Entrepreneurship, Innovation and Growth

1Entrepreneurship,InnovationandGrowthT.N.Srinivasan*AbstractThethreebasicsourcesofgrowthinanyeconomyaregrowthininputsofproduction,improvementsintheefficiencyofallocationofinputsacrosseconomicactivities,andinnovationthatcreatesnewproducts,newusesforexistingproductsandbringsaboutincreasesintheefficientofuseinputs.Solow’spath-breakinganalysisofgrowthintheUSeconomyduringthefirsthalfofthetwentiethcenturyshowedthatthecontributionofgrowthininputsofproduction,namelylabourandcapitaltoaggregategrowth,wasaroundhalf,andtheremaininghalf,thatistheunexplainedSolowresidual,iscommonlyattributedtotechnicalprogressorthecontributionofinnovationinthesenseIhaveusedtheterm.Economicgrowthisdrivensignificantlybyinnovationwhichincreasesthestockofusefulknowledge.Theprocessofinnovationislargelyendogenous,influencedbyincentives,institutionsandpoliticaleconomy.Thepaperexpositstheanalyticsofthecontributiontogrowthofinnovationdrawingonsomerecentmodelsofendogenousgrowth.Increasingopennessbyreducingtradebarriersandbyencouragingforeigninvestment,playsanimportantroleinspurringinnovation,particularlyasitoccursthroughlearningbydoing.InsomemodelsoftradebetweentheindustrializedNorthwhichinnovates,andthedevelopingSouthwhichimitatesNortherninnovation,tradeacceleratestherateofinnovationintheNorthbecauseofthethreatofimitationbytheSouth.Entrepreneurshipandfactorsthatareconducivetoitsexistenceareexplored.Anentrepreneurisonewithaninnovativeideawhichsheherselforotherstowhomshesellsorlicensesitimplement.Theentrepreneurassumesinpartoralloftheriskofprofitorlossofthebusinessventure.Issuesofaccesstocapitalorfinance,intellectualpropertyprotectionandthechancesoftheideaoftheentrepreneurbeingstolenorappropriatedifsheherselfdoesnotimplementitareexplored.Theroleofventurecapitalinfinancingstart-upenterprisesisfoundtobeimportant,bothbecauseitrelievesfinancialconstraintsandbecausetheventurecapitalistcarefullyscreenstheideasoftheentrepreneurandalsomonitorstheenterpriseafterfinancing.Thestrengthofintellectualpropertyregimes(IPRs)improvesthereturnstocommercializationofaninnovation.Publicprovisionofcapitaltosmallstart-upenterprises,particularlyinthehigh-techsector,hasbeenattemptedintheUS.Thepaperreportsontheempiricalanalysesoftheirsuccess.ResearchonnationalR&Dsystemsandspendingissummarized.ThephenomenalsuccessoftheIndiansoftwareindustry,andthecontributionofIndia’seducationsystemandpublicpolicies(particularlyforeigntradeandinvestmentpolicies)tothesuccessofthisindustryarediscussed.ThepaperconcludesbyexaminingtherolesofpatentprotectionandthestrengthofIPRsonincreasingtherateofinnovation.Theempiricalevidenceonthesignificanceofmonopolyrightsthroughgrantofpatentsontherateofinnovationandcost-effectivenessofpatentsascomparedtoalternativesinspurringinnovationisfoundtobeinconclusive.Finallytheimportanceofopennesstoforeigntradeandforeigndirectinvestmenttodevelopingapositiveclimateforinnovation,entrepreneurshipandgrowthisstressed.*SamuelC.Park,Jr.ProfessorofEconomics,YaleUniversity,NewHaven,CTUSA21.IntroductionThethreebasicsourcesofgrowthinanyeconomyaregrowthininputsofproduction,improvementsintheefficiencyofallocationofinputsacrosseconomicactivities,andinnovationthatcreatesnewproducts,newusesforexistingproductsandbringsaboutincreasesintheefficientlyofuseinputs.Solow’s(1957)path-breakinganalysisofgrowthintheUSeconomyduringthefirsthalfofthetwentiethcenturyshowedthatthecontributionofgrowthininputsofproduction,namelylabourandcapitaltoaggregategrowth,wasaroundhalf,andtheremaininghalf,thatistheunexplainedSolowresidual,iscommonlyattributedtotechnicalprogressorthecontributionofinnovationinthesenseIhaveusedtheterm.Sincebydefinitiontheresidualgrowthisthedifferencebetweenaggregategrowthandthecontributionsofgrowthinfactorsofproduction;itisalsocalledTotalFactorProductivitygrowthorTFPgrowth.WhetherornotTFPgrowthaccountsforasimilarlylargeshareofoutputinEastAsianeconomicsofKorea,Singapore,andTaiwanhasbeendebated(Young(1992)andLauandKim(1994)),inpartonmethodologicalgrounds(forexample,thedependenceofestimatesonessentiallyarbitraryassumptionsaboutscaleeconomiesandfunctionalformsfortheaggregateproductionfunction)andinpartongroundsofpossibleerrorsofmeasurementandbiasesinthedata(Pack,2001).IdonotproposetoenterintothedebatesontheempiricsofestimatingTFPgrowth.Iwillsimplyassume,asseemsreasonable,thateconomicgrowthisdrivenbyideasorincreasesin“thestockofusefulknowledge”asLucas(2002)putsit.Again,asherightlypointsout,treatinggrowthintechnologyorknowledgeasexogenousforaneconomyimpliesthatitoriginatesfromactivitiesoutsidethateconomy.Inotherwords,whatisexternaltooneeconomymustbeinternalorendogenousinsomeothereconomy.Oneisthusledtomodelingtheendogenous3processthatgeneratestechnologicalchangeinthateconomy.Evenifoneweretoassumethatfordevelopingeconomiestechnicalprogresscomesaboutthroughtheadoptionorimitationoftechnologiesdevelopedelsewhere,stilltheadoptionandimitationprocessesthemselvescouldbeendogenous.Itisthereforeessentialtoviewprocessestoinnovationandtheiradoptionasendogenousprocessesthatareinfluencedbyincentives,i