The Lucana in Economic Growth Theory

Economic growth theory, be it neoclassical or the so-called “new” growth theory, is limited in its ability to explain differences in growth rates amongst nations. Perhaps the primary reason for this is the low appreciation and understanding amongst economists with respect to the role of institutions, management, and gov- ernance. Few would dispute that the engine of capitalist devel- opment is the business enterprise; yet, the role of the business enterprise in growth and development is greatly underemphasized in economic growth theory. Accordingly, if we want to understand economic growth and economic development better, we need a more complete understanding of the role of management and entrepreneurship in enterprise performance, and of enterprise per- formance in economic development and growth.

Fortunately, economic growth theorists and development schol- ars alike are beginning to recognize that the application of technol- ogy and the development of institutions to protect property, control corruption, and advance the rule of law are critical to development and growth. For instance, a leading mainstream scholar, Jeffrey Sachs, recently wrote:

I believe that the single most important reason why prosperity spreads, and why it continues to spread, is the transmission of technologies and ideas underlying them. Even more important than having resources in the ground, such as coal, was the ability to use modern, science-based ideas to organize production. (Sachs, 2005: 41)

In the modern world, the multinational corporation is frequently the instrument by  which  technology  gets  transferred,  at  least in commercial contexts. It is necessary, therefore, to develop a better understanding, in both developing and developed coun- try contexts, of the role of the enterprise  in  developing  and using new technologies and new forms of business organization. Indeed, recognized business historians such as Chandler (1990a) and Lazonick (1990) attribute a large part of the reason why the USA overtook Britain in economic performance to differences in management and enterprise structure. Many other writers see the organization of Japanese firms post-1950 as a major factor enabling Japanese postwar growth. Mowery and Nelson (1999: 371) ascribe descriptive power to dynamic capabilities in helping to illuminate the importance of enterprise performance to industrial leadership. Notwithstanding the work of economic and business historians and others, mainstream economic theory has not properly recognized the role of entrepreneurship, institutions, management, and orga- nization in economic development and growth.

Outside mainstream economics, there is at least a consider- able literature stressing the role of the entrepreneur in economic growth and development. However, in the context of today’s open economies, the distinction between the functions of entrepreneurs and managers is fading. Indeed, the thesis of this chapter is that once the process of new business formation is achieved—with an enterprise achieving say $100 m. of revenues and/or employing 100 plus personnel—the role of the entrepreneur and the role of managers in enterprise success morph considerably. Put differently, once an enterprise is established, continued success in an open competitive economy requires entrepreneurial management and the building, maintenance, and employment within the enterprise of what I call “dynamic capabilities”. Put differently, distinctions between entrepreneurial capitalism and managerial capitalism are blurring, and marketplace success requires management to be entrepreneurial in important ways defined by the dynamic capa- bilities framework.

The notion that entrepreneurship, organization,  and  manage- ment are important to economic growth can be traced to the clas- sical economists. Even Adam Smith was aware of the importance of learning and  knowledge  to  economic  growth.  His  discussion of the pin factory demonstrated how  individual  and  organiza- tional learning—repeated exposure to  individual  tasks  flowing from specialization—enabled workers to increase productivity.

The great increase in the quantity of work which, in consequence of the division of labor, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of individual dexterity in every particular workman; secondly, to the savings of time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour. (Smith, 1776: 112)

Marshall (1925) also recognized the importance of organizational considerations, particularly external economies arising from the interaction between industrial districts. He saw positive external- ities available to all firms in a given industry. He anticipated many of the later insights on spillovers, and some of the insights on appropriability.

It is well recognized that Schumpeter was somewhat schizo- phrenic about the role of the entrepreneur and the role of management of large organizations. In The Theory of Economic Devel- opment (1911), he stressed the role of the individual entrepreneur in economic development. In Capitalism, Socialism, and Democracy (1942), he emphasized the role of the large corporation in inno- vation and economic growth. Schumpeter described in Capitalism, Socialism, and Democracy a world of “managerial capitalism” where the entrepreneurial function and the entrepreneurial class were destined to disappear. As Acs et al. (2006) note, “the large corpora- tion, by taking over the entrepreneurial function, not only makes the entrepreneur obsolete, but also undermines the sociological and ideological functions of capitalist society”. Schumpeter (1942) saw the large corporation as autonomatizing progress, with the giant industrial enterprise ousting small and medium-sized firms.

Of course, enterprises large and small have great trouble sustain- ing long-term superior performance. Even with large R&D bud- gets, success at innovation is not automatic. To sustain superior performance, the business enterprise must do a lot more than simply allocate large expenditures to R&D. The innovation process requires active orchestration of both intangible and tangible assets by entrepreneurs and managers. This is true whether the context is the small or the large enterprise.

Indeed, it is clear that both large and small firms face similar challenges. The maturity of the venture capital and private equity providers means that the differential with respect to access to finan- cial resources, as between large and small companies, has been reduced in most developed economies. Hence, the Schumpeterian dichotomy between large (well-capitalized) firms and small, poorly funded ones has substantially eroded, at least in North America and Europe where venture capital and private equity are well established.

Source: Teece David J. (2009), Dynamic Capabilities and Strategic Management: Organizing for Innovation and Growth, Oxford University Press; 1st edition.

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