the Director of the Max Planck Institute of Economics in Jena, Germany.
He also serves as a Scholar-in-Residence at the Ewing Marion Kauffman Foundation. In addition,
he is an Honorary Professor at the Friedrich Schiller University of Jena, Research Professor at
Durham University, a Distinguished Professor and the Ameritech Chair of Economic Develop ment
and Director of the Institute for Development Strategies at Indiana University, an External
Director of Research at the Kiel Institute for the World Economics, and is a Research Fellow of
the Centre for Economic Policy Research (London).
01 Audretsch article_ESRI Vol 40 10/09/2009 12:59 Page 255

social and political burden. However, we know the 1990s that followed were
actually pretty tough – perhaps not for those of you here in Ireland – but all
across the rest of Europe.
Since European economies did not prosper in the 1990s, it was not
surprising that at the turn of the century Europe was making efforts to try to
reignite growth and to generate employment. What was surprising, I think,
was the completely new direction Europe took at the Council of Lisbon 2000:
In the so-called Lisbon Strategy, the EU made a commitment not just to be the
leader of knowledge in the West but also the leader in entrepreneurship.
Romano Prodi, then President of the European Commission, said that 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”.
That was surprising, at least to me and, I suspect to many other
economists I know. I had spent the 1970s studying economics at Bachelors
and Masters degree levels, without ever hearing anything about
entrepreneurship. When public policymakers looked to ignite economic growth
and generate employment they typically turned to large corporations. Charlie
“Engine” Wilson, the Chairman of General Motors, declared “What’s good for
General Motors is good for America.” The management scholar, Alfred
Chandler provided meticulous empirical evidence confirming that economies
of scale and scope generated higher levels of efficiency and productivity in the
largest corporations.
Joseph Schumpeter, echoed this view, “Since capitalist enterprise, by its
very achievements, tends to automise progress, we conclude that it tends to
make itself superfluous – to break to pieces under the pressure of its own
success. The perfectly bureaucratic giant industrial unit not only ousts the
small- or medium-sized firm and ‘expropriates’ its owners, but in the end it
also ousts the entrepreneur and expropriates the bourgeoisie as a class which
in the process stands to lose not only in its income but also, what is infinitely
more important, its function.”
Similarly, John Kenneth Galbraith concluded that the entrepreneur “…is
a diminishing figure…. Apart from access to capital, his principal
qualifications were imagination, capacity for decision and courage in risking
money, including, not infrequently, his own. None of these qualifications is
especially important for organising intelligence or effective in competing with
it.” As Galbraith conceded, “power” has shifted from entrepreneurs to the large
organisation, “So it is with organisation – organised competence – that the
power now lies.”
Countries with a deficiency of large corporations focused their develop -
ment largely on attracting inward foreign direct investment. In fact, from
256
THE ECONOMIC AND SOCIAL REVIEW
01 Audretsch article_ESRI Vol 40 10/09/2009 12:59 Page 256

what I have read about the 1990s, a key component of Ireland’s strategy to
generate growth was to try to attract in more foreign direct investment.
Certainly, in developing countries it was all about attracting physical capital
first, with the expectation that growth and employment would follow.
My lecture today is based on a research agenda that I have been pursuing
for some years. In essence the research tries to understand why policy
throughout most of the OECD countries, regions, and cities – perhaps most
strongly at regional and city levels – has been looking to entrepreneurship as
the generator of economic growth. So the purpose of this lecture and the
underlying research behind it, is to try to uncover what entrepreneurship has
to do with economic growth. To do this, I am going to explain what we call the
“Knowledge Spillover Theory of Entrepreneurship”, which suggests that
entrepreneurship is important because it serves as a key conduit for
knowledge spillovers. Knowledge is created in one organisation, whether a
large research corporation or laboratory. However, knowledge does not just
‘appear in new organisations, like manna from heaven as the Solow growth
model implied. Rather it requires individuals to take that knowledge –
removing it from the originating organisation and bringing it to another, or
new, organisation and then commercialising it. Finally, not wishing to suggest
what public policy should be, as that is probably too bold for me, I want to
interpret what public policy seems to have been doing for some time now, for
a decade at least, which is to treat entrepreneurship as a bona fide instrument
of economic growth.
II A PUBLIC POLICY DILEMMA: EFFICIENCY VERSUS
DECENTRALISED DECISION MAKING
An entire generation of scholars in the emerging field of Industrial
Organisation identified the driving force of efficiency and productivity at firm
and industry levels. They concluded, after developing theory and conducting
empirical research, that economies of scale are important, which, in
retrospect, is not especially surprising when you think about manufacturing
industry, where physical capital matters. What this meant for public policy
was that there seemed to be a trade-off between having the scale economics of
concentrated industry and firms, on the one hand, as against the benefits of
having decentralised decision makers on the other hand. In effect, it was seen
as a trade-off between efficiency and democratic decentralised decision
making.
What this meant for public policy was really how to live with the ‘beast of
big business’: and different countries had different responses to this policy
THE EMERGENCE OF THE ENTREPRENEURIAL SOCIETY 257
01 Audretsch article_ESRI Vol 40 10/09/2009 12:59 Page 257

quandary. Countries like Sweden and France favoured concentrated
ownership of industries. In Sweden, Saab was owned by the government, as
was Renault in France – to name just two governmental ownership examples.
Other countries, such as Germany and the Netherlands, put heavy regulation
in place to prevent private industry from abusing its market power. The
United States had actually a lot of public ownership and strong regulation. In
addition, America placed a strong reliance on antitrust policy, or what is
referred to as competition policy in Europe.
What about entrepreneurship and entrepreneurship policy? Certainly the
public policy debate focusing on economic growth and employment creation
during the early post-World War II era, typically ignored entrepreneurship, or
the idea of helping people start businesses. When the US Small Business
Administration was established in 1952, the US Congress mandated that the
Small Business Administration should protect and preserve small business.
There was a clear sense that while small businesses were perceived as
essentially inefficient, they were desirable for social or political reasons –
keeping a kind of dispersed decision making intact but with an acknowledged
high opportunity cost, in economic terms. That was essentially the role of
entrepreneurship during the post-World War II era. But we know that
globalisation put an end to the competitiveness of places based on physical
capital. What we saw was the de-linking of the competitiveness of firms from
the competitiveness of what Germans call “der Standort.
As shown in a study carried out for the German Ministry of Economics,
employment at the top corporations in Germany changed after the Berlin Wall
fell. At Volkswagen, total employment stayed the same, with employment
outside of Germany increasing, while employment within Germany decreased.
The company was doing fine – we know that its profits were fine. There were
fewer employees in Germany and more employees outside of Germany due to
what we now call offshoring, substituting technology for capital and
employment in Germany. This pattern replicates itself throughout the auto
sector and elsewhere. Overall, the German auto industry lost 161,000 jobs in
Germany while creating 30,000 in other countries. If you look at examples in
the chemical industry, say Hoechst, you can see that while total employment
went down a little, employment increased outside of Germany, again leading
to many fewer employees in Germany. For the whole sector, we see in the
chemical industry a loss of 80,000 jobs in Germany, with 14,000 jobs added
outside Germany. This is true for almost all of the largest German companies.
While the companies and the industries generally were doing fine, because of
globalisation German firms were creating jobs outside their national
boundaries, and consequently Germany itself saw fewer manufacturing
employees.
258
THE ECONOMIC AND SOCIAL REVIEW
01 Audretsch article_ESRI Vol 40 10/09/2009 12:59 Page 258

In effect, globalisation hit Germany relatively early. The same pattern
followed in England, Sweden, and the US. I would not want to argue whether
this adjustment pattern was good or bad, but rather to recognise that this was
probably the inevitable impact of globalisation, and that it amounted to a very
large change.
III IS INVESTING IN KNOWLEDGE THE DEVELOPMENT POLICY
PANACEA?
Fortunately, economics had an answer to help policymakers to deal with
this major change. The answer was to move away from the public policy focus
on investing in physical capital towards recognition of the role of investing in
knowledge. Paul Romer and a whole generation of scholars shifted to models
of endogenous growth to focus on investment in knowledge. They recognised
that while you can shift factories from high cost locations in Europe and North
America to Central and Eastern Europe or Asia, it is a lot harder to shift
ideas and idea creation. Face-to-face communication is critical for ideas and
idea creation and you cannot just outsource that kind of creative process.
So in what was known as the ‘endogenous growth model’ or the ‘new
growth model’, knowledge became the focus and it framed the policy debate. In
this policy context about five or six years ago, I was invited to visit Stockholm.
Sweden, like Germany and much of Europe but not Ireland had suffered from
stagnant growth in the 1990s, with unemployment steadily increasing. So I
was asked to discuss what should Sweden do in this context. As a kind of a
born again growth theorist, I marched into Stockholm and I told the host, the
Swedish Minister of Economics, exactly what Sweden should do: It needed to
invest in knowledge, it needed to invest in R&D, it needed to invest in
universities and invest in human capital, education, and so on. I remember
our host very kindly assuring the audience that while the Professor must be
correct, nobody will ever believe him because by all the measurements,
Sweden was either number one or two in the world in terms of patents, in
terms of R&D per capita, and in terms of university education. Further, the
Pisa Studies on Pre-University Education showed Sweden to be way up at the
top. So it is hard to know what Sweden should really be doing differently. It
was there I first heard the phrase ‘Swedish Paradox’, which states that if
investing in knowledge is so important, like the economists say it is, why is
growth and employment creation so elusive in Sweden.
In Brussels, Romano Prodi, then President of the European Commission,
noting that the problem was not just Swedish, but pan-European, renamed it
the “European Paradox”. Certainly, in Northern and Western Europe, if you
start to think about knowledge, not in the narrow technical sense focused on
THE EMERGENCE OF THE ENTREPRENEURIAL SOCIETY 259
01 Audretsch article_ESRI Vol 40 10/09/2009 12:59 Page 259

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In this euphoria people expected an economic surge to follow, freed from the burden of supporting the Cold War military, but also the related