Innovation and Entrepreneurship

Résumé du document

In the absence of further fiscal and monetary stimulus, how would an appreciation of the issues surrounding innovation and entrepreneurship help the government achieve its aim of boosting the growth rate of the UK economy? Economic growth is a main point in nowadays' economic stakes. Indeed, surveys prove that in the long run, economic growth has a major effect on living standards. Most of the European countries currently experience a phase of very slow growth, in addition, policy makers' interest for economic growth is explained by the high unemployment rates which seem to set in. Since 1973 and the first oil crisis, the United Kingdom has experienced a period of stagflation (a combination of inflation and slow growth).

Moreover, as a consequence of the economic crisis, the last three years have been characterized by a period of recession finished officially on January 26th (startups.co.uk, 2010). In view of the current significance of a faster economic growth in the United Kingdom, we can wonder what policies the government can introduce to boost growth rates. Innovation and entrepreneurship are in today's literature regarded as key engines of economic growth and can represent an answer to the current issues faced by the United Kingdom.

A significant number of theories linking innovation and entrepreneurship to economic growth are based on Robert Solow growth model (1956), in particular on the production function. Solow's production function shows how much output the economy can produce from available inputs of the two main factors of production: capital and labor. Solow acknowledges that economic growth was influenced by technical change, which is in his model an unexplained residual. One of the main conclusions of his theory is that most of the variation in economic growth is due to this residual, rather than inputs of capital and labour.

Extraits

[...] 2/Application to the case of the United Kingdom economy The United Kingdom government is aware of the importance of innovation and entrepreneurship in regards to economic growth. Creating the entrepreneur visa, or allocating £200m to the UK Innovation Investment Fund, the United Kingdom government emphasizes these notions. However, these measures have to be commented. Promotion of the creation of new SMEs Studies and literature in the sixties and seventies showed that the Small and Medium Enterprises' impact on the economy efficiency and involvement on innovative activities was not as significant as their larger firms counterparts. [...]

[...] However, according to authors as David B. Audretsch, high uncertainty, asymmetries and transaction cost of new ideas makes entrepreneurship the main engine of economic growth, rather than knowledge progress by itself. Indeed, because of this uncertainty, hierarchies are less likely to trust in new ideas. This phenomenon, called knowledge filter by Audretsch, impedes investments in new knowledge from spilling over for commercialization. Then, from this point of view, the main driver of economic growth through innovation is the individual worker, who chose to start its own firm, because of a divergence in the valuation of its idea coming from its hierarchy. [...]

[...] Creation of a favourable environment in regards to entrepreneurship Randall G. Holcombe (1998) sees the entrepreneurship process as a virtuous circle, as a chain of event. According to him, entrepreneurship leads to economic growth, and economic growth leads to a favourable environment to entrepreneurship. From this point of view, policies, more than focusing on investment in innovation by itself, must lead to the creation of a favourable environment, where entrepreneurial opportunities can be easily exploited, where entrepreneurship is rewarded. We can relate this to a recent announcement from David Cameron, indeed, the government plans to review the laws on intellectual property, in order to promote entrepreneurship in the United Kingdom (The Telegraph, 2010). [...]

[...] In Schumpeter's point of view (1942), innovative entry by entrepreneurs is the force that sustains long term economic growth, even as it destroyed previous activities, derived from previous technological, organizational, regulatory, and economic concepts. This idea of creative destruction explains for him economic cycles. Schumpeter emphasises the role of the entrepreneur. He suggests that large firms tend to resist change and that this drives entrepreneurs to start new firms, based on innovative ideas. Thus, the entrepreneur, producing new products, adapting new processes, using new raw material and creating new markets, is the main driver of economic growth in his vision of capitalism. [...]

[...] European Union studies show that numerous cultural aspects can influence someone's wish to create or expand his own business (OECD, 2004). Public institutions, through education, have a significant role in the creation of an entrepreneurial society. According to a study published in December 2010, almost two thirds of Britons feel their country is not as innovative as it used to be, despite government efforts to create a culture where enterprise and innovation can flourish (The Guardian, 2010). The research, produced by pharmaceuticals company AstraZeneca, showed that America is still viewed as the most innovative country, after Japan and China. [...]