The role of innovative entrepreneurship in the economic development of EU member countries.

• Author: Crudu, Rodica

INTRODUCTION

In the last decades, especially after the 2008 global crisis, entrepreneurship and innovation have become one of the main concepts in the business fields and public development policies. Its relevance has increased, as entrepreneurship is more often associated with the ability to create new products or services, to innovate. There is a large growing body of research that shows that there is an interrelation between entrepreneurship, innovation and economic development. Researchers have expressed different views about the relationship between entrepreneurship and economic development during this time. However, in the latest period, more and more importance has started to be assigned to the role of innovative entrepreneurs in economic development enhancement. Innovative entrepreneurs are considered to be those entrepreneurs that manage to transform innovative ideas into high-demand, marketable products, services or technologies and, therefore, innovations play a specific role for them as an instrument in earning innovative incomes. Innovative entrepreneurship has sparked increased interest among academia and politics as well. For instance, SMEs and innovation lay at the core of the European Union's development strategy - Europe 2020 strategy.

Despite its relevance, in the specialized literature, there is little empirical evidence on the contribution of those entrepreneurs that are considered to be innovative to the economic development of EU member countries. There are several studies, both theoretical (e.g., Holmes & Schmitz, 1990; Shane, 2003; Acs, Audretsch, & Lehmann, 2013) and empirical (e.g., Evans & Leighton, 1989), determining the drivers of entrepreneurship development and the contribution of entrepreneurial activity to economic performance. However, the gap is determined by the constraints in the theoretical framework of innovative entrepreneur approach and the measurement of its impact at the national level. Most of the studies assess the economic performance at the level of the firm (Audretsch, 1995; Caves, 1998; Sutton, 1997) and show a positive relation between entrepreneurial activity and growth (i.e., new innovative firms become larger than existing large ones). Another fact that emerged from the existing literature analysis is that the relationship between entrepreneurial activity and economic development covers mostly geographic regions. Few studies tie the link of entrepreneurship in different regions to their economic performance (e.g., Audretsch & Fritsch, 2002; Acs & Armington, 2003) and only the Global Entrepreneurship Monitor (GERA, 2017) is linking entrepreneurship to economic performance at the national level. However, despite numerous research studies that endorse the relationship between entrepreneurship and economic growth, there is a relative hole in the literature regarding the assessment of the contribution and role of innovative entrepreneurship in the economic development of EU member countries.

The present paper has the objective to research the role of innovative entrepreneurship in the economic growth of EU member states. Taking into consideration that both processes: economic growth and innovative entrepreneurship are multifaceted, this paper analyzes the relationship between the two phenomena and its specifics in EU member countries, which are heterogeneous too. Consideration is also given to the fact that there is a reversed causality, in that the quality of entrepreneurial activity is influenced by the level of economic development.

The second section of this paper presents the literature literature on the relation and effects of entrepreneurship on economic development. Firstly are analyzed the studies that measure the effect of entrepreneurs on economic growth through job creation and the transformation of ideas into marketable products and welfare. Afterward, new trends in assessing the role of innovative entrepreneurs and their contribution to the economic growth acceleration are described. In the third section, the hypothesis to be tested are formulated, the data used in the hypothesis' testing are described and the model for regression analysis is designed. The analysis of the model and the findings are presented in the fourth section, and conclusions and final remarks are presented in the fifth section.

LITERATURE REVIEW

In the last decades, entrepreneurship has sparked salient interest and is considered an important driver of economic development, inclusive society, welfare, and as a source of innovation creation. In the economic literature, there are two trends in assessing the effects of entrepreneurship on economic development. One is based on horizontal innovation growth models and an increasing range of product (e.g., Romer, 1990). The other one relies on vertical innovation growth models and increasing quality (e.g., Schumpeter 1934, 1942; Aghion & Howitt, 1992), being mostly explained by Joseph Schumpeter's famous "creative destruction" argument, according to which, when an entrepreneur introduces on the market a new product or a technological innovation, it pulls out from the market the less productive firms, and, therefore, creates a more competitive environment that leads to higher productivity and economic growth (Schumpeter, 1934). Since then, Acs, Braunerhjelm, Audretsch and Carlsson (2009) and Pontus et al., (2010) have completed the economic literature with the knowledge spillover theory of entrepreneurship. The authors induce the idea that economically relevant knowledge is the one that matters the most, with entrepreneurship playing the role of nexus between the knowledge and commercialization and economic growth.

The influence of innovation on economic growth is largely addressed in the economic literature. In the scholars' debates, the existent approaches, i.e., the evolutionary approach and the neoclassical "endogenous growth theory," are argued as having rooted differences. The evolutionary approach takes into consideration the historical environment, the causality between events and mechanisms, and treats economic growth as being far from a constant equilibrium. Whilst the neoclassical theory approaches economic growth as a state phenomenon, the cause and effects were analyzed as separate aspects (Fagerberg, Mowery, & Nelson, 2009)

When assessing the role of innovation in economic growth, researchers more often use input (i.e., R&D expenditures) or output (i.e., patents) measures (Griliches, 1990) and try to analyze the technological innovation's contribution, specifically at the firm and industry level. They are primarily based on a neo-classical approach established by Solow (1956) and use a Cobb-Douglas production function to establish the impact of the innovation on economic growth. It is worth mentioning that the studies that use neoclassical models of economic growth do not approach the entrepreneurship issue, which is the main trigger of technological innovation.

Recent scholarly debates try to endogenize the contribution of innovation to economic performance, referring to several forms of innovation: pedagogical innovation, active learning and learning by doing (Romer, 1986); human capital (Lucas, 1988); R&D in innovative goods, services or processes (Romer, 1990; Aghion & Howitt, 1992); and public infrastructure (Barro, 1990). The new growth theories seek to try out whether the elasticity of the output, with respect to broad capital (measured in one of the four forms revealed above), is higher than its share in value added or gross-output (Cameron, 1996). The endogenous growth models acknowledge the role of entrepreneurship in economic growth, by explaining the invention process and the main reasons that motivate firms to innovate (Uppenberg, 2009).

Many studies that focused on assessing the impact of entrepreneurship on economic development rely on the contribution of entrepreneurship to job creation. Entrepreneurship, measured by the self-employment rate, is seen to positively and robustly influence annual GDP growth (Pontus et al., 2010). Additionally, new firms' creation is found to have a positive impact on employment growth (Folster, 2000; Acs & Armington, 2004). Despite the theoretical arguments supporting the positive role of entrepreneurship in economic development, the heretofore unequivocally positive impacts of small and medium enterprises (SMEs) on job creation, have been recently thrown in relative uncertainty. Not all researchers have found positive correlations between entrepreneurship and job gains, with small firms having a disproportional contribution to net job creation (Birch, 1987; Shane, 2005; Henrekson & Johansson, 2010; Neumark, Wall, & Zhang 2011; Naude, 2011; Haltiwanger, Jarmin & Miranda 2013). Some researchers also suggest that entrepreneurship has a negative impact on economic growth. Using econometric and statistical techniques, it has been found that entrepreneurship, measured by the self-employment rate, in more than half of the OECD countries analyzed, had a negative impact on real GDP growth in the period 1966-1996 (Blanchflower, 2000) and on GDP per capita in the period 1980-1995 (Salgado-Banda, 2007). Carree van Stel, Thurik and Wennekers' (2007) findings display a non-linear effect, suggesting that the effect of entrepreneurship on economic growth is insignificant.

In addition to its effect on job creation, entrepreneurship is seen as a fertile environment for innovation creation and, therefore, has been acknowledged as a key mechanism for economic growth acceleration and welfare (Wennekers & Thurik, 1999; Audretsch & Thurik, 2001; Audretsch, Bonte, & Keilbach, 2008; van Praag & Versloot, 2007; Acs, Astebro, Audretsch, & Robinson, 2016). However, according to Scott Shane (2009), the winner of the 2009 Global Award for Entrepreneurship Research, not all firms contribute to job creation and economic growth. He finds an interrelation between the motivation of becoming...