Entrepreneurial Catch Up and New Industrial Competence Bloc Formation in the Baltic Sea Region

We are grateful to Anjit Singh for very appropriately pointing out that we had failed to mention the successful record of “Government dictatorial entrepreneurship” that took, for instance, South Korea onto a fast long term growth path, an observation that is also relevant for the current policies of making the Chinese economy catch-up with Western industrial performance. Since our policy proposal in the final Sect. 6 comes out very differently from that, we address that policy alternative in that later context.

This in turn relates to the current discussion about globally increasing inequality. Are the economies of the world economy converging long term onto the same national standards of living, as was believed not long ago (Dollar and Wolff 1988), or diverging (Pritchnett 1997; Eliasson 2007; Braunerhjelm 2008; Ballot and Taymaz 2012; Piketty 2014). The industrial dynamics of the BSR pits those two hypotheses against each other.

On the Swedish Micro to Macro model. See further below.

We have been very careful not to draw conclusions where the details of the national economic classifications matter. From the point of view of our Baltic theme, the interesting region to study would also includes a significant part of the upstream river economies of Russia and (above all) Germany, which could today, as in the past, be integrated through trade across the Baltic, i.e. if the needed physical infrastructure (for instance harbor facilities) could be mobilized through governmental initiatives and entrepreneurship. For practical, and also to some extent for analytical reasons we have decided to stay as much as possible with the definitions used by the Baltic Development Forum in their State of the Region Report (2011), in which we participated.

This is a methodologically oriented paper. Most of the empirical material supporting our conclusions is found in Braunerhjelm and Eliasson (2011), and in a current updating of that report under way.

Branstetter (2000) makes the additional point that spillovers go both ways, both from investing firms to indigenous firms, and from indigenous firms to investing firms. The latter, however, is most common when FDI occurs between advanced economies, where investing international firms often function as global intelligence organizations that tap into foreign technology networks (Eliasson 1991c).

Each category is represented by at least one module that interacts through markets with all other modules in the Swedish Micro (firm) to Macro model. This makes it possible for us to discuss growth, or the absence of growth in BSR economies directly in terms of the dynamics of that model.

Selection through endogenous price and quantity determination in markets is the main non-linear feature which generates non-reversible trajectories that depend in the long term on seemingly insignificant circumstances. Complexity makes the long run virtually unpredictable as to composition, even if something might be said on macro categories such as GNP growth. Table 1 presents the taxonomy of endogenous growth. Endogenous entry sets the model economy in growth motion through competition, by forcing less productive incumbent firms to raise performance through reorganization or rationalization, or, if unsuccessful, to die (exit). Since entrepreneurial entry is endogenous (Eliasson 1991b; Eliasson et al. 2004, 2005: 333ff; Taymaz 1991a, b; Braunerhjelmet al. 2010a, b), this means that loading the model with the case data that we discuss, the macro economic growth consequences for the model economy can be calculated, conditional on the initial empirical micro macro structure of Swedish industry, and calibrated coefficients governing the market dynamics of endogenous growth processes. Non linear, initial state dependent models normally exhibit what is nowadays often called chaotic behavior (Eliasson 1977, 1978, 1991a; Eliasson and Taymaz 2000).

Also see Andersson et al. (2012) who show that entry still affects productivity among incumbents after several years, the delayed productivity effect, a dynamical systems effect that was “theoretically” demonstrated to exist, and be significant, in early simulation experiments on the Swedish Micro to Macro model (Eliasson 1978: 52ff).

Based on forecasts of such models that were reestimated every quarter on the quarterly data generated in the Micro to Macro model simulations.

This also means that we disassociate ourselves from the innovation systems propositions to stimulate growth through R&D subsidies (Freeman 1987; Nelson 1993 and Lundvall 1992) that replaced Keynesian demand policies when they became discredited in the 1980s as a means to restore growth and employment.

For reasons of space the following empirical analysis will have to be brief and incomplete. For full detail we refer to Braunerhjelm and Eliasson (2011), and an updated version in progress. The main point here is to explain the logic of our method in linking the empirical results to the theoretical categories of Sect. 2 above (Tables 1 and 2). For more detail on the method see the Supplement.

This is a brief statement of results from the more comprehensive empirical analysis in Braunerhjelm and Eliasson (2011).

As one interviewed banker responded to the question; What more could Estonia do? “Not much except patiently wait for the results”.

Of course, trade in technology assets and FDI cannot be clearly distinguished from one another, since FDI always involves exchange of assets over markets. FDI, however, often takes the form of direct investments of one firm in another country within its own organization, often to exploit some comparative advantage in that country, such as low wages. Trade in technology assets in specialized markets, for instance strategic acquisitions, on the other hand, is a phenomenon that is primarily, and increasingly found in the wealthy industrial economies to complement an existing technology portfolio of the firm (Eliasson and Eliasson 2005).

Except that Germany comes in somewhat behind Estonia in the aggregate ranking of Ease of Doing Business 2011, because of difficulties of starting a business, and relatively less protection of investors (Table 2).

This assumption is of course as far distant from reality that one can imagine. As long as you understand that this is the crucial assumption you will, however, be able to say something meaningful about ex post productivity measurements. Above all, however, the conclusions should be, that to proceed further in entrepreneurship and industrial dynamics research you have to explicitly model the ex ante ex post realization process at the micro market level (Eliasson 1992, 2009a, 2014).