Home .Change and innovation Innovating out of crisis
Innovating out of crisis
Thursday, 08 December 2011 03:26

Many macroeconomists are suggesting that the United States could be "turning Japanese" -- meaning that it could also be in for a lost decade.

But this assessment underestimates America's capacity for generating an entrepreneurship- and innovation- driven path out of crisis.

Recessions and crises can indeed be breeding grounds for entrepreneurship and innovation, and provide new sources of growth, according to OECD analysis.  Companies like Microsoft, Nokia, Google, Blackberry (RIM) were all born, or reborn, during an economic downturn. In fact, over half of the companies on the 2009 Fortune 500 list began during a recession or bear market.

Firms based on constant innovation can also become “life-saviors” in times of economic depression and serve as “fast-start engines” during recovery. Both Apple and Amazon, for example, reported the best earnings in their company history of the companies during the 3rd quarter of 2009.

So what is entrepreneurship?  No-one can agree on a single definition.  But as Zoltan Acs and Laszlo Szerb note in their work on the Global Entrepreneurship and Development Index, the key elements are risk taking, opportunity recognition, motivation and exploitation, and innovation. 

How should we think about entrepreneurship and development?  In his seminal work on the stages of economic growth, Walt Rostow suggested that countries go through five stages of economic growth, namely, traditional society, preconditions for take-off, take-off, drive to maturity, and the age of mass consumption.

Michael Porter has provided a modern rendition of this by identifying three stages of development, that is, a factor-driven stage, an efficiency-driven stage, and an innovation driven stage.  Economies in the factor-driven stage are substantially agriculture-based economies for which innovation might account for only about 5 per cent of economic activity. 

When economies pass to the efficiency-driven stage, manufacturing of basic goods and services becomes more important, and innovation might account for about 10 per cent of economic activity.  The innovation-driven stage is characterized by knowledge-intensive activities, and a high degree of entrepreneurship.  Innovation accounts for about 30 per cent of economic activity in this stage.

Acs and Szerb then proceed to estimate levels of entrepreneurship for 71 countries based on their own definition of entrepreneurship which is the dynamic interaction between entrepreneurial activity, aspiration and attitudes.

So which of these countries rank the highest in the Global Entrepreneurship and Development Index?  Denmark comes in top of the world in entrepreneurship.  Other smaller European countries also do well: Sweden 4th, Switzerland 7th, Norway 8th, and Netherlands 10th.

The US comes in 3rd placed, and some other countries most affected by the global financial crisis are very well positioned in the entrepreneurship stakes.  Ireland is 6th, and Iceland is 9th, while the UK is a bit further down the list at 14th.  Perhaps we can look forward to some dynamic and innovative entrepreneurs rising from the ashes of the financial crisis.

Things don’t look too good for Japan which has been in crisis for some two decades now -- it is only 29th.  This confirms the intuition that Japan's weak entrepreneurship may have kept it stuck in its lost decades.  Things also don’t look too rosy for some of the European-crisis countries – Spain is 28th, Portugal 33rd and Greece 34th.  

What about the dynamic, emerging economies of Asia?  Most of these have not yet reached the innovation-driven stage of development like most of the OECD countries.  They are still in the efficiency-driven stage.  Following decades of export-driven growth focused on the US and EU markets, these countries are now faced with “rebalancing growth” towards regional and domestic demand, for which innovation capacities are important. 

Most of these countries look in pretty good shape – Singapore is 15th, Korea 20th, Hong Kong 23rd, Malaysia 31st and China 40th.  However, some of the other Asian countries will struggle in their quest to rebalance growth through entrepreneurship – Indonesia is 46th, India 54th, Thailand 57th and the Philippines 70th.

So what should do to promote greater entrepreneurship? 

While everyone has their own theory of entrepreneurship, some themes emerge from the OECD’s vast work on this topic like: promoting an entrepreneurial, risk taking culture; removing the burden of unnecessary regulation; improving access to finance; providing education and training for entrepreneurship, especially to engineers and other technicians who have entrepreneurial aspirations; and promoting partnerships between business, research communities and government to develop knowledge synergies.

Fundamentally, a culture of openness is necessary, including openness to immigrants who are very often the most entrepreneurial of all.  And for this, political and societal leadership is crucial.

 

 

References:

Launch of the OECD’s Innovation Strategy, Angel Gurría, OECD Secretary-General

http://www.oecd.org/document/12/0,3746,en_2649_34273_45330700_1_1_1_1,00.html   

The Global Entrepreneurship and Development Index (GEDI), Zoltan Acs and Laszlo Szerb. 

http://www2.druid.dk/conferences/viewpaper.php?id=502261&cf=43   

OECD, Centre for Entrepreneurship, SMEs and Local Development

http://www.oecd.org/findDocument/0,3770,en_2649_33956792_1_119802_1_1_1,00.html  

 

 

 


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