Globalization and the Rise of the Entrepreneurial Economy

Globalization and the Rise of the Entrepreneurial Economy David Audretsch and Mark Sanders* Max Planck Institute of Economics Entrepreneurship, Economic Growth and Public Policy Kahlaische Strasse 10 D-07745, Jena, Germany m. sanders@econ. uu. nl Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 1 of 15

Motivation Cause and Effect? : -Globalization and Technology Political and Technological Revolutions 1980 -2000 -Rising Skill Premia in OECD e. g. Katz&Autor (1999), Nickell&Bell (1992) -Increasing importance of Outsourcing e. g. Feenstra&Hanson (1999, 2001) -Rise of the „Entrepreneurial Society“ e. g. Audretsch (2006) Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 2 of 15

Motivation This paper develops a framework for analysis in which: Technology drives trade patterns… … and comparative advantage drives technical change… … and the interaction explains observed trade and labour market trends in North(West) and South(East). Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 3 of 15

The Model South North Invention EI Development ED n NH LNH(w. NH) n NL LNL(w. NL) Mark Sanders George Mason University, Fairfax Outsourcing EO n SL LSL(w. SL) Max Planck Institute of Economics March 29, 2007 slide 4 of 15

The Basic Model Basic Demand Structure as in Krugman (1979) and Grossman and Helpman (1991) Consumers: Identical CIES ÞSavings Identical LOV ÞIso-Elastic Demand Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 5 of 15

The Basic Model Basic Production Structure as in Grossman and Helpman (1991) Producers: Monopolistic Competition+Linear Production Function in L ÞPrice is set as fixed mark-up over wage ÞProfits are positive Not 2 (G&H, 1991) but 3 different types of labor, LNH, LNL and LSL Þ not 2 but 3 wage, price and profit levels Þ not 1 but 2 potential binding price constraints Þ not 2 but 4 constellations of price, wage and profit levels Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 6 of 15

The Static Equilibrium w NH L NH * w. SL w NL L NL * L NH L NL Mark Sanders George Mason University, Fairfax L SL* L SL Max Planck Institute of Economics March 29, 2007 slide 7 of 15

The Dynamic Model How do Entrepreneurs move products over the life cycle? Entrepreneurs Invent, Develop and Outsource according to: Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 8 of 15

The Dynamic Model Why do Entrepreneurs move products over the life cycle? Entrepreneurs Invent, Develop and Outsource to gain: Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 9 of 15

The Dynamic Model E E G* E* ED EI EO w T* EI EO ED w. T Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 10 of 15

The Dynamic Model Comparative Statics: 1. 2. 3. 4. 5. 6. 7. 8. Higher LSL (Globalisation) Reduces wages in South Increases income/profits in South Re-allocates Entrepreneurs towards outsourcing Increases rate of outsourcing Causes higher SS size of foreign sector Reduces low skilled wages/employment in North Reduces wages in South Increases returns to Entrepreneurship Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 11 of 15

The Dynamic Model Comparative Statics: 1. 2. 3. 4. 5. 6. 7. Higher n. A or g (General Purpose Technology) Increases productivity of Innovators Re-allocates Entrepreneurs towards innovating Increases rate of innovation Causes higher SS size of „new“ sector Increases high skilled wages/employment in North Increases intra- and international income inequality Increases returns to Entrepreneurship Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 12 of 15

The Dynamic Model Comparative Statics: 1. 2. 3. 4. 5. 6. 7. Higher Ψ (Reduction in Risk) Reduces discount rate for outsourcing Re-allocates Entrepreneurs towards outsourcing Increases rate of outsourcing Causes higher SS size of foreign sector Decreases low skilled wages/employment in North Increases wages in South Increases returns to Entrepreneurship Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 13 of 15

Policy Implications Income Inequality vs Wage Inequality Impact of Entrepreneurship and R&D Policy Intranational vs International Wage Inequality The Entrepreneurial Society vs Industrial Economy Comparative Advantages in Entrepreneurship Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 14 of 15

Concluding Remarks Managing globalization poses the biggest 21 st century challenge to policy makers. Western politicians should focus on entrepreneurship policies, not only to maximise growth at home but also to moderate wage divergence and build comparative advantage. Smart redistribution is necessary to make globalization a pareto-improvement. Mark Sanders George Mason University, Fairfax Max Planck Institute of Economics March 29, 2007 slide 15 of 15