Policies Influencing Productivity Growth Through Entrepreneurship

Radical, disruptive innovation is a primary driver of the productivity growth that creates economic wealth and, potentially, enriches society. The world owes much of its economic progress to the ground breaking ideas of a relatively small (in terms of the overall workforce) number of innovators and entrepreneurs. And, given a marked stalling of productivity growth globally over the past decade, there is a greater focus on the ability of governments to catalyse entrepreneurial activity that translates radical technological innovation into productivity stimulating market disruption.

Yet, despite the importance of this type of innovation and entrepreneurship, there remains a gap in our understanding of how governments can best maximise the supply and productive contribution of entrepreneurs. This is an issue addressed by Professor Dominique Foray, who outlines a number of public policy measures that can help to ensure an adequate supply of productive entrepreneurs. As Foray notes, there is surprisingly little place for the entrepreneurs responsible for such innovation in classical economic theory or literature.

Entrepreneurship as a resource

One exception, however, as Foray highlights, is the contribution of American economist William Baumol, a former professor of economics at NYU and professor emeritus at Princeton University, who took a keen interest in entrepreneurs. A recipient of the Global Award for Entrepreneurship Research, Baumol believed that to blame a lack of innovation and associated productivity growth on entrepreneurs and insufficient entrepreneurial spirit, was to misunderstand entrepreneurship and its role in the economy.

As Foray notes, rather than defining entrepreneurs in the context of innovation, or indeed technology, Baumol viewed entrepreneurs as economic agents – individuals who were alert to opportunities for profit and economic rents that could be exploited. As such, there are always, at any given time, a percentage of the population who are entrepreneurs.

The problem, therefore, was not a lack of entrepreneurial spirit, but rather that talented entrepreneurs were not necessarily operating in areas where their efforts increased productivity. Instead they moved into areas that maximised their financial returns, given the social and economic environment. Unfortunately, as in the case of organised crime, for example, this might mean directing their entrepreneurial ability towards destructive and illegal activities. Or, even if not criminal activities, entrepreneurs might be attracted to non-productive endeavours, as with some speculative activities or the exploitation of monopolies, for example.

The challenge, as Baumol perceived it, was to find a way of allocating the resource of entrepreneurship towards productive activities, such as technology and innovation.

Furthermore, as Foray notes, even if it is possible to attain Baumol's vision of efficiently allocated entrepreneurship, there is another problem that public policy must address. How do economies ensure that the individuals best suited to making a valuable contribution to society via entrepreneurship have the opportunity to do so? There is a risk that, in creating conditions that are favourable and incentivise entrepreneurs, demand may outstrip supply. Individuals unsuited to the role would be encouraged to waste valuable resources fruitlessly pursuing a career as an entrepreneur. At the same time, potentially talented entrepreneurs may be being excluded by barriers to access.

As a result, Foray suggests three essential pillars to any public policy framework intended to promote entrepreneurship in order to boost innovation and productivity. With the first two pillars Foray describes many economies have made good progress. The first pillar concerns ensuring that science and the education system, notably universities, their research output and the knowledge transfer they engage in, translates into technological opportunities for entrepreneurs.

The second pillar is about the framework in which entrepreneurs have to operate. Foray describes this pillar as the "rules of the game". As Foray points out, this includes the economic, financial, fiscal and social conditions, under which entrepreneurs must operate in the technology and innovation domains (and the institutions and regulations that create those conditions).

Here, Foray suggests that modern capitalism has increasingly created rules of the game that favour productive entrepreneurship. This includes, for example, aspects of the rule of law such as property rights, contract, anti-corruption, and institutions that encourage and reward productive entrepreneurship in areas such as finance, risk, competition, and intellectual property. It also includes the values and the cultural and ethical system that shape the way entrepreneurs are perceived in society.

So, for example, Foray cites Switzerland as a country that has made excellent progress on both these pillars, namely in the areas of research, higher education, and technology transfer, creating technological opportunities, and the rules of the game favouring productive entrepreneurship.

Removing barriers to access

The third pillar, however, is more problematic. This concerns optimising the supply of entrepreneurs. Any solution must address the issue referred to earlier, where external incentives coupled with demand for entrepreneurs (and a sense among students that becoming an entrepreneur is an acceptable, even fashionable, career option) leads to students who are poorly suited to the challenge seeking to become entrepreneurs. While, at the same time, ensuring that all those who have the talent and motivation to become entrepreneurs, also have the opportunity, and are not denied access due to education, social background, race or gender, for example. As Foray shows, for example, there is strong correlation between parental income and becoming an inventor (as measured by registration of patents).

Here, says Foray, Switzerland, as with many other countries, has much to do. And while the obstacles to access that need to be targeted by public policy may differ from one country to another, the aim remains the same.

As the last decade has shown the link between technological innovation and productivity is not straightforward. However, it is clear that entrepreneurs often play a central role in both the innovation of new technologies and using those technologies to disrupt markets and improve productivity.

Foray's message for governments and policymakers is clear. If they want their economies to benefit from productivity growth linked to technological innovation, it is not enough to foster an environment that creates technological opportunities and a favourable environment for entrepreneurs. There is a third step they must take: to create a level playing field for access so that, no matter what their social and economic background, every individual with the potential to become a talented entrepreneur has the opportunity to fulfil that potential.