Exploring the Links between Entrepreneurship, Innovation, and Productivity
A slowdown in US productivity growth in recent decades has heightened interest in the determinants of entrepreneurship and innovation, and the links between them and economic growth. To provide new insights on these critical questions, the NBER, with the generous support of the Ewing Marion Kauffman Foundation, conducted a research project on The Role of Innovation and Entrepreneurship in Economic Growth.
The project consisted of 12 detailed case studies, each examining an industry with a high level of entrepreneurial and innovative activity in which there has been rapid improvement in productivity. The capstone conference at which these studies were presented drew together many leading scholars of entrepreneurship and productivity economics. It also included nearly a dozen entrepreneurs, venture capitalists, and policymakers who shared their views on the drivers of entrepreneurship.
The research papers have just been published by the University of Chicago Press in The Role of Innovation and Entrepreneurship in Economic Growth. The volume was edited by the four NBER affiliates who organized the project, Michael J. Andrews of the University of Maryland, Baltimore County, Aaron K. Chatterji of the US Department of Commerce (on leave from Duke University), Josh Lerner of Harvard Business School, and Scott Stern of the MIT Sloan School of Management.
A recent NBER project examined the specific innovations and entrepreneurial breakthroughs that supported advances in productivity in individual industries.
In their introductory essay, Andrews, Chatterji, and Stern synthesize the findings of the multiple industry-specific studies and draw several conclusions. First, they find that the extent to which entrepreneurship and innovation influence growth varies both within and across industries. The individual studies find substantial heterogeneity across sectors. The 12 sectors included in the study cover more than three-quarters of US output and nearly 80 percent of employment. On average, firms produce about one patent per thousand employees. However, this headline figure masks substantial across-industry variation. The average firm in the manufacturing sector, for example, produces about 5.6 patents for every thousand employees. In the education sector, by contrast, there are only 1.6 patents for every hundred thousand employees; the rate of patent production is about 1/300th of that in manufacturing.
The essay notes that the most innovative and entrepreneurial sectors are science based, such as information technology and energy, or are adept at incorporating productivity-enhancing technological spillovers derived from recent scientific advances. The transportation sector is an illustration of the second category: software innovations from other sectors have enabled ridesharing apps, thereby raising the productivity of both new and legacy workers. In the energy sector, which is science based, there is also a role for incorporating spillovers. The growing cost-competitiveness of clean energy technologies and the demand for improvements in existing electric grid management, for example, may allow young and entrepreneurial firms from the IT sector to enter with new innovations that meet market demands.
Innovation has been slower in industries like housing and education. The COVID-19 pandemic has highlighted intersectoral productivity differences. Even though COVID-19 forced school districts to adopt new technologies and to adapt to remote teaching, many productivity-driven sectors were more resilient at the onset of the pandemic. This was especially true for industries that had the requisite general purpose technology in place to transition to remote work with minimal disruption.
The project identified a number of factors such as the spatial correlation of entrepreneurial activity that may hold back the future pace of innovation. One study noted that patenting within the IT sector has become increasingly geographically concentrated in a few major urban hubs. Another study made a similar point about the health care sector. Entrepreneurs outside of these locations may be excluded from contributing to innovative activities. The leakage of women and minorities from the entrepreneurial pipeline, especially at the early career stage, may also reduce the number of transformative and diverse ideas that are developed enough to support substantial productivity advancement.
— Aaron Metheny