The rise of the entrepreneurial economy and the future of dynamic capitalism
Introduction
It has been nearly a quarter of a century since Bruce Kirchhoff's (1989, p. 161) prescient analysis of the shift towards an entrepreneurial economy: “There is growing interest in dynamic modeling of capitalism as recent experience has demonstrated the importance of innovation in shaping the structure and growth rate of capitalist nations.” As Kirchhoff suggested, for a long time developed economies could be characterized as what Audretsch and Thurik (2001) subsequently termed a managed economy. The inventions of the division of labor, economies of scale and scope, paid labor and the fine-tuned cooperation between man and machine following the industrial revolution led to the rise of the large multinational enterprise. This enterprise was clearly the dominant form of organization until the 1980s. Statistical evidence, gathered from both Europe and North America, points towards the increasing presence and role of large enterprises in the economy in this period (Caves, 1982, Brock and Evans, 1989, Chandler, 1990). This was the era of mass production, when economies of scale and scope seemed to be the decisive factor in dictating efficiency. This was the world described by Galbraith (1956) in his theory of countervailing power, where the power of ‘big business’ was balanced by that of ‘big labor’ and ‘big government’. Stability, continuity and homogeneity were the cornerstones of the managed economy (Audretsch and Thurik, 2001). Rising levels of prosperity absorbed the goods and services created by the typical multinational enterprise in this managed economy.
Before the fall of the Berlin Wall and the ensuing wave of globalization, the conventional wisdom predicted that small firms would wither away. In particular, with the rise of mainframe computing, it was predicted that this technology would be something of a final blow for small-scale operations (Audretsch, 2007b). Small firms were viewed as something Western countries needed to ensure decentralized decision making, obtained at the unfortunate cost of efficiency. Studies from the United States in the 1960s and 1970s revealed that small businesses produced at lower levels of efficiency than larger firms (Pratten, 1971, Weiss, 1976). Small firms were also paying lower salaries: empirical evidence from both North America and Europe found a systematic and positive relationship between employee compensation and firm size (Brown and Medoff, 1989). Based on R&D measures, small businesses accounted for only a small amount of innovative activity (Acs and Audretsch, 1990, Chandler, 1990, Scherer, 1991, Audretsch, 1995). The relative importance of small firms and self-employment had been declining over time in both North America and Europe (Scherer, 1991, Wennekers et al., 2010), in a sense fulfilling what Schumpeter (1942) had already predicted in the 1940s.
However, this managed economy has been replaced by the entrepreneurial economy. The managed economy is defined as an economy where economic performance is positively related to firm size, scale economies and routinized production and innovation. By contrast, the entrepreneurial economy is defined as an economy where economic performance is related to distributed innovation and the emergence and growth of innovative ventures (Kirchhoff, 1994, Audretsch and Thurik, 2000, Audretsch and Thurik, 2001). This replacement did not just happen in a few regions, such as Silicon Valley and the Research Triangle in North Carolina, or a single country, such as the United States, but rather in most developed countries (Drucker, 1985, Baumol, 2002, Wennekers et al., 2005, Acs, 2006, Baumol et al., 2007, Audretsch, 2007b, The Economist, 2010a). Whereas the managed economy was characterized by a divergence of institutions and policy approaches to the underlying economic problem of that era, maximizing the efficiency and productivity of large scale production while minimizing any negative externalities from a concentration of economic power, the entrepreneurial economy is characterized by a convergence of institutions and policy approaches designed to facilitate the creation and commercialization of knowledge through entrepreneurial activity.
The recognition of the emergence of the entrepreneurial economy helped to trigger policy debates to promote entrepreneurship through “entrepreneurship policy”. Governments, spanning the local, city, regional, national and even supranational levels, such as the EU, began a vigorous and targeted effort to spur the startup of firms and subsequent growth and survival.
This shift towards an entrepreneurial economy involves a move towards a more dynamic form of capitalism (Kirchhoff, 1994). Although Audretsch and Thurik, 2000, Audretsch and Thurik, 2001 identify how the manifestations and characteristics of the managed economy differ from those characterizing the entrepreneurial economy, the exact reasons triggering the shift from the managed to the entrepreneurial economy remain scattered (Audretsch, 2007b, Baumol et al., 2007). The purpose of the present paper is to explain why the shift from the managed to the entrepreneurial economy has taken place in the framework of a model. Also, some implications for public policy are given. In our model technological change is the crucial element of the explanation. However, as we will emphasize, the impact of technological change in leading to a shift from the managed to the entrepreneurial economy has been imbedded in a myriad of supporting factors, including increased globalization, corporate reorganization, increased knowledge production and higher levels of prosperity.
Section snippets
A model of the shift to the entrepreneurial economy
The present paper follows the tradition of Kirchhoff (1994) and his focus on the key role that entrepreneurship plays in generating innovation and economic growth by explicitly identifying those factors associated with the rise of information and communication technologies (ICT) influencing the shift from the managed to the entrepreneurial economy. While information and communication technologies can have different meanings for various contexts, the definition commonly applied by the OECD is
Information and communication technology
Although Karl Marx, in his analysis of technological determinism, may not have been the first, he certainly was among the most prominent scholars to make a link between technology and institutions, broadly considered. The most prolific technological change over the last decades involves the rise of ICT. Modern information technology begins with the invention of the transistor at Bell Labs in 1947, which was the basis of the Nobel Prize in Physics in 1956 (Shurkin, 2006). The transistor replaced
ICT and the demise of the communist system
A third factor conducive to entrepreneurship comes from the demise of Soviet communism. This section will demonstrate that this demise is, in part, attributable to the advent of ICT. The early theories about the demise of the Soviet Union (i.e., the generic non-viability of the socialist economic system, the rise of a popular revolution against the system, the existence of foreign pressures, and the betrayal at the very top of the Communist Party) are contested by Kotz and Weir (1997), who show
Globalization
Although the shift from the managed to the entrepreneurial economy is partly attributable to technological change, and in particular the advent of ICT, this is not the sole factor or reason for the shift. A second factor involves the process of globalization. As with all grand concepts, a definition of globalization is elusive and elicits criticism. The term is generally connected to the (rapid increase of) free movement of goods, capital, people and ideas around the globe. That domestic
Corporate reorganization
The pressures of globalization and the ICT revolution led to waves of reorganizations in the world of large corporations that provided the essence of the managed economy. Corporate reorganization involves the changing internal and external organization of corporations, demonstrated by for example increased outsourcing and offshoring, and reorganized value chains. This has led to new business models of large corporations (Brynjolfsson and Hitt, 2000), and more quantitatively, to downsizing of
Knowledge production
The policy response to globalization, both in public policy debates and in the economics literature, was to shift the source of competitiveness and growth away from physical capital and towards knowledge and ideas. In the policy debates, this shift was made clear in the Lisbon Mandate, and in the economics literature, it emerged as the critical factor underlying economic growth in the new growth theory or models of endogenous growth (Lucas, 1988, Romer, 1990). Endogenous growth theory assumes
Prosperity and entrepreneurship
In the sections above, we describe how the ICT revolution, together with globalization as the governing principle of economic behavior and spurred on by the demise of the communist system, led to expanded space for entrepreneurship through new organizational structures and a greater emphasis on knowledge as a production factor. Both investments in ICT (Mankiw et al., 1992, Jorgenson and Stiroh, 1999, Jorgenson, 2001) and globalization (Dollar and Kraay, 2004, Crafts, 2004) are found to be
Implications for public policy
Recognizing the ubiquitous nature of the shift from the managed to the entrepreneurial economy leads us to rethink the appropriate policy response. This regime shift helped to trigger an awakening in policy debates to promote entrepreneurship through “entrepreneurship policy”. Governments, spanning the local, city, regional, national and even supranational levels, such as the European Union, began a vigorous and targeted effort to spur the startup and growth of new firms. An important
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