The survey of literature and directions of theories of entrepreneurship and innovation and public policy

1. Entrepreneurship, Innovation and
Public Policy: A Survey
Chinawut Chinaprayoon

2. Motivation
 Knowledge-based entrepreneurial economy to
sustain economic growth
 The emergence of “entrepreneurial policy”
 Policy originates as a top-down process, while
contemporary entrepreneurship literatures stress the
vitality of building theory from bottom-up.

3. Entrepreneurship and Innovation
 Shane and Venkataraman (2000) argues that
entrepreneurship involves the study of the sources of
opportunities; the processes of discovery, evaluation
, and exploitation of opportunities; and the set of
individuals who discover, evaluate, and exploit them.
 Given this description, the study of entrepreneurship
is almost a tautology to the study of innovations, and
to some degree – the study of process of creative
destruction in Schumpeter’s language.
 “Theory of innovation” VS “Theory of
entrepreneurship”

4. The discovery of the residuals
 Innovation and entrepreneurship are regarded as residuals in
neoclassical orthodoxy literature. - unrealistic
 “innovation” was put back into the equation. (Romer,1990; 1994) –
the endogenous growth theory
 Only recently that entrepreneurship is still explicitly accounted in
growth theory
 Michelacci (2003): technological change requires both researchers
who produce inventions and an entrepreneur who transform them
into innovations.

5. Theory of Innovations
 Unit of analysis: firms
 Knowledge Production Function Paradigm (Griliches,
1979; Cohen and Klepper, 1991)
 Opportunities are created endogenously
 It works at aggregated level, but it is less compelling
when studied at micro level. (Acs and Audretsch,
1990)

6. Heterodox Economics
 Boundedly rational / Sub-optimality can occur / Institutions play
crucial role
 Schumpeter (1934; 1942): Entrepreneur as the Innovator / constantly
disequilibrium due to creative destruction
 Kirzner (1973, 1997): Entrepreneurship is equilibrating forces/
Entrepreneurs act on new profit opportunities
 “Systems theorists” focus on agent (innovator/entrepreneur),
institutions and their interactions and how each component of the
systems coevolves.
 Model of technology disruptions (Christensen, Dosi, Utterback, etc.)
– New ventures are source of technological changes / but how new
ventures formed is still a big question mark.

7. Contemporary Theory of Entrepreneurship
 Unit of analysis: individuals
 Again, it is the process of opportunity discovery,
opportunity evaluation and opportunity exploitation
 Dominant paradigm of innovation theory focuses on
how opportunities are created
 Theories of innovation and entrepreneurship should
be considered as a compliment to each other –
bridging the missing link

8. Market Information
Entrepreneurial Mindset
Opportunity
Alertness
Action
(Innovation)
- Technical Knowledge
- Creativity
Action
(Innovation)
Value
Appropriation
(Wealth Creation)
Burgelman & Hitt, 2007

9. Large firm advantage
Acs and Audretsch (2005); Ketchen, Ireland and Snow (2007)
 Entrepreneurial action/innovation requires high fixed
costs (Scale economies)
 Scope economies
 Small firms bear higher risk/ have relatively limited
strategic resources

10. Capital Market Imperfections
 Agency problems i.e. moral hazard and adverse
selection make financial institutions wary of new
ventures with limited track records (Acs et al, 2001)
 Venture capital investment funds are simply flowing
to states with already well-established
entrepreneurial activity (Kreft and Sobel, 2005)

11. Rules of Law/ Institutions
 Government should function in a market-augmenting way.
(Saravasthy, 2004)
 Baumol (1990;2002) – Productive entrepreneurship/Unproductive
entrepreneurship
 “Productive entrepreneurship in the free market economies, then,
has been encouraged materially by contraction of the opportunities
for financial gain through rent seeking and destructive activities,
and by the simultaneously explosion of ways of wealth-gathering
in productive occupations. Productive entrepreneurship has
also be stimulated by the growing power of rules of law and
concomitant upon arbitrary exercise of government power”
(Baumol, 2002:p. 10)
 Sobel (2008) tested Baumol’s hypothesis using data from 48 states

12. Baumol (1990;2002)

13. The results confirms Baumol’s hypothesis, better institutional quality
results in a higher level of productive entrepreneurial activity.

14. Externalities
 Profit motive alone is inadequate to stimulate entrepreneurial
innovation. (Holtz-Eakin,2000)
 Audretsch (2002)
 Network externalities
 Individual and firm capabilities conditioned upon the geographic
proximity of complimentary firms and individuals
 Knowledge externalities
 Even entrepreneurs fail, they still generate externality
 Learning externalities
 Demonstration effect/ In particular in the geographical area where
entrepreneurial tradition is absent.

15. Entrepreneurial Policy
 It is not SMEs policy – it doesn’t aim at SMEs
survival (Audretsch, 2002)
 It is not innovation policy – as innovation policy aims
at fulfilling lacks of investment in innovation.
 Entrepreneurship policy aims at influencing the level
of entrepreneurial vitality (Audretsch, 2002) It
encompasses different types/aspects of policies,
which usually uncoordinated (Hart, 2003)
 Entrepreneurship policy aims at potential
entrepreneur as well as the existing enterprises.
 Entrepreneurship policy encompasses multiple units
of organization and analysis.

16. Entrepreneurial Policy
 Audretsch (2002): Shifts in Entrepreneurial Policy
 From emphasizing on contracts (e.g. antitrust policy) to
emphasizing on the creation and commercialization of
knowledge.
 Downsizing policy focus – from federal to state, regional,
local, and firm level – even individual
 Number of scholars from distinct disciplines support
the policy focuses on local/regional development and
address the vital role of entrepreneurship, among
these are Porter, Florida and Krugman

17. Entrepreneurial Policy
Acs and Szerb (2006)
 Global scale : Trade Policy, Immigration Policy
 National scale : Science, Technology and Innovation
Policy, Property Rights Regulation
 Regional scale : Cluster development e.g. Research
Triangle
 Entrepreneurial scale : Financial supports, tax policy
But as Hart (2003) these policy are usually
uncoordinated.
 It may turn to be barriers to entrepreneurship &
innovation

18. Research Agenda
 How different levels/different types of public
policy/regulations affect individuals (entrepreneurs)?
 Do policies complement, substitute or confound with
each other?
 Use a integrated theoretical framework to develop
matrices for policy
formulation/implementation/evaluation

19. Conclusions
 The reconciliation between theory of innovation (firm
as decision-making) and contemporary theory of
entrepreneurship (individual as decision-making)
provides a multilevel perspective for policymaker to
think about what and how policy should be
formulated, implemented, and evaluated. (Using
entrepreneurship as a unit of analysis in addition to
innovation)