A Knowledge Spillover Theory of Entrepreneurship

The January 2009 issue of Small Business Economics has a very good article by Zoltan Acs (GMU), et al. It's technical, but it is also an important work. At one point Krugman didn't think knowledge spillovers were something you could model. The empirical and theoretical approach to entrepreneurship has come a long way since then and Acs and his coathors have played an important role in the field's development. Anyway, let's lift the curtain and get on with the show:

This paper develops a knowledge spillover theory of entrepreneurship to improve the microeconomic foundations of endogenous growth models, in which the creation of knowledge expands technological opportunity. The theory shifts the unit of analysis from exogenously assumed firms to individual agents with new knowledge endowments. Agents with new economic knowledge endogenously pursue the exploitation of such knowledge, implying that the existing stock of knowledge yields spillovers. This further suggests a strong relationship between such knowledge spillovers and entrepreneurial activity. The theory provides an explanation for the role of the individual and the firm in an economy. According to Romer (1996, 204), such an approach “…removes the dead end in neoclassical theory and links microeconomic observations on routines, machine designs, and the like with macroeconomic discussions of technology.”

The model is one where new product innovations can come both from either incumbent firms or start-ups (Acs and Audretsch 1988). We can think of incumbent firms as reliant on incremental innovation from the flow of knowledge, such as product improvements. Start-ups with access to entrepreneurial talent and intra-temporal spillovers from the stock of knowledge are more likely to engage in radical innovation leading to new industries or replacing existing products. According to Baumol (2004, 9): “…the revolutionary breakthroughs continue to come predominantly from small entrepreneurial enterprises, with large industry providing streams of incremental improvements that also add up to major contributions.” Entry by start-ups has played a major role in radical innovations, such as software, semiconductors, biotechnology (Zucker et al. 1998) and the information and communications technologies (Jorgenson 2001). Start-ups are especially important at early stages of the life cycle, when technology is still fluid. Therefore, this paper makes the strong assumption that radical innovation comes from new firm start-ups.

The main predictions of the model are:

1. An increase in the stock of knowledge has a positive effect on the level of entrepreneurship
2. The more efficiently incumbents exploit knowledge flows, the smaller the effect of new knowledge on entrepreneurship.
3. Entrepreneurial activities decrease under greater regulation, administrative burden and market intervention by government.

The paper is available through a creative commons license (HTML, PDF)