Academic journal article Academy of Entrepreneurship Journal

Entrepreneurial Activity and Technological Progress: A Mathematical Model

Academic journal article Academy of Entrepreneurship Journal

Entrepreneurial Activity and Technological Progress: A Mathematical Model

Article excerpt

ABSTRACT

The purpose of this paper is to examine one of the many channels of endogenous technological progress. Technology growth is usually the result of intentional and costly effort, and a significant amount of new innovation is driven by entrepreneurs who seek to introduce new products and new methods in order to earn profit. In this article, a mathematical model based on Schumpeterian theory and entrepreneurial activities is developed and examined.

INTRODUCTION

Most economic models assume that technological progress is an externality to some other form of economic activity such as investment or production. These models are convenient in that they generate permanent economic growth while maintaining an environment of perfect competition. They clash with the observed behavior of many entrepreneurs, however. Innovation and the application of new ideas are usually the result of intentional and costly effort. As (Schmookler's, 1966) classic study of innovation in several U.S. industries found that, invariably, inventions and discoveries were the result of profit-seeking behavior rather than independent intellectual inquiry. More recent research has confirmed Smookler's findings; see for example, (OECD, 1997; Thompson, 2001; and The World Bank, 2002).

Once it becomes accepted that innovation is not costless, the standard neo-classical perfect competition model must be modified to accurately depict the models of economic growth. Research, experimentation, analysis, planning, designing production equipment, and all the other activities related to the creation and application of new ideas that must somehow be paid for. When innovation has direct costs, technological progress becomes more like an investment that requires up-front costs in order to achieve expected future gains. Models that describe the process of innovation must therefore identify the incentives that induce people to incur the up-front costs of innovation. This makes models that assume perfect competition particularly awkward; when the costs of production exactly add up to the competitive price of a good, there is nothing left over to cover the up-front costs of research and development activities.

The most popular models of technological progress assume that innovation is driven by entrepreneurs who seek to introduce new products and new methods in order to earn a profit. These models drop the usual assumption of perfect competition and instead assume that innovators gain market power that permits them to charge prices above their marginal production costs. These types of models of innovation under imperfect competition are often referred to as Schumpeterian models, in honor of the twentieth century economist Joseph Schumpeter.

The purpose of this article is to develop a simple yet informative model of technological progress based on Schumpeterian theory and the natural activities of the entrepreneur. This article is organized as follows: section II presents a brief review of Schumpter's creative destruction hypothesis, section III discusses the importance of entrepreneurial activity in the creative destruction process, section IV develops the foundations and assumptions of the technology model, section V presents the mathematical model, and section VI draws conclusions and offers some remaining research questions on the topic.

SCHUMPETER'S CREATIVE DESTRUCTION HYPOTHESIS

In the early twentieth century, most mainstream economists focused on economic efficiency and resource allocation, but Joseph Schumpeter (Schumpeter ,1912; Schumpeter, 1934) stood out with his alternative viewpoints and his "anti-neoclassical" view of economic growth. Schumpeter has been classified as a radical economist for his description of the capitalist system as a dynamic system that continually generates change and technological progress. He viewed the capitalist system as one that does not reach a stable equilibrium; rather he saw it as an evolutionary process that never reverts to a stationary equilibrium. …

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