Mittelstandspolitik, Unternehmer, Wissenstransfer, EU-Staaten, Deutschland, Small business policy, Entrepreneurs, Knowledge transfer, EU countries, Germany

David B. Audretsch

English

Research Papers in Economics

CESifo Forum 2/2007 3
Focus
FROM SMALL BUSINESS
PROMOTION TO CREATING AN
ENTREPRENEURIAL SOCIETY
DAVID B. AUDRETSCH*
Globalization and the European Paradox
W
hen the Berlin Wall fell in November 1989,
most scholars as well as policy makers antici-
pated a so-called peace dividend for Europe raising
economic growth.After all, the post-war recovery of
Europe, and especially of some countries such as
Germany and Sweden, had been based on wresting
the comparative advantage from the United States
in key capital-based industries including automo-
biles, steel and machine tools. Economic growth,
employment and competitiveness throughout the
post-war era had been driven by physical capital.
Just as Robert Solow (1956 and 1957) was awarded a
Nobel Prize for identifying physical capital as the
main factor driving economic growth, it was surely
no coincidence that decades earlier Karl Marx had
titled his history-changing book Das Kapital. Based
on Europe’s favorable export performance of capi-
tal-intensive products to the United States,its export
dominance also appeared to be guaranteed in the
markets of Central and Eastern Europe as well as in
Asia, especially China.
Thus, it came as something of a shock when it
became evident that, rather than reinforce the post-
war European comparative advantage in capital-
goods industries, the post-Berlin Wall globalization
triggered a loss in European competitiveness in its
stalwart traditional manufacturing industries.Driven
by the harsh logic of globalization, European com-
panies were increasingly choosing to outsource and
offshore in a desperate effort to remain competitive
(Friedman 2005). While this might have preserved,
or even enhanced, the competitiveness of some
European companies, it eroded the levels of eco-
nomic growth throughout Europe and triggered
increases in unemployment that ratcheted upwards
throughout the decade of the 1990s.
An article entitled, “Germany: World Leading Ex-
porter (of Jobs),” in the prestigious weekly German
magazine, Der Spiegel, reports that employment in
manufacturing rose throughout the era of the post-
war managed economy, increasing from 12.5 million
in 1970 to 14.1 million in 1991; then, as globalization
hit Germany,manufacturing jobs crashed to 10.2 mil-
lion in 2004.1 Between 1991 and 2004,the number of
jobs in the German textile industry fell by 65 per-
cent, from 274,658 to 94,432. In the construction
industry, there was a 58 percent decrease in employ-
ment in Germany,from 1.9 million jobs to 778,000.In
the metalworking industries, employment decreased
from 576,299 to 250,024, or 47.5 percent.And in the
heart and soul of German manufacturing, the
machine tool industry, the number of jobs fell from
1.6 million to 947,448, or 39.1 percent.
Both outsourcing and offshoring have emerged as a
strategic response to global competition, helping
businesses maintain and, sometimes, enhance prof-
itability. In Germany, this phenomenon has brought
on a seemingly schizophrenic euphoria. On the one
hand, corporate executives and policy makers are
celebrating a “champagne mood”, as profits are ris-
ing to record levels, sales increasing, and the overall
prospects for German corporations looking better
than they have been in years.2 On the other hand,
unemployment remains perilously close to five mil-
lion unemployed workers, as one of the influential
daily German newspapers, Die Welt, warned Ger-
many’s chancellor, Angela Merkel, “what use is the
new strength and optimism of German companies if
nothing is changed in the labor market.”3
Even as the comparative advantage in (physical)
capital in Europe was beginning to fade,scholars and
policy makers began to recognize the primacy of a
very different production factor – knowledge capital,
* Indiana University, Bloomington, and Max Planck Institute of
Economics, Jena.
1 Bye-Bye Made in Germany, Der Spiegel 44 (2004), 94.
2 This is referred to as Sektstimmung (sparking wine mood), Angst
vor Aufschwung ohne Jobs,Süddeutsche Zeitung, 1 February,2006,1.
3 Merkel ist gewarnt, Die Welt, 1 February, 2006, 8.
SMALL- AND MEDIUM-SIZED
ENTERPRISESwhich is based not just on technological and scientif-
ic knowledge but also in a broader sense of ideas,
creativity,originality and novelty.The recognition by
Romer (1986) and Lucas (1993) among others, that
knowledge was not only endogenous but that it also
spilled over for commercialization by firms and indi-
viduals other than the firm or university actually cre-
ating that knowledge in the first place, shifted the
policy debate and focus away from instruments
inducing investment in physical capital towards
instruments generating knowledge and ideas,such as
university research, education and training, and
patents.
In particular,the Nordic countries,but also Northern
Europe more generally, ranked among the world’s
leaders in terms of the most common measures of
knowledge. Thus, the inability of countries which
were knowledge leaders, such as Sweden, to prosper
in the global economy was so striking that it was
referred to as the Swedish Paradox. However, it was
not just Sweden that exhibited surprisingly low
growth rates and suffering from increasing unem-
ployment, while at the same time having high rates
of investment in research,human capital and culture.
The European Union adapted the label to describe
what it termed the European Paradox.While the pre-
scriptions for investment in knowledge generated
scholarly economic models, the experience of
Sweden, and in fact much of Europe, was suggesting
that the links between knowledge and growth are, in
fact, more nuanced and complicated.
The knowledge filter
The conditions inherent in knowledge – high uncer-
tainty, asymmetries and transaction costs – result in
decision making hierarchies in companies arriving
at the decision not to pursue and try to commercial-
ize new ideas that economic agents think potential-
ly valuable.The characteristics of knowledge distin-
guished from information, a high degree of uncer-
tainty combined with non-trivial asymmetries, a
broad spectrum of institutions,rules and regulations
impose what Audretsch et al. (2006) and Acs et al.
(2004) term the knowledge filter. More precisely, the
knowledge filter is the gap between knowledge that
has a potential commercial value and knowledge
that is actually commercialized. The greater is the
knowledge filter, the more pronounced is the gap
between new knowledge and commercialized
knowledge.
As already mentioned above, it is the knowledge fil-
ter that impedes investment in knowledge from
spilling over into commercialization that leads to the
so-called Swedish Paradox and European Paradox.
Europe was not alone in having investment in know-
ledge choked off by the knowledge filter from result-
ing in economic growth. The United States has also
not been able to avoid the knowledge filter. In fact,
the knowledge filter impeding the commercialization
of investment in research and knowledge can be for-
midable. As Senator Birch Bayh once warned, “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 bureau-
cratic red tape and illogical government regulations
…”4 It is the knowledge filter that stands between
investment in research on the one hand, and its com-
mercialization through innovation, leading ultimate-
ly to economic growth, on the other. Seen through
the eyes of Senator Bayh, the magnitude of the
knowledge filter is daunting: “what sense does it
make to spend billions of dollars each year on gov-
ernment-supported research and then prevent new
developments from benefiting the American people
because of dumb bureaucratic red tape?”5
Confronted with the knowledge filter impeding the
spillover of knowledge from the firm or organization,
where it was originally generated, into commercial-
ization by third-party firms, the public policy instru-
ments aimed at promoting investment in knowledge
(such as human capital, R&D and university re-
search) may not adequately stimulate economic
growth.One interpretation of the European Paradox,
where such investment in new knowledge has certain-
ly been substantial and sustained,but vigorous growth
and reduction of unemployment have remained elu-
sive, is that the presence of such an imposing know-
ledge filter chokes off the commercialization of new
knowledge investment, resulting in diminished innov-
ative activity and ultimately stagnant growth.
Emergence of the entrepreneurial society
By choking off the spillover and commercialization
of knowledge and new ideas,the knowledge filter at
CESifo Forum 2/2007 4
Focus
4 Introductory statement of Birch Bayh, September 13, 1978, cited
from the Association of University Technology Managers Report
(AUTM 2004, 5).
5 Statement by Birch Bayh,April 13,1980,on the approval of S.414
(Bayh-Dole) by the U.S. Senate on a 91-4 vote, cited from AUTM
(2004, 16).CESifo Forum 2/2007 5
Focus
the same time presents opportunities for individu-
als, or teams of individuals, who place a high valua-
tion on the potential of that knowledge, to become
entrepreneurs. If people are not able to pursue and
implement their ideas and visions within the context
of an incumbent firm or organization that appropri-
ates the value of their ideas, they should start a new
firm, that is, become entrepreneurs. The entrepre-
neurial startup reflects knowledge spillover entre-
preneurship because the ideas serving as the basis
for the startup were obtained, typically for little or
no cost, from a different incumbent firm or organi-
zation. Thus, knowledge spillover entrepreneurship
serves as a conduit for the spillover of new ideas cre-
ated by an incumbent organization but left “uncom-
mercialized”.
The knowledge spillover theory of entrepreneurship
(Audretsch 1995;Audretsch et al.2006) suggests that
contexts which are rich in knowledge will tend to
generate more entrepreneurial opportunities. Fewer
entrepreneurial opportunities will be generated in a
context with a lower amount of investment in new
ideas and knowledge. A consequence of globaliza-
tion,which has shifted the comparative advantage of
developed countries from physical capital to know-
ledge capital, is that entrepreneurial opportunities
become more pervasive (Audretsch 2007).
With the 2000 Lisbon Proclamation,Romano Prodi,
who was at the time serving as the President of the
European Commission, committed Europe to
becoming the entrepreneurship leader in the world
in order to ensure prosperity and a high standard of
living throughout the continent. In particular, Prodi
proclaimed that the promotion of entrepreneurship
was an important cornerstone of European eco-
nomic growth policy: “our lacunae in the field of
entrepreneurship need to be taken seriously be-
cause there is mounting evidence that the key to
economic growth and productivity improvements
lies in the entrepreneurial capacity of an economy.”
(Prodi 2002, 1).
Romano Prodi and the European Union were not
alone in turning to entrepreneurship to provide the
engine of economic growth.The entrepreneurial pol-
icy mandate mirrored similar efforts throughout the
developed world. Public policy spanning a broad
spectrum of national,regional and local contexts was
turning to entrepreneurship to replace old jobs
which were being lost to outsourcing and globaliza-
tion, while at the same time trying to harness the
potential of significant long-term investment in
knowledge, such as universities, education and
research institutions.
Only a few years earlier the policy debate focusing
on growth and employment had looked to the
macroeconomic instruments of fiscal and monetary
policy on the one hand, and the size and scale
economies yielded by the large corporation, on the
other. After all, scholars such as Alfred Chandler
(1977),Joseph Schumpeter (1942) and John Kenneth
Galbraith (1967) had convinced a generation of pol-
icy makers that efficiency and growth lay in the
domain of large corporations and that small business
would simply fade away under the weight of its own
inefficiency.
In distinguishing entrepreneurship policy from more
traditional approaches to business, a shift has
occurred away from the focus on the traditional triad
of policy instruments essentially constraining the
freedom of firms to contract – regulation, competi-
tion policy and public ownership of business. The
policy approach of constraint was sensible as long as
the major issue was to restrain the market power of
large corporations.The fact that this policy approach
towards business is less relevant in a global economy
is reflected by the waves of deregulation and privati-
zation throughout the OECD.
Instead, a new policy approach is emerging which
focuses on facilitating the creation and commercial-
ization of knowledge. Probably the greatest and
most salient change in small business policy over the
last fifteen years has been a shift from trying to pre-
serve small businesses that are confronted with a
cost disadvantage due to scale disadvantages
towards promoting the startup and viability of exist-
ing and new small firms involved in the commercial-
ization of knowledge, or knowledge-based entrepre-
neurship.
Entrepreneurship policy vs. traditional small 
business policy
Entrepreneurship policy is a relatively new phenom-
enon. An important distinction should be made
between traditional small business policy and entre-
preneurship policy. Small business policy typically
refers to policies implemented by a ministry or gov-
ernment agency charged with the mandate to pro-
mote small business.The actual definition of a smallbusiness varies considerably across countries, rang-
ing from firms with fewer than 500 employees in
some of the most developed countries such as the
United States and Canada, to fewer than 250 em-
ployees in the European Union,and to 50 employees
in many developing countries.
There are at least two important ways that distin-
guish entrepreneurship policy from small business
policy. The first is the breadth of policy orientation
and instruments.While small business policy focuses
on the existing stock of small firms,entrepreneurship
policy is more encompassing in that it includes
potential entrepreneurs.This suggests that entrepre-
neurship policy is more focused on the process of
change, regardless of the organizational unit, where-
as small business policy is more static in nature and
remains focused on the enterprise level. Entre-
preneurship policy is also more sensitive to frame-
work or contextual conditions that shape the deci-
sion-making process of entrepreneurs and potential
entrepreneurs.
While small business policy is primarily concerned
with one organizational level, the firm, entrepreneur-
ship policy encompasses multiple units of organiza-
tion and analysis. These range from the individual to
the firm, and to the cluster or network, which might
involve an industry or sectoral dimension, or a spatial
dimension, such as a district, city, region, or even an
entire country.Just as each of these levels is an impor-
tant policy target,the interactions and linkages across
these disparate levels are also important.In this sense,
entrepreneurship policy tends to be more systemic
than small business policy.However,it is important to
emphasize that small business policy still remains at
the core of entrepreneurship policy.
The second way in which entrepreneurship policy is
distinguished from traditional small business policy is
that virtually every country has a ministry or govern-
mental agency charged with promoting the viability
of the small business sector. These ministries and
agencies have by now developed a well established
arsenal of policy instruments to promote small busi-
ness. However, no agencies exist to promote entre-
preneurship. Part of the challenge of implementing
entrepreneurship policy is this very fact, i.e. that no
country has yet introduced an agency mandated with
the charge of promoting entrepreneurship. Rather,
aspects relevant to entrepreneurship policy can be
found across a broad spectrum of ministries and
agencies, ranging from education to trade and immi-
gration. Thus, while small business has agencies and
ministries that champion their issues, no analogous
agency exists for entrepreneurship policy.
Not only are the instruments of entrepreneurship pol-
icy decidedly distinct from those traditionally used to
promote business and small business in particular,but
the locus of such enabling policies is also different.
The instruments constraining the freedom of firms to
contract – antitrust, regulation and public ownership
– were generally controlled and used at the federal or
national level. By contrast, the instruments of entre-
preneurship policy are generally applied at the levels
of a state or city or local community.
Entrepreneurship policy ranges across a broad spec-
trum of instruments, spanning taxes, immigration,
education,as well as more direct instruments such as
the provision of finance or training. If entrepreneur-
ship policy can be viewed as the purposeful attempt
to create an entrepreneurial economy, entire institu-
tions that were the cornerstone of the Solow
Economy are being challenged and reconfigured, at
least throughout the OECD countries, to create the
entrepreneurial economy.
References
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CESifo Forum 2/2007 6
Focus

Capitalism, Socialism and Democracy,

Change and the Aggregate Production Function”,

Increasing Returns and Long-Run Growth”,

Innovation and Industry Evolution,

Prodi,R.(2002),For a New European Entrepreneurship, Instituto de Empressa,

Solow,R.(1956),“A Contribution to Theory of Economic Growth”,

The Entrepreneurial Society,

The Missing Link: The Knowledge Filter and Entrepreneurship

The New Industrial State,

The Visible Hand: The Managerial Revolution in American Business, Cambridge:

The World is Flat,

From small business promotion to creating an entrepreneurial society

http://www.cesifo-group.de/portal/page/portal/DocBase_Content/ZS/ZS-CESifo_Forum/zs-for-2007/zs-for-2007-2/forum2-07-focus1.pdf

From small business promotion to creating an entrepreneurial society

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