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Chapter 14: New Knowledge: The Driving Force of Innovation, Entrepreneurship and Economic Development
Bo Carlsson INTRODUCTION In the 1950s, Abramovitz (1956) and Solow (1956) observed that increased inputs of labor and capital account for only a small portion of economic growth, leaving most of the explanation to a residual factor. Solow referred to this residual as the ‘technology factor’, while Abramovitz called it ‘a measure of our ignorance’. Subsequently, endogenous growth theory (Romer, 1986, 1990; Lucas, 1988, 1993 and others) provides a way to incorporate technology (particularly in the form of technological spillovers) into the macro-production function. But what are the spillover mechanisms that convert technological change into economic growth? In a series of papers (Acs et al., 2009; Carlsson et al., 2009; Braunerhjelm et al., 2010) my co-authors and I develop a model that distinguishes between knowledge and economically useful knowledge (following Arrow, 1962) and that introduces the notion of entrepreneurship as one of the mechanisms (in addition to incumbent firms) that translates economic knowledge into economic growth. This raises the question of where and how economically useful knowledge is created. The claim of this chapter is that new knowledge – specifically, the creation of economically useful knowledge – is the main driver of innovation; that innovation is what generates economic development (in Schumpeter’s sense, i.e. distinct from ‘economic growth’ that is associated with the ‘circular flow’); and that the institutional arrangements (referred to as innovation systems) that support innovation and entrepreneurial activity vary across time and space. Innovation creates opportunities for both incumbent firms and startups. It is innovation (the application and diffusion...
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