- Email: [email protected]
Emergence of the entrepreneurial society
Business Horizons (2009) 52, 505—511
www.elsevier.com/locate/bushor
Emergence of the entrepreneurial society David B. Audretsch School of Public and Environmental Affairs, Indiana University, 1315 East 10th Street, Bloomington, IN 47405, U.S.A.
KEYWORDS Entrepreneurship; Economic history; Entrepreneurial development
Abstract Once 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. # 2009 Kelley School of Business, Indiana University. All rights reserved.
1. The power shift Entrepreneurship seemed to be fading during the heady years of American post-World War II prosperity. Even as the country surged with new confidence reflecting leading world rates of growth and levels of prosperity, the role of entrepreneurship was diminishing. Charlie ‘‘Engine’’ Wilson–—then the Chair of General Motors–—declared ‘‘What’s good for General Motors is good for America,’’ highlighting the emergence of large manufacturing corporations able to churn out record numbers of automobiles, tons of steel, and other manufactured goods by exploiting scale economies yielding an unprecedented level of efficiency and productivity. As Chandler (1977, 1990) showed, it was the unique capacity of the large corporation to harness economies of scale and scope that generated an unprecedented competitive advantage and admirably high levels of performance. E-mail address: [email protected]
Even Joseph Schumpeter (1942), the eminent scholar who identified a unique contribution by entrepreneurs in triggering a widely proclaimed process of creative destruction, conceded in the later years of his writing that: Since capitalist enterprise, by its very achievements, tends to automize 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 mediumsized 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 its income but also, what is infinitely more important, its function. (p. 134) John Kenneth Galbraith (1967) would subsequently echo Schumpeter’s dismissal of entrepreneurs, concluding that the entrepreneur ‘‘is a diminishing
0007-6813/$ — see front matter # 2009 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2009.06.002
506 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 organizing intelligence or effective in competing with it’’ (p. 61). As Galbraith (1967) concludes, power shifted from entrepreneurs to the large organization: ‘‘So it is with organization–— organized competence–—that the power now lies’’ (p. 61). By the 1990s, something radically changed. Business and policy leaders were no longer looking to the large corporations, based on scale and scope, to provide growth and jobs. Rather, entrepreneurship emerged as the engine of growth, innovation, and economic development. For example, the 2000 Lisbon Proclamation of the European Council of Europe committed the European Union to becoming the world’s entrepreneurship leader, in order to ensure prosperity and a high level of economic performance in the EU. According to Prodi (2002), at that time the President of the European Commission, ‘‘Our lacunae in 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’’ (p. 1). Europe was not alone in turning to entrepreneurship as an engine of economic growth and job creation. In 2006, the National Governors Association of the United States declared innovation and entrepreneurship as the keys to generating economic development and competitiveness at the state level. In this article, I explain the emergence of the entrepreneurial society. As the focal force for generating economic growth, employment, and competitiveness has shifted from physical capital to knowledge and on to include entrepreneurship, the institutions and public policy have correspondingly changed. The entrepreneurial society’s institutional landscape is hospitable and nurturing of entrepreneurial forces.
2. The managed economy Along with the victory from the Second World War, America was relieved to enjoy a vigorous and largely unanticipated prosperity movement. Post-War American prosperity was built on manufacturing. America’s soldiers returned home from the battlefields of Europe and beaches of Asia with a hunger for the good life. That good life consisted of manufactured products. But, it was not just America which displayed pent-up demand for these items: war-devastated Europe and Asia also desired the
D.B. Audretsch manufactured goods needed to restore a basic standard of living. While many countries wanted, only one actually had what was needed to efficiently supply the goods: capital. After the war, the United States found itself with the lion’s share of the world’s viable capital stock: [The U.S. was] an economic lord set far above the destroyed powers, its once and future competitors among both Allies and Axis powers. . . .While European and Japanese factories were being pulverized, new American factories were being built and old ones were back at work, shrinking unemployment to relatively negligible proportions. (Gitlin, 1993, p. 13) As Robert Payne, the prominent historian, pointed out: There never was a country more fabulous than America. She sits bestride the world like a Colossus; no other power at any time in the world’s history has possessed so varied or so great an influence on other nations. . . .Half of the wealth of the world, more than half of the productivity, nearly two-thirds of the world machines are concentrated in American hands; the rest of the world lies in the shadow of American industry. (Halberstam, 1993, p. 116) The major industries serving as the engine of American economic success–—automobiles, steel, tires, chemicals, aluminum and, later, computers–—were characterized by an oligopolistic market structure consisting of a few dominant firms with high, and ever increasing rates of, concentration. Volumes of literature identified a clear, longterm trend toward increased concentration in economic activity both at the aggregate level, as well as for individual markets. The manufacturing assets owned by America’s largest 100 corporations increased from 36% in 1924 to 39% after the war. By the end of the 1960s, America’s 100 largest corporations controlled over 50% of the manufacturing assets, causing Scherer (1970) to conclude that, ‘‘Despite the [statistical] uncertainties, one thing is clear. The increasing domestic dominance of the 100 largest manufacturing firms since 1946 is not a statistical illusion’’ (p. 44). Physical capital’s key role was captured in Solow’s Growth Theory, which was ultimately awarded a Nobel Prize in Economics. The Solow model recognized that labor also mattered in shaping economic growth. William H. Whyte (1956) observed factories in the post-war economy for his 1956 book, The Organization Man. Whyte described the proudly independent, free-thinking,
Emergence of the entrepreneurial society American men who had once pushed west and tamed the last frontier as being replaced by slavishly obedient organization men, conforming to society’s sense of propriety and doing what they were told. The once maverick characters now obeyed social norms, valuing reliability, regularity, predictability, and loyalty to the employing organization–— usually a corporation–—above all else. As Whyte concluded, conformity was supposed to buy contentment. However, generating high economic performance required more than just an organizational structure and workforce. Rather, this managed economy depended upon a complex and nuanced set of interventions, regulations, fine-tuning, and support–—not just from government, but also from a broad spectrum of social institutions spanning schools and churches. Friedan (1963), in The Feminine Mystique, noted that it went so far as to include marriage and the family. Small business and entrepreneurship received scant attention in the managed economy. Compelling literature found that small firms were generally less efficient than their larger counterparts, provided lower levels of compensation for their employees, and were only marginally involved in innovative activity. In short, the relative importance of small firms in the economy was declining. Galbraith’s (1967) thinking reflects the shift from what he viewed as an entrepreneurial and individualistic industrial revolution era, to the contemporary era of managed capitalism. In this sense, the industrial revolution’s great entrepreneurs were replaced by the large, structured, and hierarchical corporation. The entrepreneurial founders, as Galbraith (1967) observed, ‘‘must, in fact, be compared in life with the male Alpis mellifera. He accomplishes his act of conception at the price of his own extinction’’ (pp. 93-94). Much of Galbraith’s book, The New Industrial State, is devoted to explaining why the earlier era of the entrepreneur and the individual gave way to the bureaucracy inherent in large corporations. Not only did Schumpeter (1942) conclude that the large corporation was more efficient and productive, but he also believed it was the engine of technological change and innovative activity: What we have got to accept is that [the largescale establishment or unit of control] has come to be the most powerful engine of. . .progress and in particular of the long-run expansion of output not only in spite of, but to a considerable extent through, this strategy which looks so restrictive. (p. 106)
507 The empirical evidence was convincing: small firms and entrepreneurship were burdened with an inefficient size that resulted in low levels of productivity. These firms were a drag on economic efficiency and growth, and generated lower quality jobs in terms of direct and indirect compensation. Public policy reflected the view of economists and other scholars that small firms were becoming less and less important, and unexpected to survive in the longrun. Galbraith (1958) concluded that: There is no more pleasant fiction than that technical change is the product of the matchless ingenuity of the small man forced by competition to employ his wits to better his neighbor. Unhappily, it is a fiction. Technical development has long since become the preserve of the scientist and engineer. Most of the cheap and simple inventions have, to put it bluntly and unpersuasively, been made. (pp. 86-87) Consistent with the trend toward concentration was the shift in economic activity from small firms to large enterprises. The share of employment by small firms decreased in every major economic sector after World War II. Perhaps most striking was the decrease in the share of employment accounted for by small manufacturing firms: nearly 25% between 1958 and 1977. There was no doubt that the driving force of the American post-war success was not just its abundance of factories, establishments, and plants, but the extent to which this physical capital was controlled by a select few large corporations in key industries. Some countries–—such as the Soviet Union, Sweden, and France–—allowed small firms to gradually disappear as a matter of public policy. In the United States, policy echoed Jeffersonian traditions as it reflected the long-term political and social valuation of small firms. There was a strong and vigorous policy to preserve small business, even if it was burdened by glaring inefficiencies that might otherwise drive it into extinction. In 1953, Congress created the Small Business Administration, to ‘‘aid, counsel, assist, and protect. . .the interests of small business concerns.’’ (The Small Business Act, authorizing the creation of the Small Business Administration, was passed by Congress on July 10, 1952) It reflected a preservationist American public policy toward small business, despite the managed economy. Globalization put an end to the American managed economy. By the 1970s, the country lay paralyzed in the throes of the oil crisis. Imported manufactured goods–—initially automobiles and steel, later electronics–—flooded the United States.
508 The rest of the world, or at least Europe and Japan, had finally recovered from the devastation of World War II and were catching up to the United States. The U.S. had lost its physical capital monopoly. The superiority of the United States in manufacturing industries based on large scale capital investment gave way to the widely despaired competitiveness crisis. The internationalization of U.S. markets was the harbinger of widespread globalization (Friedman, 2005). Globalization brought gloomier prospects, as articulated by the Dean of MIT’s Sloan School of Management, Lester Thurow (1984). He felt that America was ‘‘losing the economic race,’’ because: Today it’s very hard to find an industrial corporation in America that isn’t in really serious trouble basically because of trade problems. . . .The systematic erosion of our competitiveness comes from having lower rates of growth of manufacturing productivity year after year, as compared with the rest of the world. (p. 23) A dream team of 23 scholars, spanning a broad spectrum of academic disciplines and led by the MIT Commission on Industrial Productivity, produced Made in America, a report directed by Michael L. Dertouzos, Richard K. Lester, and Robert M. Solow (1989). The work presented a compelling case that the key to restoring the international competitiveness of American corporations lay in regaining the lead in capital-based industries which fueled the American economic engine in the 1950s, such as automobiles and steel. It suggested that the U.S. should adapt those institutions, policies, and strategies that had proven so successful in facilitating the ascendency of German and Japanese companies to become international leaders, such as industrial targeting of key manufacturing industries. Total Quality Management (TQM) and Just-In-Time (JIT) production became buzzwords for American firms. Studying foreign firms and adapting their strategies would restore America’s international competitiveness.
3. The entrepreneurial society Regaining international competitiveness is exactly what the United States accomplished in the 1990s. By the middle of the decade, record levels of economic growth, productivity, and job creation were evidence of global leadership. Stock prices soared. However, even as the U.S. entered this new golden era of economic prosperity, Europe and Japan stagnated. It was not the expert suggested restoration of the capital-based economy that triggered the American
D.B. Audretsch economic resurgence. Rather, it was something new and unanticipated: the great steel and automobile corporations were supplanted by emerging entrepreneurial firms such as Amazon and Google. Entirely new industries materialized out of thin air–—industries inconceivable in the 1980s. These entrepreneurial firms restored America’s global competitiveness (Audretsch, 2007). The new entrepreneurial firms and industries driving American growth, job creation, and global competitiveness were not borne from an institutional and policy vacuum. Rather, the organization man–— along with his proclivities toward conformity, monotony, rigidity, and homogeneity–—was superseded by creativity, independence, autonomy, selfreliance, and non-conformity (Bennet, 1991). Entirely different values, skills, priorities, and attitudes characterized the entrepreneurial society. The dull conformity and homogeneity prevalent in the managed economy was replaced. As Mowery (2005) pointed out: During the 1990s, the era of the ‘‘New Economy,’’ numerous observers (including some who less than 10 years earlier had written off the U.S. economy as doomed to economic decline in the face of competition from such economic powerhouses as Japan) hailed the resurgent economy in the United States as an illustration of the power of high-technology entrepreneurship. The new firms, that a decade earlier had been criticized by authorities such as the MIT Commission on Industrial Productivity for their failure to sustain competition against non-U.S. firms, were now seen as important sources of economic dynamism and employment growth. Indeed, the transformation in U.S. economic performance between the 1980s and 1990s is only slightly less remarkable than the failure of most experts in academia, government, and industry, to predict it. (p. 1) It also took a very different public policy focus and orientation to enable the emergence of the entrepreneurial society. Beginning with the airline industry, the U.S. Congress enacted a wide sweeping set of legislation to deregulate industry after industry, industries previously regulated under the managed economy. Industries such as financial services, natural gas, oil, telecommunications, trucking, and railroads–—regulated by Democrat and Republican presidents alike–—were quickly deregulated, supported by members of both political parties. With experts focused on benchmarking how mainstay American industries–—such as steel and automobiles–—were competing against foreign competition from Japan and Germany, the force
Emergence of the entrepreneurial society restoring American growth, competitiveness, and prosperity went largely unnoticed. In fact, a very different set of values, priorities, and institutions had emerged. Without much notice, the entrepreneurial society had replaced the managed economy. Why was entrepreneurship the key to restoring American prosperity following the stagnation of the 1970s and the competitiveness crisis of the 1980s? Even as the competitiveness of production based on physical capital shifted from high-cost OECD (Organization for Economic Cooperation and Development) countries to lower cost regions, scholars and policy makers looked to the factor of knowledge as a new source of competitiveness. Unlike production based largely on physical capital combined with unskilled labor, goods and services based on new ideas and creativity could not be outsourced and offshored at low cost. Rather, being at the right location, where the relevant knowledge and ideas were being generated, seemed to be essential for knowledge-based goods and services. Just as the Solow (1957) model emphasized the role of physical capital as an engine of economic growth and prosperity, the new growth models or endogenous growth theory shifted the focus to knowledge (Lucas, 1993; Romer, 1986). Even as the policy goal remained the same–—economic growth, sustainable employment, and global competitiveness–—the policy focus and instruments shifted dramatically, with a new focus on investing in education, human capital, research, science, and the protection of intellectual property.
3.1. The knowledge filter At first, entrepreneurship and small firms did not seem any more compatible with Romer’s (1986) knowledge-based economy than they did with Solow’s (1957) managed economy. It was thought that small and new businesses did not have the scale to invest in costly research and development or other knowledge generating activities. Again, it seemed that small firms were relegated to the economic margins. However, the shift from physical to knowledge capital did not prove as seamless as new growth theory implied. Despite exhibiting rich and vigorous investments in science and research, regions such as Baltimore and Champagne-Urbana lacked the expected and anticipated economic growth. Similarly, entire countries, such as Sweden, rich in knowledge generating activities, were still bogged down with stagnant economies and ever increasing unemployment. Disappointed in this seemingly contradictory combination, Sweden nicknamed it The Swedish Paradox. The idea was co-opted and
509 renamed The European Paradox; most European nations were falling victim to the same contradictory combination of increased research budgets and stagnant economies featuring high levels of unemployment. Finding a resolution to the European Paradox required rethinking the fundamental model of innovation. We now know that not all of the newly created knowledge automatically results in innovations brought to market. Ideas are impeded by what is now called the knowledge filter (Audretsch, Keilbach, & Lehmann, 2006). There are many sources and causes contributing to it. The knowledge filter’s fundamental sources are the uncertainties and asymmetries innate to creativity, new ideas, and knowledge in general. While a new idea might be perceived as valuable by an employee, others may dismiss it, leading to the rejection of potentially valuable innovations. The knowledge filter can also be imposed by legal regulations and public policies. In the 1970s, Indiana U.S. Senator Birch Bayh raised the alarm, admonishing that: A wealth of scientific talent at American colleges and universities–—talent responsible for the development of numerous innovative scientific breakthroughs each year–—is going to waste as a result of bureaucratic red tape and illogical government regulation. What sense does it make to spend billions of dollars each year on government-supported research and then prevent new developments from benefiting the American people because of dumb bureaucratic red tape? (Association of University Technology Managers, 2004, p. 5) In this case, a knowledge filter imposed by government prevented investments in research from being commercialized, which would ultimately contribute to economic growth and job creation. Thus, a legal knowledge filter resulted in costly investments in research, education, and culture, while creativity remained dormant and uncommercialized. A mechanism was needed to link the knowledge, ideas, and creativity to the market, and that is where entrepreneurship emerges as having a key role. For example, Germany’s SAP was founded by three IBM employees after their proposal for new business software was rejected by IBM’s knowledge filter. Likewise, Steve Jobs went on to found Apple Computer after his proposal for a personal computer was rejected by several existing computer firms. The Knowledge Spillover Theory of Entrepreneurship provides a rational explanation of why some people choose to become entrepreneurs and why it matters for society. Like the founders of SAP and
510 Apple Computer, individuals choose to become entrepreneurs not just because they enjoy the thrill of risk or want independence, but because new ventures provide the only feasible opportunity to pursue dreams once rejected by knowledge filters. As an entrepreneur, individuals can try to make their vision succeed in the marketplace, taking ideas from the laboratory in one setting and spilling them over into the marketplace. Knowledge spillover entrepreneurship makes a significant contribution to the economy because it facilitates the spilling of costly knowledge created in one organizational context but commercialized in the context of a new organization, thus contributing to innovative activity and economic growth. Empirical results confirmed the Knowledge Spillover Theory of Entrepreneurship by analyzing startup rates across multiple industries and regions, each reflecting different knowledge bases. No matter how the data were examined, whether by industry or by region, it was found that having bigger investments in new knowledge tended to result in more new venture startups. If there was less investment in new knowledge, there were fewer startups. This suggests that no matter how one looks at it–—whether from the firm, industry, or region perspective–— new knowledge from incumbent organizations provides the entrepreneurial opportunity that drives future growth (Audretsch & Keilbach, 2007). Entrepreneurial activity is crucial for an economy whose competitiveness is based on knowledge, ideas, and creativity. By serving as an important conduit for the spillover of knowledge from an existing organization into new organizations actually using it in innovations, it provides a crucial link between the resources of an economy and future performance. Entrepreneurship is vital because it provides the missing link in the process of economic growth by taking investments in knowledge and turning them into social returns that provide economic growth and job creation. Thus, those cities, regions, or countries with an abundance of entrepreneurship capital (Audretsch et al., 2006), the capacity to generate entrepreneurial activity, in addition to labor, physical capital, and knowledge capital, should experience robust economic performance. Just as social capital (Coleman, 1988; Putnam, 1993) included social interactions and linkages to the traditional factors shaping economic performance, entrepreneurship capital includes the institutions, culture, and historical context conducive to entrepreneurial activity. There is now considerable evidence linking entrepreneurial activity and measures of entrepreneurship capital to economic performance; in particular, growth rates of cities, regions, and countries.
D.B. Audretsch Public policy now reflects the recognition of entrepreneurship’s crucial role in taking advantage of globalization’s opportunities, rather than falling victim to its effects. Public policy’s focus has transitioned from facilitating investments in the efficient use of physical capital to supporting a myriad of institutions supporting entrepreneurship. As Bresnahan and Gambardella (2004, p. 1) observe: Clusters of high-tech industry, such as Silicon Valley, have received a great deal of attention from scholars and in the public policy arena. National economic growth can be fueled by development of such clusters. . . .Innovation and entrepreneurship can be supported by a number of mechanisms operating within a cluster.
4. A concluding caution The entrepreneurial society exists in places where entrepreneurship is now the focal point for economic growth, sustainable job creation, and competitiveness in global markets. The emergence of the entrepreneurial society in the 1990s reversed a decades-long decline in America’s economic performance. The resurgence not only prevented America from being surpassed, but enabled it to pull ahead of its European and Asian competitors. However, the rest of the world has not passively accepted divergent rates of economic growth and employment creation. Rather, as reflected by the 2000 Lisbon Proclamation of the European Council of Europe, Europe and Asia have vigorously and aggressively worked to become entrepreneurial, as well. Just as the U.S. lost its assumed leadership and competitiveness in the managed economy, it may now be vulnerable to losing its leadership and competitiveness generated by the entrepreneurial society. The current economic and financial crisis provides a timely opportunity to reinforce the American commitment to the entrepreneurial society.
References Association of University Technology Managers. (2004). Recollections: Celebrating the history of AUTUM and the legacy of Bayh-Dole. Northbrook, IL: Association of University Technology Managers. Audretsch, D. B. (2007). The entrepreneurial society. New York: Oxford University Press. Audretsch, D. B., & Keilbach, M. (2007). The theory of knowledge spillover entrepreneurship. Journal of Management Studies, 44(7), 1242—1254.
Emergence of the entrepreneurial society Audretsch, D. B., Keilbach, M., & Lehmann, E. (2006). Entrepreneurship and economic growth. New York: Oxford University Press. Bennet, A. (1991). The death of the organization man. New York: Simon & Schuster/Touchstone. Bresnahan, T., & Gambardella, A. (2004). Building high tech clusters: Silicon Valley and beyond. New York: Cambridge University Press. Chandler, A. (1977). The visible hand: The managerial revolution in American business. Cambridge, MA: Belknap Press. Chandler, A. (1990). Scale and scope. Cambridge, MA: Belknap Press. Coleman, J. (1988). Social capital in the creation of human capital. American Journal of Sociology, 94(Supplement), S95—S120. Dertouzos, M. L., Lester, R. K., & Solow, R. M. (1989). Made in America: Regaining the productive edge. Cambridge, MA: MIT Press. Friedan, B. (1963). The feminine mystique. New York: Norton. Friedman, T. L. (2005). The world is flat. London: Lane. Galbraith, J. K. (1958). American capitalism: The concept of countervailing power. Boston: Houghton Mifflin. Galbraith, J. K. (1967). The new industrial state. Harmondsworth, UK: Penguin. Gitlin, T. (1993). The sixties: Years of hope, days of rage. New York: Bantam Books.
511 Halberstam, D. (1993). The fifties. New York: Villard Books. Lucas, R. (1993). Making a miracle. Econometrica, 61(2), 251—272. Mowery, D. (2005). The Bayh-Dole act and high-technology entrepreneurship in U.S. universities: Chick, egg, or something else? In Advances in the study of entrepreneurship, innovation, and economic growth (Vol. 16, pp. 39-68). Bingley, UK: Emerald Group Publishing. Prodi, R. (2002). For a new European entrepreneurship. Madrid, Spain: Instituto de Empresa. Putnam, R. (1993). Making democracy work: Civic traditions in modern Italy. Princeton, NJ: Princeton University Press. Romer, P. (1986). Endogenous technological change. Journal of Political Economy, 98(5/2), 71—102. Scherer, F. M. (1970). Industrial market structure and economic performance. Chicago: Rand McNally. Schumpeter, J. A. (1942). Capitalism, socialism, and democracy. New York: Harper. Solow, R. (1957). Technical change and the aggregate production function. Review of Economics and Statistics, 39(3), 312—320. Thurow, L. (1984, September 27). Losing the economic race. New York Review of Books, 31(14), 29-31. Whyte, W. H. (1956). The organization man. New York: Simon and Schuster.
www.elsevier.com/locate/bushor
Emergence of the entrepreneurial society David B. Audretsch School of Public and Environmental Affairs, Indiana University, 1315 East 10th Street, Bloomington, IN 47405, U.S.A.
KEYWORDS Entrepreneurship; Economic history; Entrepreneurial development
Abstract Once 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. # 2009 Kelley School of Business, Indiana University. All rights reserved.
1. The power shift Entrepreneurship seemed to be fading during the heady years of American post-World War II prosperity. Even as the country surged with new confidence reflecting leading world rates of growth and levels of prosperity, the role of entrepreneurship was diminishing. Charlie ‘‘Engine’’ Wilson–—then the Chair of General Motors–—declared ‘‘What’s good for General Motors is good for America,’’ highlighting the emergence of large manufacturing corporations able to churn out record numbers of automobiles, tons of steel, and other manufactured goods by exploiting scale economies yielding an unprecedented level of efficiency and productivity. As Chandler (1977, 1990) showed, it was the unique capacity of the large corporation to harness economies of scale and scope that generated an unprecedented competitive advantage and admirably high levels of performance. E-mail address: [email protected]
Even Joseph Schumpeter (1942), the eminent scholar who identified a unique contribution by entrepreneurs in triggering a widely proclaimed process of creative destruction, conceded in the later years of his writing that: Since capitalist enterprise, by its very achievements, tends to automize 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 mediumsized 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 its income but also, what is infinitely more important, its function. (p. 134) John Kenneth Galbraith (1967) would subsequently echo Schumpeter’s dismissal of entrepreneurs, concluding that the entrepreneur ‘‘is a diminishing
0007-6813/$ — see front matter # 2009 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2009.06.002
506 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 organizing intelligence or effective in competing with it’’ (p. 61). As Galbraith (1967) concludes, power shifted from entrepreneurs to the large organization: ‘‘So it is with organization–— organized competence–—that the power now lies’’ (p. 61). By the 1990s, something radically changed. Business and policy leaders were no longer looking to the large corporations, based on scale and scope, to provide growth and jobs. Rather, entrepreneurship emerged as the engine of growth, innovation, and economic development. For example, the 2000 Lisbon Proclamation of the European Council of Europe committed the European Union to becoming the world’s entrepreneurship leader, in order to ensure prosperity and a high level of economic performance in the EU. According to Prodi (2002), at that time the President of the European Commission, ‘‘Our lacunae in 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’’ (p. 1). Europe was not alone in turning to entrepreneurship as an engine of economic growth and job creation. In 2006, the National Governors Association of the United States declared innovation and entrepreneurship as the keys to generating economic development and competitiveness at the state level. In this article, I explain the emergence of the entrepreneurial society. As the focal force for generating economic growth, employment, and competitiveness has shifted from physical capital to knowledge and on to include entrepreneurship, the institutions and public policy have correspondingly changed. The entrepreneurial society’s institutional landscape is hospitable and nurturing of entrepreneurial forces.
2. The managed economy Along with the victory from the Second World War, America was relieved to enjoy a vigorous and largely unanticipated prosperity movement. Post-War American prosperity was built on manufacturing. America’s soldiers returned home from the battlefields of Europe and beaches of Asia with a hunger for the good life. That good life consisted of manufactured products. But, it was not just America which displayed pent-up demand for these items: war-devastated Europe and Asia also desired the
D.B. Audretsch manufactured goods needed to restore a basic standard of living. While many countries wanted, only one actually had what was needed to efficiently supply the goods: capital. After the war, the United States found itself with the lion’s share of the world’s viable capital stock: [The U.S. was] an economic lord set far above the destroyed powers, its once and future competitors among both Allies and Axis powers. . . .While European and Japanese factories were being pulverized, new American factories were being built and old ones were back at work, shrinking unemployment to relatively negligible proportions. (Gitlin, 1993, p. 13) As Robert Payne, the prominent historian, pointed out: There never was a country more fabulous than America. She sits bestride the world like a Colossus; no other power at any time in the world’s history has possessed so varied or so great an influence on other nations. . . .Half of the wealth of the world, more than half of the productivity, nearly two-thirds of the world machines are concentrated in American hands; the rest of the world lies in the shadow of American industry. (Halberstam, 1993, p. 116) The major industries serving as the engine of American economic success–—automobiles, steel, tires, chemicals, aluminum and, later, computers–—were characterized by an oligopolistic market structure consisting of a few dominant firms with high, and ever increasing rates of, concentration. Volumes of literature identified a clear, longterm trend toward increased concentration in economic activity both at the aggregate level, as well as for individual markets. The manufacturing assets owned by America’s largest 100 corporations increased from 36% in 1924 to 39% after the war. By the end of the 1960s, America’s 100 largest corporations controlled over 50% of the manufacturing assets, causing Scherer (1970) to conclude that, ‘‘Despite the [statistical] uncertainties, one thing is clear. The increasing domestic dominance of the 100 largest manufacturing firms since 1946 is not a statistical illusion’’ (p. 44). Physical capital’s key role was captured in Solow’s Growth Theory, which was ultimately awarded a Nobel Prize in Economics. The Solow model recognized that labor also mattered in shaping economic growth. William H. Whyte (1956) observed factories in the post-war economy for his 1956 book, The Organization Man. Whyte described the proudly independent, free-thinking,
Emergence of the entrepreneurial society American men who had once pushed west and tamed the last frontier as being replaced by slavishly obedient organization men, conforming to society’s sense of propriety and doing what they were told. The once maverick characters now obeyed social norms, valuing reliability, regularity, predictability, and loyalty to the employing organization–— usually a corporation–—above all else. As Whyte concluded, conformity was supposed to buy contentment. However, generating high economic performance required more than just an organizational structure and workforce. Rather, this managed economy depended upon a complex and nuanced set of interventions, regulations, fine-tuning, and support–—not just from government, but also from a broad spectrum of social institutions spanning schools and churches. Friedan (1963), in The Feminine Mystique, noted that it went so far as to include marriage and the family. Small business and entrepreneurship received scant attention in the managed economy. Compelling literature found that small firms were generally less efficient than their larger counterparts, provided lower levels of compensation for their employees, and were only marginally involved in innovative activity. In short, the relative importance of small firms in the economy was declining. Galbraith’s (1967) thinking reflects the shift from what he viewed as an entrepreneurial and individualistic industrial revolution era, to the contemporary era of managed capitalism. In this sense, the industrial revolution’s great entrepreneurs were replaced by the large, structured, and hierarchical corporation. The entrepreneurial founders, as Galbraith (1967) observed, ‘‘must, in fact, be compared in life with the male Alpis mellifera. He accomplishes his act of conception at the price of his own extinction’’ (pp. 93-94). Much of Galbraith’s book, The New Industrial State, is devoted to explaining why the earlier era of the entrepreneur and the individual gave way to the bureaucracy inherent in large corporations. Not only did Schumpeter (1942) conclude that the large corporation was more efficient and productive, but he also believed it was the engine of technological change and innovative activity: What we have got to accept is that [the largescale establishment or unit of control] has come to be the most powerful engine of. . .progress and in particular of the long-run expansion of output not only in spite of, but to a considerable extent through, this strategy which looks so restrictive. (p. 106)
507 The empirical evidence was convincing: small firms and entrepreneurship were burdened with an inefficient size that resulted in low levels of productivity. These firms were a drag on economic efficiency and growth, and generated lower quality jobs in terms of direct and indirect compensation. Public policy reflected the view of economists and other scholars that small firms were becoming less and less important, and unexpected to survive in the longrun. Galbraith (1958) concluded that: There is no more pleasant fiction than that technical change is the product of the matchless ingenuity of the small man forced by competition to employ his wits to better his neighbor. Unhappily, it is a fiction. Technical development has long since become the preserve of the scientist and engineer. Most of the cheap and simple inventions have, to put it bluntly and unpersuasively, been made. (pp. 86-87) Consistent with the trend toward concentration was the shift in economic activity from small firms to large enterprises. The share of employment by small firms decreased in every major economic sector after World War II. Perhaps most striking was the decrease in the share of employment accounted for by small manufacturing firms: nearly 25% between 1958 and 1977. There was no doubt that the driving force of the American post-war success was not just its abundance of factories, establishments, and plants, but the extent to which this physical capital was controlled by a select few large corporations in key industries. Some countries–—such as the Soviet Union, Sweden, and France–—allowed small firms to gradually disappear as a matter of public policy. In the United States, policy echoed Jeffersonian traditions as it reflected the long-term political and social valuation of small firms. There was a strong and vigorous policy to preserve small business, even if it was burdened by glaring inefficiencies that might otherwise drive it into extinction. In 1953, Congress created the Small Business Administration, to ‘‘aid, counsel, assist, and protect. . .the interests of small business concerns.’’ (The Small Business Act, authorizing the creation of the Small Business Administration, was passed by Congress on July 10, 1952) It reflected a preservationist American public policy toward small business, despite the managed economy. Globalization put an end to the American managed economy. By the 1970s, the country lay paralyzed in the throes of the oil crisis. Imported manufactured goods–—initially automobiles and steel, later electronics–—flooded the United States.
508 The rest of the world, or at least Europe and Japan, had finally recovered from the devastation of World War II and were catching up to the United States. The U.S. had lost its physical capital monopoly. The superiority of the United States in manufacturing industries based on large scale capital investment gave way to the widely despaired competitiveness crisis. The internationalization of U.S. markets was the harbinger of widespread globalization (Friedman, 2005). Globalization brought gloomier prospects, as articulated by the Dean of MIT’s Sloan School of Management, Lester Thurow (1984). He felt that America was ‘‘losing the economic race,’’ because: Today it’s very hard to find an industrial corporation in America that isn’t in really serious trouble basically because of trade problems. . . .The systematic erosion of our competitiveness comes from having lower rates of growth of manufacturing productivity year after year, as compared with the rest of the world. (p. 23) A dream team of 23 scholars, spanning a broad spectrum of academic disciplines and led by the MIT Commission on Industrial Productivity, produced Made in America, a report directed by Michael L. Dertouzos, Richard K. Lester, and Robert M. Solow (1989). The work presented a compelling case that the key to restoring the international competitiveness of American corporations lay in regaining the lead in capital-based industries which fueled the American economic engine in the 1950s, such as automobiles and steel. It suggested that the U.S. should adapt those institutions, policies, and strategies that had proven so successful in facilitating the ascendency of German and Japanese companies to become international leaders, such as industrial targeting of key manufacturing industries. Total Quality Management (TQM) and Just-In-Time (JIT) production became buzzwords for American firms. Studying foreign firms and adapting their strategies would restore America’s international competitiveness.
3. The entrepreneurial society Regaining international competitiveness is exactly what the United States accomplished in the 1990s. By the middle of the decade, record levels of economic growth, productivity, and job creation were evidence of global leadership. Stock prices soared. However, even as the U.S. entered this new golden era of economic prosperity, Europe and Japan stagnated. It was not the expert suggested restoration of the capital-based economy that triggered the American
D.B. Audretsch economic resurgence. Rather, it was something new and unanticipated: the great steel and automobile corporations were supplanted by emerging entrepreneurial firms such as Amazon and Google. Entirely new industries materialized out of thin air–—industries inconceivable in the 1980s. These entrepreneurial firms restored America’s global competitiveness (Audretsch, 2007). The new entrepreneurial firms and industries driving American growth, job creation, and global competitiveness were not borne from an institutional and policy vacuum. Rather, the organization man–— along with his proclivities toward conformity, monotony, rigidity, and homogeneity–—was superseded by creativity, independence, autonomy, selfreliance, and non-conformity (Bennet, 1991). Entirely different values, skills, priorities, and attitudes characterized the entrepreneurial society. The dull conformity and homogeneity prevalent in the managed economy was replaced. As Mowery (2005) pointed out: During the 1990s, the era of the ‘‘New Economy,’’ numerous observers (including some who less than 10 years earlier had written off the U.S. economy as doomed to economic decline in the face of competition from such economic powerhouses as Japan) hailed the resurgent economy in the United States as an illustration of the power of high-technology entrepreneurship. The new firms, that a decade earlier had been criticized by authorities such as the MIT Commission on Industrial Productivity for their failure to sustain competition against non-U.S. firms, were now seen as important sources of economic dynamism and employment growth. Indeed, the transformation in U.S. economic performance between the 1980s and 1990s is only slightly less remarkable than the failure of most experts in academia, government, and industry, to predict it. (p. 1) It also took a very different public policy focus and orientation to enable the emergence of the entrepreneurial society. Beginning with the airline industry, the U.S. Congress enacted a wide sweeping set of legislation to deregulate industry after industry, industries previously regulated under the managed economy. Industries such as financial services, natural gas, oil, telecommunications, trucking, and railroads–—regulated by Democrat and Republican presidents alike–—were quickly deregulated, supported by members of both political parties. With experts focused on benchmarking how mainstay American industries–—such as steel and automobiles–—were competing against foreign competition from Japan and Germany, the force
Emergence of the entrepreneurial society restoring American growth, competitiveness, and prosperity went largely unnoticed. In fact, a very different set of values, priorities, and institutions had emerged. Without much notice, the entrepreneurial society had replaced the managed economy. Why was entrepreneurship the key to restoring American prosperity following the stagnation of the 1970s and the competitiveness crisis of the 1980s? Even as the competitiveness of production based on physical capital shifted from high-cost OECD (Organization for Economic Cooperation and Development) countries to lower cost regions, scholars and policy makers looked to the factor of knowledge as a new source of competitiveness. Unlike production based largely on physical capital combined with unskilled labor, goods and services based on new ideas and creativity could not be outsourced and offshored at low cost. Rather, being at the right location, where the relevant knowledge and ideas were being generated, seemed to be essential for knowledge-based goods and services. Just as the Solow (1957) model emphasized the role of physical capital as an engine of economic growth and prosperity, the new growth models or endogenous growth theory shifted the focus to knowledge (Lucas, 1993; Romer, 1986). Even as the policy goal remained the same–—economic growth, sustainable employment, and global competitiveness–—the policy focus and instruments shifted dramatically, with a new focus on investing in education, human capital, research, science, and the protection of intellectual property.
3.1. The knowledge filter At first, entrepreneurship and small firms did not seem any more compatible with Romer’s (1986) knowledge-based economy than they did with Solow’s (1957) managed economy. It was thought that small and new businesses did not have the scale to invest in costly research and development or other knowledge generating activities. Again, it seemed that small firms were relegated to the economic margins. However, the shift from physical to knowledge capital did not prove as seamless as new growth theory implied. Despite exhibiting rich and vigorous investments in science and research, regions such as Baltimore and Champagne-Urbana lacked the expected and anticipated economic growth. Similarly, entire countries, such as Sweden, rich in knowledge generating activities, were still bogged down with stagnant economies and ever increasing unemployment. Disappointed in this seemingly contradictory combination, Sweden nicknamed it The Swedish Paradox. The idea was co-opted and
509 renamed The European Paradox; most European nations were falling victim to the same contradictory combination of increased research budgets and stagnant economies featuring high levels of unemployment. Finding a resolution to the European Paradox required rethinking the fundamental model of innovation. We now know that not all of the newly created knowledge automatically results in innovations brought to market. Ideas are impeded by what is now called the knowledge filter (Audretsch, Keilbach, & Lehmann, 2006). There are many sources and causes contributing to it. The knowledge filter’s fundamental sources are the uncertainties and asymmetries innate to creativity, new ideas, and knowledge in general. While a new idea might be perceived as valuable by an employee, others may dismiss it, leading to the rejection of potentially valuable innovations. The knowledge filter can also be imposed by legal regulations and public policies. In the 1970s, Indiana U.S. Senator Birch Bayh raised the alarm, admonishing that: A wealth of scientific talent at American colleges and universities–—talent responsible for the development of numerous innovative scientific breakthroughs each year–—is going to waste as a result of bureaucratic red tape and illogical government regulation. What sense does it make to spend billions of dollars each year on government-supported research and then prevent new developments from benefiting the American people because of dumb bureaucratic red tape? (Association of University Technology Managers, 2004, p. 5) In this case, a knowledge filter imposed by government prevented investments in research from being commercialized, which would ultimately contribute to economic growth and job creation. Thus, a legal knowledge filter resulted in costly investments in research, education, and culture, while creativity remained dormant and uncommercialized. A mechanism was needed to link the knowledge, ideas, and creativity to the market, and that is where entrepreneurship emerges as having a key role. For example, Germany’s SAP was founded by three IBM employees after their proposal for new business software was rejected by IBM’s knowledge filter. Likewise, Steve Jobs went on to found Apple Computer after his proposal for a personal computer was rejected by several existing computer firms. The Knowledge Spillover Theory of Entrepreneurship provides a rational explanation of why some people choose to become entrepreneurs and why it matters for society. Like the founders of SAP and
510 Apple Computer, individuals choose to become entrepreneurs not just because they enjoy the thrill of risk or want independence, but because new ventures provide the only feasible opportunity to pursue dreams once rejected by knowledge filters. As an entrepreneur, individuals can try to make their vision succeed in the marketplace, taking ideas from the laboratory in one setting and spilling them over into the marketplace. Knowledge spillover entrepreneurship makes a significant contribution to the economy because it facilitates the spilling of costly knowledge created in one organizational context but commercialized in the context of a new organization, thus contributing to innovative activity and economic growth. Empirical results confirmed the Knowledge Spillover Theory of Entrepreneurship by analyzing startup rates across multiple industries and regions, each reflecting different knowledge bases. No matter how the data were examined, whether by industry or by region, it was found that having bigger investments in new knowledge tended to result in more new venture startups. If there was less investment in new knowledge, there were fewer startups. This suggests that no matter how one looks at it–—whether from the firm, industry, or region perspective–— new knowledge from incumbent organizations provides the entrepreneurial opportunity that drives future growth (Audretsch & Keilbach, 2007). Entrepreneurial activity is crucial for an economy whose competitiveness is based on knowledge, ideas, and creativity. By serving as an important conduit for the spillover of knowledge from an existing organization into new organizations actually using it in innovations, it provides a crucial link between the resources of an economy and future performance. Entrepreneurship is vital because it provides the missing link in the process of economic growth by taking investments in knowledge and turning them into social returns that provide economic growth and job creation. Thus, those cities, regions, or countries with an abundance of entrepreneurship capital (Audretsch et al., 2006), the capacity to generate entrepreneurial activity, in addition to labor, physical capital, and knowledge capital, should experience robust economic performance. Just as social capital (Coleman, 1988; Putnam, 1993) included social interactions and linkages to the traditional factors shaping economic performance, entrepreneurship capital includes the institutions, culture, and historical context conducive to entrepreneurial activity. There is now considerable evidence linking entrepreneurial activity and measures of entrepreneurship capital to economic performance; in particular, growth rates of cities, regions, and countries.
D.B. Audretsch Public policy now reflects the recognition of entrepreneurship’s crucial role in taking advantage of globalization’s opportunities, rather than falling victim to its effects. Public policy’s focus has transitioned from facilitating investments in the efficient use of physical capital to supporting a myriad of institutions supporting entrepreneurship. As Bresnahan and Gambardella (2004, p. 1) observe: Clusters of high-tech industry, such as Silicon Valley, have received a great deal of attention from scholars and in the public policy arena. National economic growth can be fueled by development of such clusters. . . .Innovation and entrepreneurship can be supported by a number of mechanisms operating within a cluster.
4. A concluding caution The entrepreneurial society exists in places where entrepreneurship is now the focal point for economic growth, sustainable job creation, and competitiveness in global markets. The emergence of the entrepreneurial society in the 1990s reversed a decades-long decline in America’s economic performance. The resurgence not only prevented America from being surpassed, but enabled it to pull ahead of its European and Asian competitors. However, the rest of the world has not passively accepted divergent rates of economic growth and employment creation. Rather, as reflected by the 2000 Lisbon Proclamation of the European Council of Europe, Europe and Asia have vigorously and aggressively worked to become entrepreneurial, as well. Just as the U.S. lost its assumed leadership and competitiveness in the managed economy, it may now be vulnerable to losing its leadership and competitiveness generated by the entrepreneurial society. The current economic and financial crisis provides a timely opportunity to reinforce the American commitment to the entrepreneurial society.
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