Creating entrepreneurial energy and the Dutch Disease - e-TC
Transcription
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. 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