Entrepreneurship and innovation in the disruption age – the three dimensions of a public policy
Productive entrepreneurship (expression that covers independent inventors and innovators) is an essential factor in productivity growth for reasons that mainly involve its central role in producing radical (as opposed to incremental) innovations. It is thus important to identify the public policy that should be dedicated to it, particularly in the age of digitalisation when so many new technological opportunities present themselves to potential entrepreneurs. We think that an ideal comprehensive policy should have three dimensions.
The first concerns science and higher education and their translation into technological opportunities – this mainly involves policies devoted to universities (research, higher education and knowledge transfer).
The second concerns framework conditions, also known as the rules of the game – this mainly involves the improvement of economic, financial, fiscal and social institutions and regulations, aimed at enabling those who wish to “do technology and innovation” to do so as entrepreneurs.
Finally the third dimension concerns optimisation of the potential supply of entrepreneurs, that is to say, the supply of persons whose talent and motivations should destine them for this type of professional development but who do not all have access to it for reasons of gender, social or geographic origin.
We shall see that Switzerland excels as far as the first aspect of this policy is concerned and is making significant progress with regard to the second. On the other hand, it still has a long way to go regarding the third one.
Excess of incentives and supply depletion: what are the solutions?
The most interesting question today is to know whether by improving the rules of the game in favour of entrepreneurship, creating more and more positive incentives, such as an unprecedented abundance of financing (Hill, 2015), and multiplying the exhortations to become involved in entrepreneurial activities in schools and universities, we are not running the risk of at some point encountering a supply problem, since according to the great economist Baumol (1990), entrepreneurship is a relatively constant resource across time and countries[1]. When all those who have the right talents and taste for this activity have responded positively to these positive incentives, the supply runs out and the supply problem manifests as the entry of additional people into this arena, who have neither the taste nor the talent to be entrepreneurs but who try their luck anyway, being practically compelled to do so by the atmosphere, discourse and all these new rules of the game.
We have probably not yet reached that point, but the sheep like behaviour so prevalent in all the current domains of technological opportunity can be considered as an indication of a trend in this direction – something also clearly expressed by Schmalensee and Sanders (2016) when they write: “Most who try this business model will fail miserably, after burning through mountains of cash. Some of the copycat ‘Uber for something’ will revolutionize industries, but most will close down and become the Uber for nothing “. Indeed, the start-up entrepreneurial project is by definition an extremely dissipative process in which lots of resources are burned with little effect; and when outcomes are viable, they are likely to be duplicative and give rise to equilibria that look like monopolistic competitive equilibria: small enterprises with excess differentiation on product or service lines and excess capacity – a typical situation in today’s Internet and digital economy.
The continuous and relentless improvement of the rules of the game and positive incentives is obviously an excellent thing but it must be linked with another policy that focuses on increasing the supply of entrepreneurship.
This has been said by Baumol to be relatively constant – which is true as long as certain parameters of gender, social class and geographic origin, which greatly determine access to this supply, are not modified. This is the message of recent American works (Bell et al. 2017) as well as works on Finland (Aghion et al., 2016) that show that the supply of productive entrepreneurship is greatly determined by these criteria. For example: the geographic location of children’s education plays a major role in determining whether they will become inventors: children who grow up in areas where there are more inventors, and are thereby more exposed to innovation while growing up, are much more likely to become inventors themselves. Likewise concerning social class (Figure 1): children with parents in the top 1 per cent of income distribution are ten times more likely to become inventors than children with below median income parents. There are analogous gaps regarding race and gender. As these authors write: “America is full of ‘lost Einsteins’ among women, minorities, and low-income groups: high performers who never become inventors because they are not exposed to innovation as children”. These findings call for greater focus on policies that harness the underutilised talent in these groups by providing them with greater exposure to innovation.
We can thus be glad about rules of the game that are more favourable to productive entrepreneurship but to prevent this from manifesting as excess demand (case where the supply is exhausted and less competent and motivated persons become involved in this activity), the supply must be increased by policies targeted at groups and populations that for the moment have no access to it.
What’s the state of play in Switzerland?
This targeted policy would make perfect sense in Switzerland, especially in the areas of gender, social class and geographic origin. Switzerland excels in the domains of research, higher education and technology transfer. The first aspect of the policy (in terms of technological opportunities) is thus very well assumed (especially since Switzerland is a small country that could settle for merely absorbing international knowledge spillovers). Furthermore it is making significant progress with regard to improving the rules of the game in favour of productive entrepreneurship. The second aspect of this policy is therefore also well assumed, even if there is still room for improvement. But Switzerland remains very timid with regard to the third aspect of the policy, that which concerns increasing the supply of productive entrepreneurship. It is behind with regard to access to productive entrepreneurship by women, migrants and (otherwise) disadvantaged social classes.
And yet an entrepreneurship policy that focuses only on science and research on the one hand and the rules of the game on the other is a shaky one. If the third aspect of public policy is neglected, the country loses potential innovators (Bell et al. estimate that the innovation rate could be quadrupled in the United States by correctly addressing these gender, race and social class gaps). Moreover, the blossoming of technological opportunities and continuous improvement of the rules of the game ultimately result in the recruitment of less competent and motivated people in entrepreneurship – since owing to a lack of reinforcement from hitherto little mobilised classes and groups, the supply runs out!
Each country is different however and increasing the exposure to inventors and innovators in favour of disadvantaged groups will not happen in Switzerland as it does in the United States. Particular consideration must be given to the excellence of the professional training system – which must play a central role in these targeted programmes. Along with the entrepreneurial campuses of the ETHs, Universities and innovation Parks, the entire professional training system must be better mobilised to increase the exposure of each student to innovation, in ways that are still to be invented.
References
Aghion, Akcigit, Hyytinen and Toivanen, Living the American dream in Finland: the social mobility of inventors, January 2017, draft
Baumol, Entrepreneurship: productive, unproductive and destructive, Journal of Political Economy, Oct. 1990
Bell, Chetty, Jaravel, Petkova and Van Reenen, The lifecycle of inventors, 2017, draft
Hill, S., Raw Deal, St Martin’s Press, 2015
Schmalensee and Sanders, What platforms do differently than traditional businesses, Harvard Business Review, May 11, 2016
[1] The full argument of Baumol is that there is always, in any society and historic period, a percentage of persons who are ‘entrepreneurs’ (broadly defined as alert persons who perceive and exploit profit opportunities) but these entrepreneurs are not necessarily operating in the domain of innovation and technology. This depends on the rules of the game – i.e. the reward structure of the economy. Since a few decades, the rules of the game have continuously improved in order to attract entrepreneurship more and more towards innovation and technology.