This paper is published in The roots of growth: entrepreneurship, innovation and the capitalist firm. In Pyka A, Cantner U (eds.) Foundations of Economic Change – A Schumpeterian View on Behaviour, Interaction and Aggregate Outcomes. 2017, Springer.

Michael Joffe

Imperial College London

Abstract

The spectacular growth record of capitalist economies in the past 200 years is frequently attributed to entrepreneurship and/or innovation. This cannot be the whole story, because entrepreneurship has a far more widespread historical and geographical distributions than these high-growth countries, and occurs particularly in rather stagnant societies; innovation contributes to economic growth, but it is unclear why it has become so much more prevalent in capitalist societies, or why it takes a form that is growth-promoting in that context. Thus, entrepreneurship and innovation only contribute to dynamism in a particular institutional context: a real economy that is dominated by capitalist firms, which are able to purchase all their inputs including labour, making it easy to change the technology, workforce, product, location, etc. Because entrepreneurship and innovation have tended to be analysed in capitalist societies, this extra component has been taken for granted. But it is not a natural, ubiquitous feature—it has its specific history, notably the development of “entity shielding” that protects the firm from its shareholders as well as from outsiders, enabling it to accumulate assets, including premises and equipment, as well as less tangible items such as expertise, relationships and reputation.

These features of the capitalist firm shape entrepreneurship and innovation, and make them effective. The central imperative to make a profit provides direction for entrepreneurs and innovators, and the potential rewards of success provide an incentive both for their performance and for their choosing these roles. The capitalist firm’s flexibility of inputs gives scope for the inventiveness of entrepreneurs and innovators, and its potentially large market magnifies the success of their efforts.