Creating entrepreneurial energy and the Dutch Disease - e-TC

Creating entrepreneurial energy and the Dutch Disease
How to create innovation and
Entrepreneurship in a resource-rich economy
Jochen Röpke & Ying Xia
University of Marburg
&
Marburg Center for the Promotion of Academic entrepreneurship (Mafex)
[email protected]
[email protected]
Paper prepared for
International Workshop Higher Education and Entrepreneurship
University of Tehran
28-31th January, 2006
Last revision: December 24 , 2006
"Energetic action is the basic principle of economic development"
Schumpeter (1911/2006, p. 180)
Contents:
1. Different views on entrepreneurship
2. What powers growth? Two views
3. Energetic entrepreneurship
4. Knowing-doing-gap: from knowing to doing
5. An increasing gap between what we know and what we do
6. The Creation of a modern sector in a resource-rich country
7. The creation of new firms
8. How to promote entrepreneurs?
9. Filter model
References
1. Different views on entrepreneurship
The empirical background for our paper is the Iranian society. Today, the Iranian
economy is dominated by oil, a $40 billion reserve, nuclear program... very popular
in Iran.... Oil provides over 90% of export industries, and its dominance makes it
hard to develop other industries (Dutch Disease):
“The misfortune is, on which the luck supports itself. The luck is where the
misfortune lies hidden. “
(Laozi, Chapter 58, Dao De Jing)
Poverty and inequality have spread. Unemployment is running around 12% and
inflation around 15%, with these problems worse for the young and the poor.
The questions we want to answer are several:
• How Iran can tackle the challenges of its future economic development through
entrepreneurship? The best way to predict the future is to create it. There may
exist other ways. We focus on entrepreneurship and innovation for reasons
detailed below.
• In which economic sector Iran does possess a competitive advantage, when the oil
and gas reserves, whose exports are now mainly responsible for much of state
and economic activity, become exhausted? 1
• What a oil/gas-rich country can do now and in the foreseeable future, to provide
the population with improved employment and income opportunities?
• How can we create a class of entrepreneurs required to provide the nation with a
bright economic future?2
• How are (innovation) opportunities realized through entrepreneurial energy?3
Our essay is theoretically based but dedicated to very practical problems. We use
theory for helping to overcome practical problems. We try to find a "good" theory in
the sense of the philosopher Immanuel Kant:
Saudi Arabia has already reached a production peak. By 2025, Saudi will still export oil, but far less
oil than now and each tanker will be of such value as to require its own armed escort. Iran is not quite
at its production peak, but within 20 years, even the most optimistic estimates forecast that Iran will
cease to be a net oil exporter. This may also have something to do with Iran's desire to develop a
nuclear program. See King (2006) for these conjectures. If we assume that Iran holds 100 billion barrels
of oil reserves (roughly 9 % of the world's total), and an increase of oil production from 3.8 bpd now to
around 4 bpd in a few years, the reserves will be theoretically finished in 25 years, less than one
generation. But peak production may come much earlier.
2 What are entrepreneurs, what is entrepreneurship? The definition is the least thing which matters.
For our discussion, we can make use of any of the following ones (no references provided):
Entrepreneurship is the process of creating or seizing an opportunity and pursuing it regardless of the
resources currently controlled (Bygrave, 1994; Timmons, 1994). Schumpeter (1911/2006) described an
entrepreneur as one who destroys the existing economic order by introducing new products and
services, by creating new forms of organization, or by exploiting new raw materials. Entrepreneurs
are also identified as the organizers of uncertainty (Knight, 1921), that is, they recognize and seize
opportunities that result from uncertainties. Entrepreneurial activity can be carried out by the
founding of a new business or enterprise or it can be conducted in a previously existing business
(Gartner, 1985; Low & MacMillan, 1988).
3 The concept and the components of "energy" are delineated below. We use for this purpose the
energy model of entrepreneurship of Joseph Schumpeter (1911/2006). The Schumpeterian and our
logic is congruent with the Chinese concept of energy (neng yuan): "The source of capacity, power,
competence" (neng means competence, yuan is source).
1
2
“The most practical thing is a good theory. “
Since we want to keep the paper short, we do not go in many details.4
Each theory invents a different reality. There is no possibility of knowing an
economic world independent of the observer.
When we write about entrepreneurship, how this impacts on the economy and
society, everybody of us wears his own (theoretical) eyeglasses. Removing the
glasses blurs reality or makes us even blind. But wearing glasses lets us look at the
world in different ways or construct different realities. Each of us has a different
theory, experience concerning entrepreneurship. Also those not engaged
professionally or academically in this subject. Not realizing this could make us
somewhat dogmatic. We would then believe: the world as how I see it, is the real
world. And if the real world is not as I like it, I (as an administrator, consultant,
scientist etc.) am going to influence in a way that world looks more and more like the
reality I like. And being dogmatic, sticking to the peculiarities of knowledge and
experience we have acquired through our life, is the way to failure. Looking at the
literature and observing how scientists, consultants, administrators, law makers try
to influence the economy, each wears is own glasses. We cannot prevent this. What
we can do is to develop consciousness about this. This leaves us open to other
viewpoints and experiences. This creates in ourselves and in what we do a higher
level of variety and this allows us to create more wealth.5
This open and flexible mindset is especially crucial in matters of entrepreneurship.
(1) Entrepreneurs are the driving forces of change in any system of society, not only
the economy (Werner Siemens) but also in religion (Imam Mahdi) or in science
(Albert Einstein).
(2) We have no established paradigm on entrepreneurship. Various theories and
schools are available. Sometimes they overlap, sometimes they contradict each other.
What theory to choose? Should we choose at all?
In what follows, we present the outline of a theory of entrepreneurship based on the
Schumpeterian paradigma, written up already in 1911. Into this theory we integrate
newer approaches coming from institutional theory, psychology, and systems theory.
2. What powers growth? Two views
In economics, we have available two "grand" theories (or paradigms) to explain and up to some degree - create growth. By growth we mean the creation of additional
For more on this see the 2004 workshop paper "The construction of entrepreneurship." The paper has
been revised several times since then and is available on request from the author via email. See also
Röpke (2005), available online.
5 Ashby's Law of requisite variety; Zhuangzi: Variety creates wealth.
4
3
income, wealth, employment, welfare. Even more specific: To prefer solving
problems through advances in technology to bring higher living standards over
heeding calls for sacrifices and suffering to atone for our sins.
The prevailing theory is called neoclassical economics. It is equilibrium oriented. It
looks at an optimal allocation of resources. To create growth, it tells us to prevent
misallocation (through free operation of markets) and to create additional inputs
(labour, capital, natural resources etc.). Growth of output is a function of growth of
input. Entrepreneurs have the function to allocate resources and to transform input
into output. Conventional management theory and practice is connected to this
thinking.
The second paradigm argues otherwise. It says, growth comes from new
combinations of inputs, new recombinations, not necessarily from input growth. The
focus is on innovation and the determinants of innovative action. Individuals and
firms are considered systems to produce innovation, and from these follow
additional income, employment, wealth, etc. Innovation management tries to inspire
innovation in existing firms. Radical innovation cannot be produced this way. The
Established firms have - if at all succeeding in doing new things - a comparative
advantage in small or incremental innovation.
To create and promote new firms is a second type of how to create innovation in an
economy, since new firms can be considered the main road for the introduction of
radical (basic) new recombinations in an economy. Of course, also radical things start
small. And also basic innovation needs some kind of management. Only that this is
very different from conventional, including "innovation management". John Miner
(1997) has shown how the teaching and application of traditional management
techniques may kill entrepreneurship. We can apply only to a small degree the
theory and methods of intrapreneurship and incremental innovation to the creation
and management of radical innovation. This point is, to our knowledge, seldomly
taken into account in the management literature and the education and training of
(potential) entrepreneurs. On the other hand, it is empirically well founded and
discussed in detail in the works of Schumpeter (1911/2006), Christensen (2003) and
most recently in Markides & Geroski (2005) in their book "Fast second".
4
In conventional economics/management, innovation is theoretically freezed.
Entrepreneurs in their function as innovators are like deeply frozen stem cells. New
firms can be considered like embryonic stem cells. They have a lot more potential
than adult (entrerpeneurial) stem cells, and of course deep frozen stem cells.
The focus of our contribution is the creation of new firms with innovation potential,
especially with an academic background. Why an economy needs this type and how
it can be created is discussed in the following.
• The growth of knowledge
The function of academic entrepreneurs consists in economically applying
knowledge, created in the system of science. If the science system creates new
knowledge, in the students, in the staff of academic institutions, which does not
become applied, the knowledge is economically "dead". It is economically not
"useful". 6 You may have super scientists in your country, but if the knowledge and
competencies, these people have, is not transformed into economic value, the
economic impact remains marginal and science itself will become handicapped, since
the resources for supporting science will dwindle.
Knowledge therefore is not the critical resource. Similar, new ideas are not a
constraint on growth (we discuss this below). What is the constraint? The
entrepreneurial energy been needed to transform knowledge into economic value
through innovation.
• Let us look at an historical example
China in the 13th and 14th centuries was generally recognized as the most advanced
civilization on earth. The Chinese invented paper, timepieces, gunpowder,
encyclopedias and moveable type in the ninth century, 500 years before Gutenberg
re-invented the printing press.
This is easily to see when tacit knowledge is involved. Unfortunately, the transfer of explicit
knowledge is also full of difficulties, some of which we mention below. Obviously, the question we
discuss depends critically on the definition and concept of knowledge used. Similarly critical is the
distinction between data, information and knowledge.
6
5
But the creation and transmission of ideas is not sufficient for economic progress. The
rise and fall of China over the last millennium demonstrates how the suppression of
the application of new ideas by the reigning authorities led to stagnation and then
decline.
Great inventions of the Chinese more than a thousand years ago were lost for many
centuries before being reinvented and put to use by others. Similarly, many advances
achieved in the Middle Ages and were lost for generations during the Roman
Empire.
China came within a hair's breadth of industrializing in the 14th
century. Yet in 1600 their technological backwardness was apparent.
By the nineteenth century the Chinese themselves found it
intolerable. The gap to the rapidly industrializing West and later
Japan widened continually. Poverty was widespread and prepared
the way for the communist revolution.
After 1500 a rush of scientific achievements laid the foundations of
modern science. But Europe had to wait at least two centuries before
these discoveries could be turned into the building blocks of the
Industrial Revolution.
The Industrial Revolution of the 18th century kicked off two hundred years of the
greatest growth in the world's history. But that growth will pale in comparison to
what's next. China has woken up. Instead of rejecting nearly everything which came
from abroad, it is now copying everything from technology to factory blueprints and
training manuals so it can leapfrog ahead of other developing and soon advanced
industrial nations. It seems, that China is restoring its imperial glory by infusing
modern technology and market economics into (by western standards) a nondemocratic system.
Question: How can a country with the economic attributes of Iran participate in this
knowledge explosion for the benefit of its population?
3. Energetic entrepreneurship
Figure 1 gives a typological overview about entrepreneurship. The main distinction
is between entrepreneurs working within an organisation (intrapreneurs) and those
working with a more or less high degree of autonomy (entrepreneur). For both types,
the centers of our attention are academic entrepreneurs/intrapreneurs.
The next figure (2) classifies academic entrepreneurs into four types. The
entrepreneurs powering development we find in cells A and B. In A we see
entrepreneurs creating new knowledge, or having access to this, and endowed with
the energy to transform this knowledge into new products, technologies and
services. Cell B shows us entrepreneurs using the knowledge and often the products
and markets created by others: imitators. Cell C has entrepreneurial types which are
good in creating knowledge but lack the energy to implement it through innovation.
In the science/university system, we often see this kind of entrepreneur. If a nation
only has entrepreneurs of type C, it will not develop. In Cell D we find the "losers".
6
The entrepreneurial economy of Iran
Figure 2: Four types of academic entrepreneurs
We first give an overview of our argument with the help of the next table. In the
remaining sections, we apply this thinking for the study of contemporary Indonesian
7
capitalism, with a special focus on the “people’s economy”. The table shows three
types of action logic open to an entrepreneur. They are not exclusive, even not with a
specific entrepreneur. Entrepreneurs can and do and must (in order to survive)
change the way how they react to and construct the economic world. What is ruled
out: to take actions and decisions in more than one logic at the same time.
Table 1: Entrepreneurial policy options
The three policy options of
Traditionalist
Routine
Adaptive response
Routine entrepreneur
an entrepreneur
Modernist
Innovation
Creative response
Innovator
Enabling innovation
Orthodoxy
Policy pluralism
Competence builder
Integral competencies
Evolutionary response
Evolutionary
entrepreneur;
social
transformer
creator of competencies
Society-wide
transformations
and differentiations
According to Joseph Schumpeter, there are two kinds of response in (economic)
history, namely “adaptive response” and “creative response”. We integrate an
“evolutionary” response into the Schumpeterian framework.
Figure 3: Functions of entrepreneurship
8
Figure 3 shows four functions of entrepeneurship, to which we repeatedly refer. The
following table provides a re-arrangement of this logic of functional
entrepreneurship. The figures show the prevalence of the different functions.
Everybody is a routine entrepreneur (“mere manager “ or “Wirt”) according to
Schumpeter (1911/2006). From this fact, modern (mainstream) economics derives the
imperial ambition to be the science and have the models for everything in which
scarcetity plays a role. Arbitrage entrepreneurs make up the vast majority of what
Keynes termed “economic animals”. If we look at entrepreneurship from the
quantitative side, arbitrageurs do indeed surpass, as measured in the volume of
activity, any other entrepreneurial function.
Despite the quantitative dominance and functional prevalence, routine and arbitrage
entrepreneurs do not contribute directly to economic development. If we, in a mental
exercise, we would get rid of them, development could still proceed, if entrepreneurs
doing innovation and evolution would be active. The minority - innovators make up
around five percent; evolutionary entrepreneurs one percent - of the entrepreneurial
population are the change makers and wealth creators.7 Yes, everybody is an
entrepreneur. But entrepreneurial majority rule does not create higher-productivity
jobs, development, wealth-creation. To achieve these, we must move outside - and
this includes policy making and education/training. What drives development, what
sustains makes for sustainable growth at the firm and economy-wide level, is the
synergetic interaction between innovation and evolution (see arrows; table 2).
Entrepreneurs according to Schumpeter may survive and prosper without much
creativity and new knowledge (cell B in fig. 2; a creative businessman (firm) without
energy (cell C) cannot. Entrepreneurs operating in cells C and D become thus easy
victims of creative destruction. We stress this point because many academically
trained entrepreneurs are operating in this cell. They believe knowledge and a good
idea are all it needs for entrepreneurial success. “Besides, the innovation which is the
function of entrepreneurs to carry out need not necessarily be any invention at all”
(Schumpeter, 1934, p. 89). This view is today accepted by psychologists. They still
seem to struggle about the notion of creativity, how it can be improved. Similarly to
Schumpeter’s reasoning, they argue: “The creative process is not finished with the
discovery of an original solution. After the evaluation and improvement of the idea,
the primary task consists in implementing the idea through innovation, i.e. transform
it into producable and saleable products. For doing an innovation, a very different
capability and behaviour is needed” (Schuler, 2006).
Creativity (new knowledge) in itself does not result in business success. As
Schumpeter observes with irony:
“The fruits (of their creativity) they hardly ever enjoy.”
Or as a Chinese proverb says:
To know how to do something is not difficult.
What is difficult is to do it.
The percentages we take from the research of David Birch and Bruce Kirchhoff, empirically
substantiated by other authors. Birch calls routine entrepreneurs “mice” and innovative entrepreneurs
“gazelles”. In the US, gazelles make up around 4 percent of the entrepreneurial population, in China
5-6 percent, in Germany two, in France two, in Japan even less.
7
9
Table 2: Functional depth in entrepreneurship
Functional depth
Flatland
Entrepreneurial
function
Routine (100 %)8
„Wirt“; „mere manager“
Homo oeconomicus
Entrepreneurship in
equilibrium and allocation
system
Paradigm
What to do
via
education/training?
Neoclassical/
Mainstream
economics
Logic of allocation
Training for business plan
Bookkeeping
Easy entry and creative
destruction
„Austrian
economics“
(Hayek [picture],
Mises, Kirzner)
Logic of
exchange/market
Window of opportunity
Opportunities are easily
lost (no permanent
advantage)
Source: Peter Rohde
Arbitrage (60)
Alert entrepreneur
Discovery and
implementation of
exchange opportunities
Innovation (5)
Schumpeter
Entrepreneur as bearer of
Neo-schumpeterians
innovative function (new
recombination of resources)
Logic of development
Evolution (1)
IM-economics
Selfevolution
Daoism
co-evolution
Learning new competencies
Logic of evolution
Bridging the knowingdoing gap
Learning to sell, to lead, to
innovate
Creating awareness for
permanent innovation
Learning to interact with
new customers
Getting access to financial
capital
Overcoming the “I knowall-attitude”
Creating new
competencies
in the emotional, spiritual,
cognitive and bodily
spheres
„Economics is still struggling with explaining entreprenership,
the function and the motivation of entrepreneurs“9
The figures in the first column - 100, 60, 5, 1 – are rough estimates, in percent, of the empirical
prevalence of these functions. In a given period, all entrepreneurs operate in a routine function, 60 %
as arbitrageurs, etc.
9 The citation in the table we took from Karen Horn (2006). She writes about the present understand of
entrepreneurship among economists.
8
10
Academic entrepreneurship (Cell C).
The interesting, since surprising combination is strong creativity (new knowledge)
together with weak energy (cell C). How is this possible? Weak energy in a dynamic
market means of course entrepreneurial death. This type we observe very often in
academic institutions. It is also the focus of teaching and training of
entrepreneurship. It is evident already by now, that each of the different types
mentioned in the table requires different teaching and training– methods and
techniques (sections 8 & 9). Some teachers doubt, including the authors, that the
conventional teaching methods as used in institutions of higher learning are
effective.10 In addition, the rise of distance (e-) learning poses further questions.
Visionay thinkers as Peter Drucker even question whether the universities will
survive. “Universities won’t survive. The future is outside the traditional campus,
outside the traditional classroom. Distance learning is coming fast” (Peter Drucker,
cited in Swanson, 2006, note 3). The combination of what is called constructivist
learning combined with distance and traditional learning in the field of
entrepreneurship training has, to my knowledge, not yet discussed. But it could open
exciting possibilities for entrepreneurial learning and make, for the first time, a
reality, what has been maintained but not yet proved: That entrepreneurs are made,
not born.
“Constructing” an entrepreneur includes the possibility of his de-construction. The
next figure illustrates this possibility. From school to organizational life,
entrepreneurial competencies become eroded. What students learn and how they
learn, in the education system and what they need to move up in the organizational
hierarchy is different from what they need in order to master entrepreneurial
challenges. There is no or negative correlation between the level of education and the
creation of entrepreneurship. 11
Even the teaching of entrepreneurship may – paradoxally – contribute to this. How
does teaching affect risk taking propensity, innovative and proactive behavior, need
for achievement, visionary and goaloriented doing, hard working and perseverence –
to mention some of the prominent traits attributed to entrepreneurial personalities.
Knowledge “transfer” is multidimenisional. We mention here only two dimensions:
the transfer of knowledge from the system of science to the economy, and the
transfer of knowledge between teacher and student. The teacher-student-interaction
For more discussion on this see Röpke & Xia (2006) and Röpke & Rassidakis (2006).
"...the percent of the population receiving a college education is shown [in the United States] to exert
a negative and significant influence on ... entrepreneurial growth" (Kreft & Sobel, 2005, p. 609).
Marilyn Kourilsky (1990) shows, how entrepreneurship is discouraged, even getting killed, in the
classroom. Our references are evidently highly selective. Since our focus is different, and the empirical
evidence overwhelming, we do not need to go into details here. The reasons for the crowding out of
entrepreneurship through education are well-known. In educational practice, practically nothing
happens. If one reads how students have to learn and how they should and could learn in order to
think and act creatively (see for this the text of the German gestalt psychologist Wolfgang Metzger,
1962, part 2) one is struck by the deep insight available for centuries, and the neglicence of the
educational establishment. The educational system seems that part of society, where the gap between
knowing and doing is the widest. For an excellent recent discussion of the impact of teaching and
learning in schools and institutions of higher learning from a construcitivist perspective see Löbler
(2006).
10
11
11
is seldomly discussed in entrepreneurship training, which is more concerned with
content than method, with what to teach than how to teach. But the last is the much
more relevant challenge. From observation and literature, we can get the impression
of a relatively ineffective learning relationship between teacher and student (see also
figure). Since the “output” of this interaction should be an “entrepreneur”, the
traditional teaching methods are especially problematic. To expect that by just
teaching an entrepreneurship course, or offering an MBA in entrepreneurship, we
could produce entrepreneurial competencies, is an illusion. Only those already
entrepreneurially minded will get something out of this. And knowledge alone, or a
degree in entrepreneurship, does not make an entrepreneur. What it does is to create
a new type of knowing-doing gap. The teaching method thus becomes crucially
important.
Cell C entrepreneurs are near but not identical with a type John Miner (1997)
describes as “expert idea generator”. These experts indeed do create new knowledge.
But in addition are willing and able to bring their ideas to fruition in the market.
Let us assume for a moment, a nation, a region, an industry is populated by types C
and D. Economic development obviously will be handicapped. A nation could still
become rich through other means than entrepreneurship, for instance by making use
of the gifts of nature (mineral and energy resources). This can be called growth
without development. Sooner or later, this nation faces the challenge to move the
entrepreneurial class into Cells B and C, i.e. provide entrepreneurs with energy, or
create an energetic entrepreneurship. How this can be accomplished we discuss in
the following.
Let us quote Schumpeter (1911), on whose thinking the above figure 2 is constructed,
even also if the interpretation and classification into four types is our own.
12
Schumpeter distinguishes clearly between four different types of entrepreneurs.12
Before doing my own interpretation of Schumpeter’s thought, we present his own
writing on his classification of entrepreneurs.
The first group consists of routine entrepreneurs. Schumpeter calls them “Wirte”,
“mere managers”. “This is the masses” of economic agents (corresponding to cell D
in the following table: lack of creativity/ ideas, weak energy).
A second group consists of entrepreneurs with good ideas and plans, a creative
“minority” (cell C).13
A minority of people with a sharper intelligence and with a more agile
imagination perceive countless new combinations. They look at everyday
events with more open eyes and a wealth of ideas suggests themselves on their
own. Many people belonging to this minority rescue enough freshness from the
daily routine, allowing them to further pursue some of those ideas and give
them concrete form. But that is not enough. Similar obstacles also exist to these
people, they too have to dedicate their energy to the chosen path in order to
avoid ending up paying for their ideas with their economic existence. Should
they not do so, nothing ever happens and such insights will have no more
practical implications than dreams in the realm of fairies. And even very
carefully elaborated ideas are so worthless for practice that the “practitioner”
in most cases has but a smile left for them, and excessive contriving of plans is
considered a mental defect. Not without justification. Often, the only
implication is that the static activity of such conjurers of plans is suffering. But
at least they establish the preliminaries, the fruits of which, however, they
hardly ever enjoy (Schumpeter, 1911/2006, p. 413).
What is common to both the routine entrepreneurs and those with creative ideas is
their lack of entrepreneurial ambition and “energy”. The routine entrepreneurs
lack ideas, the other group has a “wealth of ideas”, but “nothing ever happens”
with these. Both are weak innovators due to their lack of entrepreneurial energy.
Schumpeter is very clear on this:
How can “the latest idea” assert itself in the economy? We have to consider a
strict static equilibrium of some national economy and countless possible
new combinations that draw on no tangible subsistence whatsoever. Thus
where do the latter exist? They exist within the personality [original:
"Psyche"] of a small group of economic subjects.14 Most people by far don’t
see them. They don’t even exist for them. Most people go about their daily
Usually, in the literature, we differentiate between routine entrepreneurs (cell D) and "innovators"
(cell A). Schumpeter himself writes only about intrapreneurs. He introduced the term "innovator"
much later in his book on business cycles.
13 In the following we give longer excerpts from Schumpeter's pioneering book, published in 1911.
There is no English (or any other foreign language) translation available. A new edition, identical to
Schumpeter 1911, has just been published in Germany (Schumpeter, 2006). In the citations below, all
emphasis has been added by us. In English translation of Schumpeter (1911/2006) is in preparation.
14 The leader’s conduct is the driving force behind the implementation of the new combinations as
well as the development of their form and structure. Of course our impression of the economy would
be different if all of the economic subjects were at the same time both farsighted and energetic. But
that’s not the case in every day life and we believe that the gradual differences in people’s
personalities, which usually are irrelevant for the economy, are in this case one of the deciding factors
that have a huge impact on the overall outcome.
12
13
profession and in doing so have enough to deal with. Usually they are
standing on slippery ground and the attempt to maintain themselves, takes
up so much of their energy that it smothers their appetite to look for new
prospects. They simply don’t want to go under, so they earn their bread in a
tried and tested way. They don’t have the inclination to experiment with
something new. Even if it occurs to them, that this or that could be done in a
better or more efficient way, they don’t possess the moral courage, which would
allow them to try it. They lack the strength and the courage to think the matter
through and they can’t risk their previous existential foundation. Their daily
job holds them down and both the organization and their comrades’
influence impose an untearable chain on them (Schumpeter 1911/2006, p.
161).
Then the third group comes (cell A and B). Some members of this group have
creative ideas, others do not. For Schumpeter this does not matter so much. The
decisive thing is energy and not merely insight.
Then there is an even smaller minority – and this one acts. It does not matter
whether they have conceived the plan of their activity themselves or have
picked up one of the many plans that the just mentioned type is incessantly
producing. You can always have the new combinations, but what is
indispensable and decisive is the act and the force to act. It is this mental
constitution we sought to characterize earlier. It is this type that scorns the
hedonic equilibrium and faces risk without timidity. He does not consider
the complications a failure will inflict upon him or care whether everybody
depending upon him will lose their keep for old age. He does not care at all
what his equals and superiors have to say about his enterprise, and his daily
work has not left him without force and courage. And whatever his
situation, whether he urgently needs further employment, or can abundantly
satisfy all his needs – he is tempted by the act. The decisive moment is
therefore energy and not merely the “insight”. The latter is much more
frequent, without leading to even the simplest act. What matters is the
disposition to act. It is the ability to subjugate others and to utilize them for
his purposes, to order and to prevail that leads to successful deeds – even
without particularly brilliant intelligence (Schumpeter, 1911, pp. 413-414,
emphasis added).
From his distinctions of entrepreneurial types, Schumpeter draws the conclusion:
"The entrepreneur brings into action his personality
and nothing else then his personality."
Schumpeter, 1911/2006, p. 529
Now, if the "personality" lacks of energetic and "moral" competencies, what then?
First answer: the economy has to live with the entrepreneurs it is endowed with.
Second, improve the other entrepreneurial energy-components: property/action
rights and the task or environmental challenge. We discuss these in later sections.
The only problem with this later "solution": if the competencies are not available,
creating/boosting the other two sources of entrepreneurial energy comes to nothing.
14
Therefore the third answer: create competencies. And this is a main task of the
education system, promotional agencies and a core function of an entrepreneurial
university.
4. Knowing-doing-gap: from knowing to doing
Our own sketch on knowledge production, spillover of knowledge to firms
(especially SMEs) and innovation is illustrated in the next figure. We see the various
„sources“of new knowledge: a firm’s own R& D, foreign firms (FDI or foreign direct
investment), local firms (big, SMEs), knowledge embodied in imports, especially
capital goods (as machinery), and to an increasing degree services, finally, the main
interest of our paper, knowledge produced in the science system.
Figure 4
Considering the relationships between knowledge and innovation, we have to point
out two influences:
First, how much knowledge a firm has available from the various producers of
knowledge, including science. This we can call the spillover effect.
The second process to consider is what the firm is actually doing with the knowledge
which enters into the stock or pool of knowledge. In both sub-processes (acquisition
of knowledge and competencies) and innovation, the factors mentioned above,
especially what we called entrepreneurial energy and its components (action rights,
competencies, motivation/environmental) enter the theoretical and policy making
framework.
15
In the inner (blue) circle we find the stock (pool) of knowledge actually available to a
firm. How does a firm acquire this knowledge (and competencies?). The knowledge
must overcome an energy barrier (the inner blue circle). Knowledge is something
which cannot be transferred, whatever is the source, but will have to be acquired via
learning, teaching, training, that is by activities of the firm/entrepreneur itself.15 This
obviously requires energy (in the figure above, this does not enter, with exception for
science).
Let us assume now, that some of the knowledge has been acquired by the firm. Being
endowed with this knowledge is not the same as using the knowledge. Knowledge
must overcome another barrier or the knowing-doing-gap, again a function of let us
assume now, that some of the knowledge has been acquired by the firm. Being
endowed with this knowledge is not the same as using the knowledge. Knowledge
must overcome another barrier or the knowing-doing-gap, again a function of
entrepreneurial energy. So only a part of the knowledge will make it into innovation.
We do not argue that Iran lacks technical progress. What we say is, that the origin of
innovation is often, if not usually, endogenous research and development, and
especially, that the structural coupling between science and economy does not work
well, in other words: there is a gap between knowing (in the science system) and
doing (in the economy) within Iranian society. According to Schumpeter and
Maurice Scott, we cannot distinguish between capital accumulation per se and
technological progress. If firms invest, they may, via investment, also innovate. All
innovations need investment. Since investment needs to be financed, the quality of
the financial systems becomes a crucial determinant of investment and hence
innovation. How much of this investment embodies innovation is another question,
we cannot answer. Due to increasing consumer demand, also businesses producing
old products with old technology may expand their capacity or need additional
working capital.
Figure 5: Knowing-doing-gap in the science system
At least this is the point of view of constructivism, a theory of knowledge explained more
extensively in our essay Transforming knowledge into Action. Constructivism is a theory of knowledge,
maintaining, that all knowledge is created by an individual, that knowledge acquisition is not possible
via transfer but through self-creation, and that their exists no objective reality.
15
16
In figure 5 we see, that only a part of the knowledge being potentially available from
the various sources spills over into the knowledge pool of a firm. Our own
conjectures concerning how much of the knowledge produced is actually available to
the firm (which is not the same as being used), is illustrated by the dotted (red) line
around the inner circle in fig. 4. The further the line is away from the inner circle, the
more knowledge of a specific source enters into the stock of knowledge available to
the firm. As many studies show, the spillover from foreign direct investment to local
firms is negligible. A case in point is Indonesia. The big exception may be China. This
has many reasons, not discussed here (absorptive capacity, technological distance,
intellectual property rights). On the other hand: a lot of the knowledge embodied
into imports spills over into local firms. This kind of embodied knowledge actually
explains more of the rise of productivity in (Indonesian) manufacturing than any
other source of growth, including the traditional input factors as capital and labor
(Jacob & Szimai, 2004). This is easy to understand: a firm buying and learning how to
use a machine16 makes automatically use of the knowledge embodies in the capital
good (or service).
An important point to consider is the lack of entrepreneurial energy in the
science/university system itself, creating its own knowing-doing-gap (see figure 4).
The structural couplings between science and economy do not work to make the use
of scientific knowledge a realistic option for Iranian firms.17 How much of this
knowledge is actually applied in firms and thus is entering the market via new
products and technology, remains an open question. If we take patents as an
indicator, we know that in Europe around 95 percent of patents remain unused. For
the United States is has been estimated (Council, 2004), that nine out of 10 patents
remain unused – despite substantial efforts of universities and research institutes to
commercialise patents.
5. An increasing knowing-doing gap
The gap between knowing and doing, between knowledge produced in the system of
science and actually used in the economy is an entrepreneurial gap. The knowingdoing-gap is narrowed by innovators. The more on economy is based on science and
knowledge, the more crucial the role of an innovating entrepreneur with scientific
capacity turns out to be. Since a knowledge society without innovation produces
economically dead knowledge, it is not sustainable. Evolving into an entrepreneurial
knowledge society implies the existence of innovators bridging the gap.
And the incentive to learn is quite strong, since the firm had to pay dearly for the capital good or
service imported.
17 Again the case of Indonesia, where the minister for research and technology has estimated, that 25
percent of the research undertaken in the science system has potential commercial application (Bisnis,
2005c).
16
17
Figure 6
Why Iran needs is needing science and why the country will have to need academic
entrepreneurs at all? Iran has been endowed with ample stocks of natural resources.
With rising energy prices, a lot of wealth is flowing into the country.
Our simple answer to these questions becomes clear if we ask additional questions:
From what resources Iran can live when the stocks of oil and gas become completed?
With what kind of goods Iran can compete nationally (against imports) and
internationally, in the export market in one or two generations? Labour intensive
goods, capital goods, science/knowledge-based products? Where lies the dynamic
comparative advantage and how the advantage can be achieved or actually
produced. The Iranian policy towards the development of a nuclear-based industry
gives some indication of the thinking of Iranian policy makers. As a first step for
answering the above questions and getting to the basics of a development strategy
suited to constraints of a resource-rich country as Iran, we introduce two graphs. The
first provides an overview about economic development from the Industrial
Revolution until now.
The second provides a look at the knowing-doing gap in historical time and our
suggestions where several countries are finding itself on the curve.
With each Schumpeterian (Kondratieff) wave (so far six from the Industrial
Revolution until today; not counting the four Kondratieffs we observed in China) of
basic innovation, the scientific intensity and the role of academic entrepreneurship is
increasing. This poses huge problems for a differentiated modern society, in which
science and economy are governed by different rules, cultures and incentives,
resulting in an increasing gap of what we know and what we do (see next figure).
One important and effective way to address these difficulties is bringing
entrepreneurship teaching and training into academic institutions.
18
Figure 7: Basic innovation, knowledge creation and academtic entrepreneurship
6. The Creation of modern sector in resource-rich country
If we look at a primary goods economy from a Schumpeterian
viewpoint [development = f(innovation)] one question comes
immediately to mind: How can an economy develop18 by continously
producing the same product, by doing more of the same, by growing
more coffee or cotton, by digging for more copper or gold, by
extracting more oil and gas? What we may get is, at best, growth, but
growth without development and prosperity without progress. What
a country, which nature has endowed with a comparative advantage in primary
goods, seems essentially lacking, are new recombinations. The second question
immediately follows: why primary goods exporters seem to have so much difficulty
in out-innovating from its natural resource base, in building up an industrial sector,
offering more opportunities for innovation and creative application of new
knowledge? Third question: why the gap between knowing and doing, between
what is known at the frontiers of knowledge and what is known by local people,
seems to be wider in resource-rich economies than in newly industrializing countries
as Korea or Greater China? (Please see figure 9). After the why-questions, our fourth
question: how a primary goods producer can overcome these difficulties, i.e. start to
18
Development = qualitative change.
19
recombine in new ways the given resources, including primary products and acquire
the competencies to do so?
For answering the first question, we introduce the theoretical concept of the “Dutch
disease”. Dutch disease is an economic phenomenon in which the discovery,
exploitation and export of natural resources (“nature capital”) de-industrializes a
nation’s economy. The industrial sector moves backward or stagnates or is prevented
from capturing the rents of knowledge and innovation. In a resource rich country as
Iran or Middle Eastern or African countries, the Dutch disease prevents the
emergence of a substantial industrial sector and the wide range of learning processes
that are connected with industrialization and exports of manufactured goods.
There are several economic and political mechanisms which make such an outcome
likely. A country with a strong (comparative) advantage in natural resources has by
definition a disadvantage in manufactured goods. In industrializing, the economy
must develop against its own (natural) comparative advantage, which, in an open
economy, is nearly impossible. In this scenario, the value of a country’s currency
rises, making manufactured goods less competitive. Exports of industrial goods
decline (or cannot enter the world market), imports increase, profits in the industrial
sector are meagre, innovation is discouraged, entrepreneurs exit the industrial sector
(or do not enter it) for greener pastures – all under conditions of free market or free
trade. The Dutch Disease tends, under a free trade regime, to skew the composition
exports (output) away from those manufacturing and service exports that may be
particularly conducive to economic development over time. As we say in the above
table and the structure of Iranian exports and import, for nearly half a century,
export and import structure have remained unchanged.
These phenomena were also observed in the Netherlands in the 1950s/60s, when
large reserves of natural gas were first exploited. Therefore the term “Dutch disease”.
In a systematic empirical test Stijns (2003) found out, that a one percent increases in
world energy price decreases a net exporter’s real manufacturing exports by almost
half a percent. Similarly, a one percent increase in an energy exporting country’s net
energy exports decreases the country’s real manufacturing exports by 8 percent.
A main problem with countries infected by the Dutch disease is thus, that they
cannot follow a “natural” path of industrialization from low-skill, low-wage labour
intensive goods moving up to increasingly sophisticated goods. All Far Eastern tiger
economies have followed this path, and all these economies have gradually entered
the league of developed countries. The latest countries going this way are China and
India. Countries infected by the Dutch disease are too "energy"-weak to climb up the
ladder of industrialization. An illustration: “White goods” made in China, as by
Haier, have entered the Iranian market. How local manufacturers would ever be able
compete against such producers? Another illustration: the textile industry.19
The irony of the Dutch Disease: a country like China (see box: Energy silk road) is
developing modern industry with energy ressources imported from countries like
"Iran’s textile industry is not competitive at the global level in terms of price and quality, and still
faces huge challenges, obstacles and setbacks because of inefficient policies as well as fresh challenges
in the world markets as a direct result of globalization." (Iran Daily, 26.1.2006/Economic
Focus:"Textile Tragedy"). The author thinks, with the right government policy, the sector could be
made internationally competitive. Yes and no. If the structural challenges mentioned are not taken
into account, no kind of efficient policy making will help.
19
20
Iran. Trade develops the one and keeps the other in long-term "disease", ceteris
paribus: if the resource rich country does not strategically counteract, that is uses the
income and trading possibilities from resource exports to build up a long-term
economic structure built on new knowledge and innovative entrepreneurship.
Energy silk road
China currently gets 13.6% of its oil imports from Iran. Beijing is also in the process
of importing Iranian natural gas. China's plan is to become a comprehensive
participant in exploration, drilling, petrochemicals, pipelines and other upstream and
downstream services related to Iran's oil and gas industries.
As the Organization of Petroleum Exporting Countries' second-largest oil supplier,
with a unique location straddling two main energy hubs, the Caspian Sea and the
Persian Gulf, invoking the notion of an "energy Silk Road" to China, Iran is a natural
partner for China and its booming economy's increasing appetite for foreign oil.
Source: Afrasiabi, 2006.
Under free trade, resource-rich countries are crowded out by the market mechanism
from the production of low-technology and increasingly medium-technology
products. There is thus a mismatch between the entrepreneurial competencies
available and mostly sufficient to produce and export primary products and
technologically simple processed resource-based manufuctures and the competencies
needed for higher value-added resourced-based manufactures.
Many countries endowed with natural capital are locked into a development trap.
They have difficulty to transform their static into a dynamic comparative advantage.
This requires the infusion of entrepreneurial energy that is new knowledge and
competence creating.
While the routes to dynamic specialization are many and varied, the main
ingredients for competitiveness are the same: innovative entrepreneurship based on
increasing competencies.
Figure 8
There is no inherent factor, which prevents a resource-based economy to develop
into a knowledge-driven, highly innovative economy. But the transformation is
difficult to achieve.
21
•
•
•
To overcome the constraints of the Dutch disease, the economy needs to invest
heavily into knowledge creation and the creation of entrepreneurial competencies
to a far higher degree than “natural” industrializers as the tiger economies of the
Far East.
Just creating knowledge, doing research, will not do.
The ever looming knowing-doing gap requires innovative entrepreneurship,
much of it with academic character.
There exist two principal ways to increase value added in a resource-rich economy.
By producing specialized inputs as capital goods and services, needed to produce
and process natural resources (upstream; backward linkages); second: downstream
(forward linkages): Greater value added and specialized products made out of the
natural resources (from cacao to chocolate; from pulpwood in woodpulp into
furniture).20
Let us look at the Iran. With a population of 65 million, it can be considered a labour
rich economy, and under “normal” conditions could develop an industrial sector,
climbing the ladder of development upwards as Japan or Korea or China has done it.
Before the Islamic Revolution, such a policy was tried to some degree via import
substitution. To provide sufficient incentives to produce industrial goods with a
comparative disadvantage, industry needed heavy protection and substantial
subsidies to compete. The economic and social costs turned out to be substantial. The
government had to intervene in drastic ways into the economy. This created
substantial opportunities for corruption and rent seeking. In the end, the strategy
failed. So far, Iranian industry has been unable to sell manufactured products in the
world markets. What was produced was sold on the heavily protected home market.
Since the onset of the Islamic revolution in 1979, the export-import structure has
remained basically the same.
In newer versions of the Dutch Disease concept, a connection between resource
abundance and authoritarian political systems is established. Resource-based
development not only leads to slower growth but also to the emergence or
consolidation of illiberal if not dictatorial regimes (political Dutch disease), the “First
law of petropolitics” according to Thomas Friedman.
The richest man in the world has followed his path: the processing of wood into furniture. Ingvar
Kamprad, the Swede who founded furniture retail chain IKEA, has overtaken Microsoft's Bill Gates as
the world's richest man. Kamprad, 77, had, in 2004, a personal fortune of 400 billion crowns ($53
billion).
20
22
Figure 9: The first law of petropolitics
Source: Friedman (2006).
Iran again is a case in point. The high and increasing price of energy (oil, gas) has
allowed Iranian governments to proceed with a policy of maintaining political power
of a religiously legitimated leadership21 by buying out dissent, subsidizing to an
unsustainable degree basis products including petrol – and killing, with a few
exceptions, any endeavour for modernizing society and reforming the economy. 22
According to a report on Bloomberg.com (August 2, 2006), “Iran spent $25 billion on
subsidies last year, ore more than half the $ 44.6 billion it collected through crude oil
exports.” Actually, Iran has to import more than half of its gasoline, because it cannot
refine enough itself. The construction of new refineries has been bogged down for
years. Fearing a public backlash, the government abannoned plans to ration
subsidized petrol (subsidized gasoline costs 34 cents US a gallon). To buy public
support, the government subsidizes housing, gasoline, interest rates, flour and rice.
This does not prevent banks to charge starting up companies with interest rates of 32
per cent per year.
Is there a way out of the disease? The general answer (our focus is on the economy,
not politics): To industrialize, a resource-rich country must jump and not gradually
move up on the industrial ladder. It will have to develop high value-added
industries and firms in order to become internationally competitive. This requires a
strong focus on human capital, knowledge and skills like venture evaluation and
deal making – and crucially – the entrepreneurial competencies to recombine
President Ahmadinejad has said repeatededly to act under “instructions” of the hidden Imam
Mahdi (born in 868 AD and assumed to be still living). In the first session of the Council of the
Ministers, Ahmadinejad signed a treaty with the Hidden Iman and they asked the Minister of Culture
to hand over the treaty to Mahdi by throwing a copy of the Treaty down a well in Jamkaran, a village
near Qom in the south of Tehran. According to popular belief, the water well in Jamkaran has a better
chance of getting messages to the Hidden Imam (Diba, 2006).
22 A journalistic observer: “Because of the high oil price, the government can pursue any dilettante
policy” (Hoffmann, 2006).
21
23
successfully these newly acquired resources. In addition, it requires further to
overcome, at a much earlier state in their development level compared to countries
without Dutch-disease problems, the knowing-doing-gap, that means to transform
educational and scientific institutions in order to foster entrepreneurship. The R & D
content of industrial exports and innovation intensity will have to increase
substantially. At present, Iranian export products have little, if any, R& D content
(Pirasteh, 2004). A case in point is the Iran’s automobile industry (Nikoueghbal &
Valibeigi, 2004). The auto industry was already promoted heavily in the decade
before the Islamic Revolution. It is still not competitive.23 The Russian auto industry
gives a similar illustration. Build up during central planning (communism), it sunk
immediately into difficulties, as soon as Russia liberalized its economy and harvested
– thank you David Ricardo - the Dutch disease. And the Iranian auto industry will
remain non-competitive, as is implicated by the hypothesis of this paper.24
With each Schumpeterian (Kondratieff) wave of basic innovation, the scientific
intensity and the role of academic entrepreneurship is increasing. This poses huge
problems for a differentiated modern society, in which science and economiy are
governed by different rules, cultures and incentives, resulting in an increasing gap of
what we know and what we do (see next figure). One important and effective way to
address these difficulties is bringing entrepreneurship teaching and training into
academic institutions.
The above empirical facts about industrialization in Iran indicates for us also, that
the linkages between university research and education are not yet adequate to
provide industries with the knowledge and professional manpower to engage in
more innovation-intensive production. As Pirasteh (2004, p. 229) found out further,
factor endowment (Iran as a labour abundant country) does not explain export success.
This depends on firm-specific factors. In our framework: on entrepreneurial skills and
competencies (capabilities to innovate). This makes Iran, as a resource rich country,
different from the new industrialized countries from East Asia. With these we find
what is theoretically to be expected: at the lower levels of the industrial ladder, a
strong impact of factor endowment, especially labour, on international
competitiveness. This is not surprising given these countries comparative advantage
in such products and Iran’s and other resource rich economies disadvantage.
On a more practical level, we suggest therefore, that a substantial amount of the
resource income (rents) from resource exports to be invested into research,
development and especially teaching and training of potential entrepreneurs with an
All cars produced locally are heavily dependent on imported parts (around five billion dollars in
2005). Total earnings reached US 11.6 billion from sales of around one million cars (2005). Despite
considered by experts as internationally uncompetitive and of substandard quality, the industry
managed to export cars and auto parts worth $ 350 mio., in 2005, mostly to neigbouring countries Arabian countries and former Sovietunion republics. Imports of cars are heavily restricted (10, 000
units in 2005) and taxed. See Iran Daily, January 30, 2006, p. 3.
24 An interesting case study is the Iranian nuclear industry. It needs a careful analysis under the
developmental strategy proposed here. It surely is high-tech, requires the creation of an endogenous
research & development and engineering capacity and may even have, in the long run, given the
constraints nuclear industry is facing in mature industrialized countries, a potential comparative
advantage. Evidently, going nuclear is a highly controversial issue, not only for the hotly debated
military application and safety concerns, also in relation to the rentability in comparison to other
energy sources. For an excellent summary of recent debates on nuclear power see Parker (2005),
whose website contains a rich source of relevant information.
23
24
academic background. This could include Iranian professionals returning home from
overseas. Also special incentives could be given for Iranian researchers willing to
come back from the US and Europe, who think about to establish their own
businesses. India and the Far Eastern tiger economies have achieved good results
with such programs. Spending resources on research alone will not do it. The focus
will have to be to prevent that any knowing-doing gap is emerging. Otherwise the
investment will likely to be wasted and a brain drain of Iranian professionals sets in.
Figure 10
Figure 10 above shows three curves: the increasing level of new knowledge; an
increasing gap between what is known and what is done (but crucially, with wide
divergences between nations); the doing curve in a resource-rich country as Iran, that
is the doing-curve for an economy infected by the virus of the Dutch disease. The gap
is bigger, and becomes bigger all the time; the distance to the frontiers of knowledge
becomes wider, indicating an increasing range of lost opportunities. Iranian
universities and research institutions are producing knowledge at a far higher level
than what actually become embedded into new recombinations (We have positioned
Iran at the end of the fourth Kondratieff. This position averages all knowledge
producing activities and does not rule out, those Iranian scientists and engineers are
not engaded in R&D beyond this position). The wider gap in a primary products
economy indicates the difficulties mentioned above.
The challenges a country like the Iran faces are complicated by the fact, that the
government dominates economic activity. The share of GDP provided through the
state is around 84 percent, the private sector has to be content with a contribution of
14 percent.25 Two-thirds of the entire budgets (for the year 2006-7) go to state-owned
companies. 26
There are different figures available. In a critical report on industrial policymaking in Iran Daily (21
January, 2006: Lack of coherence), summarizes the problems succinctly: "Private investment schemes
25
25
Private sector activity is primarily concentrated in agriculture, the provision of
simple services and trading (bazaar economy). This constellation aggravates the
entrepreneurial challenge substantially. Since the formal financing of entrepreneurial
ventures is done via state banks, additional difficulties arise. Banks anywhere face
problems in financing innovation and entrepreneurial start ups. If government
controlled state banks do this job, private entrepreneurship becomes crowded out.
This happens even in countries not fighting with the Dutch Disease, as China.
Financing of new recombinations is then done mainly via bootlegging or networks, if
done at all. In the Iran some networks have evolved doing this job besides the
traditional bazaar financing. But the information we have does not allow any firm
conclusion. 27
The next figure gives an illustration what is involved. It shows first the rise of the
private sector in China, which was once dominated by state owned firms.
Where did these new firms come from? There were all new firms, start ups. Another
figure shows what the boom in firm creation has produced economy-wide. The
graph compares growth in China and India with countries in the west and Japan. In
the theory favoured by us, innovation and entrepreneurship is playing the crucial
role in the transformation and growth of both these economies (and the relative lack
of it in the other nations.) 28 Of course, the possibility of such a development always
needs to be understood within the framework of the structural constraints mentioned
(Dutch disease etc.).
gradually surfaced in many fields in the third economic phase. Iranian industrialists do not play a
decisive role in the macroeconomic and political decision-making. They usually follow the whims of
politicians. And this has been the case for the past 27 years. According to the Persian magazine
Karafarin, past records indicate politicians have been running in a vicious circle because of internal
tensions, imbalanced foreign relations and special standpoints. As a result, industrial policies have
also been subjected to the same vicious circle for years. Each time the industry moved a step forward,
it was been forced to step backward. Since the victory of the Islamic Revolution in 1979, the country
has changed its economic policies for at least five times." The Iranian experience differs substantially
from the Chinese. Here leadership is provided the opportunity through the one-party-state system for
long-term policy making. Party-elected leaders are provided a nearly life-long opportunity to
implement their economic visions. They do not have to worry, as politicians in a party-politics
democracy, to loose power in the next elections, thus focusing their main efforts on becoming reelected.
26 Iran Daily, January 30, 2006, p.3: “Budget bill seeks $ 16b from Forex fund”.
27 From the paper of Jalali-Naini & Khalatbari (2003) we learned that bank lending to the Iranian
private sector is positively correlated with growth, supporting the Schumpeter-hypothesis about the
overriding importance of access to financial capital for innovation and development (see Röpke, 2002
and Siemon, 2006 for an extensive discussion besides the sources cited by the two authors). The
authors report also about the rise of networks and private banking in Iran. To what degree these
institutions have impacted on innovation seems a matter still to be researched. What seems clear, on
the other hand, is the relatively ample finance available for routine and arbitrage activity (trading;
bazaar economy; real estate), de-linked to a large degree from the repercussions of the international
economy. A substantial amount of financial capital is leaving the country for places like Dubai.
28 This is our theoretical construction (see section 1). Using another theory, you get a different
interpretation.
26
Figure 11: New firms and output growth in China
Necessary conditions
New firms?
Innovation?
Entrepreneurship?
Figure 12: Growth performance in China
Source: Frankfurter Allgemeine Zeitung, Jan. 25. 2006
Evidently, the situation in Iran is much more complex. Policymakers now face the
double challenge of the Dutch Disease plus the transformation of the state sector. In
the case of Iran, a third challenge has to be considered: the depletion of gas and oil
reserves.
27
7. The creation of new firms
Fortunately, the answer to these challenges is the same: increase the (private)
entrepreneurial share in economic activity, especially via starting up firms (see
figure).
Figure 13
On the other hand, the solution becomes complicated by the necessity for a high
intensity of innovation to be accomplished through new firms in an economy
dominated by routine and arbitrage entrepreneurship. The Bazar economy has an
overproportionate influence on policy making and regulation in Iran. Speculation in
housing and real estate is a much more promosing activity than establishing goods
producing ventures. Innovation is crowded out by arbitrage.
We see two primary ways to overcome these difficulties. The first one we discuss in
this paper: improve the structural coupling between science/education through
entrepreneurship education and deregulating the interaction of the academic with
the economic world. Considering the foreseeable depletion of oil and gas reserves,
the country faces the challenge to develop a new comparative advantage within 20 to
40 years, i.e. within one generation. Since other countries are not standing still in
developing science-based innovation, Iran would have to make substantial
investments first into building up its science system and then to find institutional
solutions to the problem of science and economy interaction. In other words: the
future comparative advantage will have to be founded on science and science-based
innovation (assuming the reproduction of high growth rate of the economy in the
future).
The second one is to reverse the brain drain of scientific and entrepreneurial Iranian
talent that means making the Iranian economy attractive for the immigration of
Iranian talent. As an illustration, we refer to Eastasia, where scientists and academic
entrepreneurs, returning from abroad, play up to now a crucial role especially in
developing the high-tech-sectors in their home countries. They did not only found
new firms. They were co-responsible for the creation of totally new sectors (what we
call Kondratieff 5 and 6).
Both policy options hinge critically on the reform of the Iranian economy. Evidently,
the reform must address the shortage of innovative entrepreneurship in the Iranian
economy. Two reform alternatives are available: tinkering or deep institutional
reform (see Iyigun and Rodrik, 2003 for a discussion of these reform alternatives).
28
With tinkering policy makers can draw a policy from the pre-existing policy regime
(for example a reduction in corporate taxes). Doing an institutional reform (for
instance a switch from import substitution to export orientation) means policy is
drawn from a different policy regime. Since the present Iranian policy regime is
ineffective, tinkering may not do it anymore. On the other hand, an institutional
reform in an economy with weak innovation capabilities will fail. Tinkering and
institutional reform thus both require the formation of vigorous entrepreneurial
economy, making the promotion of innovative entrepreneurship a low risk policy
option.
Figure 14: Policy instruments
8. How to promote?
In figure 14 above, we summarise the actions parameters available for the creation of
innovation and entrepreneurial energy. We translate theory into policy instruments
as suggested by Kant (section 1). What remains open is a deeper understanding of
the energy model of entrepreneurship. What are the factors providing
entrepreneurial energy?
As a theoretical basis, we make use of two concepts. The first we call the "energy"model; the second we give the name "filter-model". These are two ways to look at the
factors and variables, which influence entrepreneurial action.
When we want to educate, coach and promote entrepreneurship, we must know
what makes entrepreneurs act, what "causes" entrepreneurial action. This seems
trivial. But neither theory nor practice usually follow such a kind of thinking.
Both models can be expressed through the following equation.
29
Entrepreneurial action =
function (entrepreneurial energy) =
f (competence, property rights, motivation)
The entrepreneurial energy level is dependent on the three variables competence
(Können), property or action rights (Dürfen) and motivation (Wollen).
Figure 15: Entrepreneurial energy
Competence, property rights (including regulation and cultural values) and
motivation are connected multiplicatively. If one of the components becomes zero,
entrepreneurial activity goes to zero, it stops.
Promotion can and must focus on each of these three variables of entrepreneurial
action. These thus become "action parameters".
High level of competence cannot compensate for a system of property rights (law,
regulation, legal system, culture) inhibiting entrepreneurial activity.
Another important point to consider: each of the three variables are (or can turn into)
action parameters of entrepreneurs. This is rather obvious for competencies. Through
learning and self-cultivation, entrepreneurs can transform themselves and thus gain
higher levels of energy. Property rights, including institutions, to some degree also
culture, can be changed through entrepreneurial activity. Any country offers
illustrations. There is, since we observe the development process in Iran, continuous
discussion, complaints, criticism about rent seeking, corruption, and a weak or nonexistent rule of law. And many have given up. Why the regulatory “environment”
does not “improve”? Because "weak property rights” is also function of
entrepreneurial energy. Property rights are an action parameter of innovators. Weak
energy produces weak energy. This is sometimes called circulus vitiosus, as when
poverty leads to poverty.
The strong, high-energy entrepreneurs 29 change the regulatory framework in their
favor, the energy weaklings or the “static (routine) entrepreneur” (Schumpeter) just
adapt to it. The strong act, the weak complain. Werner Siemens, the founder of
Siemens AG in the late 19th century, tried, in order to change the German patent law
in his favor, to get elected into the German parliament. In his view, he could not
With an unfavorable action rights, entrepreneurs must compensate for this through competence and
motivation.
29
30
compete successfully in innovation goods with British firms, at that time still ahead
of German companies, due to weak intellectual property rights in Germany. And he
succeeded. He got the German patent law changed. And in a few years, he
“creatively destroyed” the British competition through innovation based on
protected knowledge created in his firm. The returns to investment and innovation of
self-initiated action to transform property rights in a country in Iran are tremendous.
How much I do not know. From a country, Indonesisa, it is assumed the cost of
corruption, legal and contractual uncertainties, to be around twenty percent of the
revenues of firms.30 There exist thus tremendous opportunities to increase the return
on sales through changing the system of property rights. If we compare this figure
with the Indonesian tax ratio (tax as a share of GDP) of around thirteen percent, it
becomes obvious that Indonesian enterprises operate in high tax environment (33
percent official taxes plus illegal burdens) and how the Indonesian government is
financially handicapped to promote that kind of policies (education, research,
industrial policy), needed to achieve self-sustaining development. The knowingdoing-gap between the frontier of knowledge and innovation which is putting this
knowledge to productive use is continuously widening.
Throughout this essay, we suppose development to be produced endogenously,
within the economic system. The three drivers of entrepreneurial energy are not
“inputs” into the economic system. They are internally created variables and thus
action parameters of entrepreneurs.31
9. Filter model
To create entrepreneurial energy, we must know the factors influencing it. ”We” are
the teachers, trainers and coaches of entrepreneurs, scientists trying to understand
how entrepreneurs think and act, policy makers, and (potential) entrepreneurs
themselves: it is part of their entrepreneurial consciousness to know what makes
them behave as they do. It allows them to ask the right questions to themselves and
others, and find out, with which components, they feel uneasy, need advice and ask
for coaching.
Innovative entrepreneurs search for and implement new opportunities (innovation).
Our focus here is academic or science-based entrepreneurship. A researcher, scientist,
academic, detects an economic opportunity, based on his knowledge. "Researcher"
could also be a team, a loose group, and members of a network.
A reader can take the case of energy research; nuclear technology. What does the
entrepreneur/intrapreneur need to accomplish innovation? What gives him the
entrepreneurial "energy" to innovate? These variables can be seen as three "filters" or
three barriers (see figure 15). We see a red opportunity outside the three circles: an
This is a figure routinely used by the World Bank and Asian Development Bank (Basri, 2005).
For this first time, as far as I am aware, it was Schumpeter (1911/2006), who used such a theoretical
framework in his theory of economic development. Decades later, system theory employed similar
views, today summarized in concepts like autopoiesis, closed system thinking, second order
cybernetics. Reframing Schumpeter with systems thinking: an entrepreneur, endowed with high
energy, sends impulses (disturbances, irritations) to the political and law system, which respond by
changing property rights (the regulatory environment). Other entrepreneurs, interacting with him
directly or indirectly (through competition) need to engage themselves in order not be left behind
30
31
31
innovation, which cannot be realized by the entrepreneur. It lies outside his
possibility space. This can be for the three reasons mentioned. Which reasons? We
see three circles: the red circle stands for property rights, the blue for capabilities, the
green for his willingness (motivation, interest). The red opportunity (genetic
modified rice; a nuclear reactor) cannot be implemented because the entrepreneur
has not "right" to do it.
To understand the above graph, we note again, the multiplicative and
multifactorial/dimensional nature of entrepreneurial action. Entrepreneurship is not
only determined by several factors (we mention three). All the factors must be
present to some degree in order to produce action.
In the following graph, we see different colored circles. They stand for innovation
possibilities. Those lying inside the read circle are opportunities for which action
rights are available. For example, those which are not contradicting sharia law,
international law, explicit ethical constraints, and so on. Only few of the available
possibilities - those within the most inner circle - can pass through the filters of
rights/norms, competency and motivation.
Opportunities outside the outer (red) circle are not pursued by the entrepreneur,
since they are outlawed or connected with too much regulation.
For instance, the genetic manipulation of plant material is scientifically well
developed and has progressed to innovation in some countries. But in many
countries, nearly all over Europe, genetic modified seeds are prohibited to be
planted. This possibility must thus move inside the red circle or the circle must be
amended to include this possibility. To do this, entrepreneurs may lack the necessary
energy.
Another illustration: The red point stands for the Iranian nuclear program. The
"International community" has imposed severe restrictions on this. The west’s
response to Iran’s stance on acquiring nuclear technology for its ambitious
development projects is considered by some observers as both absurd and comical.
For us the response has much to do with self-irritation of the political systems in the
West and the fear to loose of decision makers (loss of face) combined with pressure
from Israel. As an observer, all this is difficult to evaluate. Political decision-makers in
the West consider the nuclear program is morally and legally highly problematical,
i.e. lying out the action rights of the country. They may go as far to sanction the
country, even by war, should it trespass the boundary.32
Iranian president Ahmadinejad maintains that “Iran has the right to acquire nuclear technology for
peaceful purposes. We expressed our support for Iran in its pursuit of peaceful nuclear technology
and we back the idea of a dialogue with international parties. “(Iran Daily, 21 January, 2006). As it is,
Iran may have valid reasons to rethink the wisdom of staying in the NPT, which now seems to be
more useless than ever. According to the Nonproliferation Treaty, the IAEA agency’s statute, among
other things, says it should “supply materials, equipment, or facilities“to non-nuclear states. The
agency has a mission to train scientists and “foster the exchange of scientific and technical
information. “ To my knowledge, Iran has so far not benefited from any of this internationally
recognized assistance.
32
32
Figure 16
The next constraint on energy to be overcome is the willingness of an entrepreneur to
undertake the action. The production of genetically modified seeds may be legally
and ethically possible, but the entrepreneur may be unwilling to undertake the
venture because he evaluates the profit prospects as too poor, because he likes to do
other things, and so on. These possibilities lies thus outside the blue circle.
Finally, the last filter: competencies. The green opportunity is attractive for the
entrepreneur, poses no legal problems, but is outside the competence level of the
innovator. So for lack of capability, he does not innovate, or lacks the necessary
energy to engage in innovation. Only those opportunities lying inside the inner circle
can muster the necessary entrepreneurial energy for innovation. They satisfy the
necessary and sufficient conditions for entrepreneurial action.
From the energy model we can derive two educational approaches on the
construction of entrepreneurship (entrepreneurial energy).
The first approach is competence based. Its focus is entrepreneurial capabilities and
their application in discovering and implementing a business opportunity.
The focus of the second approach is derived from the two remaining components of the
energy model, action or property rights (law and law enforcement, institutional
influences, regulation, cultural and religious influences, etc.) and the environment in
which the entrepreneur is operating (trade regime, taxes, competitive intensity).
Both approaches can be combined of course and integrated. For the moment it is
enough to say, that the first approach of entrepreneurship education and training is
focused on factors, which the entrepreneur can influence himself by learning to
become and act as an entrepreneur.
Property rights and the degree to which the task environment of an entrepreneur
impacts on his motivation33 are components which are difficult and costly for an
The „task difficulty“in the McClelland model, the optimal challenge being a “modest” one, not too
difficult and not too easy to master.
33
33
entrepreneur to change by himself. He must consider these factors for the time as
being given. Nevertheless, they directly influence his energy level.
To introduce entrepreneurship moduls as discussed above into the standard teaching
approach at universities is a second challenge (beyond finding and training people
for applying it). Cohen (2003) describes in detail, how Babson College achieved this
fate. It was a struggle going on for years.
At the heart of the changes are radical curriculum reforms in both the undergraduate
and MBA programs with unusual integration among business subjects and between
business and liberal arts; an undergraduate competence-based curriculum;
requirements for international experience, more field-based work, an emphasis on
team learning and ethical considerations; and other innovations (Boyer, 2003).
34
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