Edited by Robert E. Litan
Chapter 2: The Role of the Entrepreneur in Economic Growth
Daniel F. Spulber1 2.1 INTRODUCTION From the industrial revolution to the scientific revolution to the information revolution, it has become clear that inventions are critical for economic growth. But how do inventions move from the lab to the marketplace? Innovation – the commercialization of invention – is understood far less well than scientific and technological progress. Existing firms and entrepreneurs are the two principal agents of innovation. Existing firms are major contributors to economic growth through their expansion, investment, and incremental innovation. In contrast, entrepreneurs drive innovation by continually introducing new ideas into the economy embodied in new firms. Entrepreneurs also drive innovation through competition with each other, with existing firms, and with traditional informal institutions. In this chapter, I examine the essential role of the entrepreneur in economic growth. Why not rely exclusively on existing firms for innovation? Existing firms, as compared to entrepreneurs, have greater market knowledge, access to credit, access to customers, and the ability to apply new technologies. However, there are various factors that explain entrepreneurial advantages over existing firms. First, in new industries such as electronic commerce, entirely new firms are needed, which embody new technology so as to obtain the benefits of specialization and division of labor. In developing economies, there may not be any existing firms in many sectors of the economy. Second, existing firms may have less incentive to innovate than entrepreneurs because their innovations are incremental to their current business (Arrow, 1962). Additionally, larger existing firms have different incentives to innovate than smaller...
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