Entrepreneurship and Knowledge

Entrepreneurship represents the actions of entrepreneurs who develop new products, production methods, or businesses. Entrepreneurship is sometimes considered a factor of production, joining natural resources, human resources, and capital goods. Entrepreneurs are innovators and risk-takers who transform ideas into commercial enterprises. The founding of Apple Computer by Steven Jobs, Microsoft by Bill Gates, and Walmart by Sam Walton testify to the importance of entrepreneurial activity in the U.S. economy. The annual Global Entrepreneurship Monitor (GEM) has made compelling links between entrepreneurship and economic growth and development. The GEM 2011 Global Report investigated entrepreneurial activity in 52 economies. One conclusion from this study was that “an economy's prosperity is highly dependent on a dynamic entrepreneurship sector.”[1]

Closely related to the topic of entrepreneurship is knowledge. Knowledge promotes innovation, the process of converting scientific discoveries and technological advances into profitable products or improved methods of production. Knowledge and innovation often ripple through an economy, sparking additional business formation, job creation, and national output. Under the banner of new growth theory, economist Paul M. Romer argued that economic growth is mainly the result of new knowledge. For example, new knowledge created through investments in education, research and development, and other means supported economic growth in the United States and Japan after World War II. New growth theorists also argue that knowledge is not subject to the law of diminishing returns. The law of diminishing returns states that as additional inputs are used in production, progressively smaller amounts of output are created. Instead, these new growth theorists contend that knowledge spawns increasing returns, as the boundless applications and adaptations of new ideas create limitless commercial possibilities.

During the twentieth century the benefits of knowledge gained through research and development (R&D) became more apparent to businesses and to the government. Businesses, especially large corporations, created R&D departments to remain competitive in domestic and global markets. In 2009 total spending on R&D in the United States was $400 billion. Of this total, private industries supplied $247 billion in R&D funding, about three-fifths of all money spent on R&D, as shown in Table 8.5. The top private sector R&D spenders were found in six industry groups: chemicals, computer and electronic products, aerospace and defense manufacturing, automotive manufacturing, software and computer-related products, and R&D services. Another major source of R&D funding was the federal government ($124 billion). Finally, state governments, colleges and universities, and nonprofit organizations spent $29 billion on R&D. Historically, nations with

Thomas Alva Edison at his New Jersey research laboratory

Thomas Alva Edison at his New Jersey research laboratory, 1901. (Library of Congress)

relatively high spending on R&D include the United States, Japan, Germany, and South Korea.[2]

Favorable Economic Environment

The process of economic growth is enhanced by a favorable economic environment, which includes a sophisticated infrastructure, supportive economic institutions, and macroeconomic stability. A country's infrastructure includes public sector facilities and services such as roads and bridges, airports and seaports, water and sanitation systems, hospitals, schools, courts and prisons, and other public goods that support an orderly living environment and predictable business climate. The government finances most of its spending on infrastructure—sometimes called social capital—with tax dollars. A country's infrastructure also includes private sector features such as information and communications systems, electric power networks, and other energy systems. Infrastructure construction and maintenance is a high priority item in the advanced countries but often is underfunded in the developing world.

Table 8.5 U.S. Funding for Research and Development, 2009

Source of Funding for R&D

R&D Funding ($ billions)

R&D Funding (% of total)

Private industries



Federal government






Total R&D Funding



Source : National Science Foundation, “Table 4.1,” Science and Engineering Indicators, 2012

Supportive market-oriented economic institutions, formal and informal, are also crucial to economic growth. Some market institutions are abstract, such as private property rights, voluntary exchange, economic freedom, and profit incentives. Yet these institutions motivate people to work, save, invest, and take financial and business risks in domestic and foreign markets. Other institutions are more tangible. For example, banks and other depository institutions channel savings into productive investments. Stock and bond markets provide a mechanism to raise funds for business start-ups, expansions, or mergers and acquisitions. Public institutions, such as the Federal Reserve System (Fed) and the Securities and Exchange Commission (SEC), provide oversight of financial markets.

Finally, macroeconomic stability supports economic growth. The federal government promotes macroeconomic stability—stable prices and full employment—through responsible monetary and fiscal policies. In the U.S. economy the Federal Reserve System (Fed), the nation's central bank, implements monetary policy. During times of inflation the Fed uses its monetary tools to tighten credit and withdraw money from the economy. These actions reduce the primary cause of inflation—too much money chasing too few goods. If the economy slumps into a recession, however, the Fed loosens credit and

ECONOMICS IN HISTORY: General Purpose Technology and the Birth of the Internet

Government support for R&D takes many forms, including grants to colleges and universities, financial aid to private firms, and funding for general purpose technologies. A general purpose technology (GPT) is a technology that could, over time, have many possible uses depending on the creativity of entrepreneurs and other innovators in the economy. Government funding of GPTs is sometimes necessary to defray prohibitive research costs. The selection of research projects for such funding is based mainly on the likelihood of spillover benefits for the economy and society. Perhaps the best-known GPT is the Internet.

The Internet, originally called ARPANET, was a GPT financed through the U.S. Department of Defense. Its main goal was to facilitate communication and information sharing by linking computers located at different sites. As the linkages grew, the project was taken over by the National Science Foundation.[3] Since its invention (1969), the Internet’s commercial value increased with the introduction of complementary technologies such as email in 1972 and the World Wide Web (WWW) in 1989. By 2012 about 2.3 billion people worldwide were Internet users, according to the International Telecommunications Union (ITU).[4] The value of U.S. ecommerce, which is conducted over the Internet, accounted for $3.4 trillion in 2009. Most of this $3.4 trillion in ecommerce was for business-to-business (B2B) transactions ($3,073 billion) rather than business-to-consumer (B2C) transactions ($298 billion).[5]

expands the money supply. These actions stimulate business activity. Congress stabilizes the economy through fiscal policy. Congress fights inflation by withdrawing money from the economy by raising taxes or lowering government spending. Congress fights recession by pumping money into the economy by lowering taxes or increasing government spending.

Good Governance

Good governance occurs when the government is honest and competent in the discharge of its responsibilities. At the core of good governance is the rule of law, an understanding that all participants in the nation's economic and political life must abide by the same rules. Good governance promotes economic growth by encouraging people's participation in the formal economy and by creating equal opportunities for success.

The advanced economies of the world have long traditions of good governance. Specific indicators of good governance include a fair system of taxation, enforceable patent and copyright laws, legal protections for private property and private profits, effective antitrust laws, transparency in public and private sector business transactions, the absence of corruption and political cronyism, and a host of rules and regulations to protect the rights of marketplace participants, including workers, investors, savers, and consumers. Combined, these features of good governance provide incentives for people to develop and apply their talents in the formal economy. On a broader level, good governance supports human rights, gender equity, tolerance, and democracy.

Democracy and freedom support market-oriented economic institutions and economic growth. Democracy is a type of political system that relies on broad-based citizen participation, free elections, and the rule of law. The political freedoms inherent in democracies are compatible with the economic freedoms of capitalism. That is, democracy and capitalism embrace freedom of choice and informed decision making by the people. Studies by the Freedom House, the world's most recognized authority on global political trends and the status of freedom, established a direct relationship between freedom and economic growth. This conclusion applies to countries at all levels of economic development.[6] Not all countries with growing economies are democratic, however. China, one of the fastest growing economies in the world in recent decades, maintains an undemocratic, one-party political system. Similarly, the growing economies of some oil-rich Persian Gulf countries such as the United Arab Emirates and Saudi Arabia are monarchies.

Corrupt political institutions, on the other hand, undermine economic growth and development. Corruption is the abuse of public trust for personal gain. Corruption occurs when public officials or private sector business people intentionally circumvent existing laws and ethical standards to improve their own wellbeing. The activities commonly associated with corruption are manifest in a tangled web of improprieties among public officials, government agencies, private businesses, or other special interest groups. Corruption reduces a country's growth potential. Rampant bribery, intimidation, and cronyism stifle legitimate business start-ups, investment, research and development, and innovation. Corruption also weakens entrepreneurship, retards capital formation, and discourages long-term global connections such as foreign direct investment (FDI), international trade, and foreign aid. This type of unstable business environment also encourages the hasty exodus of skilled workers and financial resources from the country.

  • [1] Niels Bosma, Sander Wennekers, and Jose Ernesto Amoros, Global Entrepreneurship Monitor 2011 Extended Report: Entrepreneurs and Entrepreneurial Employees across the Globe (Babson Park, MA: Babson College, 2012), 8
  • [2] National Science Foundation (NSF), “Table 4.1: U.S. R&D Expenditures, by Performing Sector and Source of Funding, 2004–2009”; U.S. Bureau of the Census, “Table 779: Research and Development (R&D) Expenditures by Sources and Objective, 1980–2008,” “Table 800: National Research and Development (R&D) Expenditures as a Percent of Gross Domestic Product by Country, 1990–2009,” “Table 806: Funds for Domestic Performance of Business Research and Development (R&D) in Current and Constant (2005) Dollars by Source of Funds and Selected Industries, 2005–2008,” Statistical Abstract of the United States: 2012, 522, 525
  • [3] Council of Economic Advisors, “Support for Research and Development,” Economic Report of the President: 2000 (Washington, DC: U.S. Government Printing Office, 2000), 123-124.
  • [4] International Telecommunications Union (ITU), World Telecommunications, “Key Statistical Highlights: ITU Data Release June 2012,” ICT Indicators Database, 2012
  • [5] U.S. Bureau of the Census, “U.S. Shipments, Sales, Revenues and E-Commerce: 2009 and 2008,”
  • [6] Freedom House, “Freedom and Economic Growth,” Freedom in the World: 2000-2001 (New York: Freedom House, Inc., 2000)
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