The process of "creative destruction," whereby entrepreneurs with new ideas and methods of production displace less efficient incumbents, is believed to play a critical role in driving productivity growth in the economy. High-profile entrepreneurs create and commercialise new technologies such as automobiles and semiconductors--major innovations that spawn new industries. Although clearly important, such start-ups only represent a tiny proportion of overall entry in the economy. Perhaps 0.1%-0.2% of U.S. start-ups receive venture capital funding each year--the predominant source of finance for such high-growth ventures.
A less visible channel is the enhanced productivity growth arising
from increased efficiency in existing methods of production. A
substantial share of the productivity growth in the economy is believed
to arise from through the birth of more productive firms and the closure
of unproductive firms rather than just through existing firms becoming
more productive. Foster et al. (2008) show the productivity advantages
of new entrants in a variety of manufacturing industries, including
traditional products such as concrete. A number of related studies
further point to the vital role of this general entrepreneurship for
economic growth. Policymakers should thus pay as close attention to
these attempts to "build better mousetraps" as they do to venture
capital-backed start-ups.
To read the full, original article click on this link: How Governments Should Spur Entrepreneurship - Forbes.com
Author: William Kerr and Ramana Nanda
