Entrepreneurship and Innovation as Strategies to Manage the Crisis

8/8/2019 Entrepreneurship and Innovation as Strategies to Manage the Crisis

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ENTREPRENEURSHIP AND

INNOVATION ASSTRATEGIES TO MANAGE

THE CRISIS

Jerry CourvisanosCentre for Regional Innovation and

Competitiveness and the School of Business

APEC Symposium on SME Strategies to Managethe Impacts of the Global Financial Crisis (GFC)

9 June 2009


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Human ingenuity and technological

innovation can do the job for us, butonly if there is genuine global

commitment to change. As with

addressing climate change, bothdeveloped and developing countrieshave to modify the trajectory of their

impact on the natural environment.Tanner, Lindsay. (2009), Gear change on recoveryroad, The Age, Business Day, April 16, p. 8).


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Outline

Background: The GFC and post-GFC Stimulus and innovation

SMEs and capitalism

Susceptibility in crisis

in previous global downturns in East Asian financial crisis of 1997

GFC and innovation

Climate change crisis and innovation

Strategy out of the two crises: eco-sustainable Role of APEC member nations in this strategy

Role of SMEs in APEC in this strategy


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Background: The GFC

IMF: the great recession unusuallylong and severe with sluggish recovery

Stiglitz: new model of growth needs to

replace the consumerist-debt model Ed Kane: Zombie banks gambling on

resurrectionresult of bank bailouts

Deleveraging will take a very long time

Developing a new growth engine willtake even longer & requires innovation


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Background: Post-GFC

Innovation for the new Post-GFC growth modelneeds to meet three requirements:1. Long term investment in physical capital

- not short-term financial capital - mustunderpin innovation (no cheap credit)

2. Consumption and trade need to support thephysical investment, not drive growth (nomassive consumerism)

3. Growth must be designed for ecologically

sustainability, not high speed growth to themaximum (no inadequate pollution costing)Without these three, any attempt atinnovation-based growth will be afalse dawn


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Stimulusand Innovation

Two strategies for the recession have beenimplemented world-wide:1.Monetary and fiscal stimulus consisting of

increase money supply (m), cash benefits (s),tax cuts (m), improve training and education(m), bring forward infrastructure spending (l).Various short (s), medium (m) and long (l)term Keynesian macro reflation policies (Keynes,1936)

2.Innovation consisting of new knowledgeapplication - technology or organisation-basedemerging in public (e.g. defence) &private (e.g. ICT) sectors (Kalecki, 1971)


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Stimuluscreates floor

Keynesian reflation stimulus aims to limit depthof downturn and provide some psychologicalconfidence as precondition to the first phase inrecovery, with prices beginning to rise

Problem: How to sustain reflation? At cycle trough, there are many false

dawns as investors, banks, consumers,economists and politicians react to

stimulus measures with confidence thatinevitably is short-livedlack substance

No new growth engine emerges todrive economy upwards


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Innovation creates engine

Historically, engines of growth emerged out ofinnovation that latches on to the stimuluspolicies, like well-built train tracks (especiallyinfrastructure & training), and provide the ability

topower up the economic cycle

Post-1890s depression: US electricity generation

Post-1930s depression: WWII war machine &reconstruction (mechanical engines, consumerism)

Post-1989-91 recession: ICT & knowledge base Post-GFC: (needs to be) eco-innovation

Requirement: To chart path of post-GFC


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SMEsand Capitalism

SMEs are a significant element in the path ofpost-GFC recovery

Schumpeter (1911) father of innovation studies-identified SMEs - as they established R&D

(technological) and marketing (organisational)power in post-1890s

Post-1930s, Schumpeter (1939) large firmsproviding same two innovation powers but withnegative impacts, complemented by SMEs

Post-1989-91, symbiotic relation between largehardware & software platforms and SMEssoftware services


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Susceptibility in Crisis

How the engines of innovation develop,depends on a firms fragile confidence (oruncertainty), given level of investment orders

Susceptibility is the degree of fragility to

investment commitments - related to financialrisk, excess capacity and profits

Commercialising innovation requires seriousinvestment commitmentwhich in crisis is

problematic (with high debt & excess capacity; low profits) Stimulus policies provide a floor, but do not

directly address susceptibility...what is neededare structural policies (for innovationand investment)


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in previous global downturns Expansion out of 1970s downturn was weak

with no industry structural change policies andlittle significant innovation

Susceptibility was only marginally ameliorated Expansion out of the early 1990s downturn was

strong with neo-liberal deregulatory policiesthat allowed structural change to information-

based economy Susceptibility was significantly ameliorated but at the cost of building massive speculative

investments following dot.com crash


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in East Asian financial crisis of 1997 Exceptionally high susceptibility by East Asian

economies in 1997 forced these economies toaddress fragile innovation, high investmentsusceptibility and speculation

Japan did not restructure industrial or financialsystems, with zombie banks & highly susceptibleindustrial investment leading to a decade longpoor economic growth (S. Korea to less extent)

Other East Asian economies directly addressedthese concerns and reduced significantlysusceptibilitystructural change occurred


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GFC and Innovation: FrameworkSet up a dynamic circular flow link between innovation (H)

and investment (I):


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GFC and Innovation: Stylised Facts

Correspondence and contradiction in GFC: GFC exposed by the impact of entrepreneurial

innovation in increasingly deregulated neo-liberalised economies

Innovation cyclical framework operating in avirtuous circle since the major recession of theearly 1990s with the interaction of ICT andfinancial innovation

As innovation stimulated investment and AD;Tgrew through expansion phase to powerdiffusion of incremental RD and

supporting investment


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GFC and Innovation: Stylised Facts

As the boom gathered momentum, gearingratios and, then, excess capacity both increased,while value creation from marginal incrementalinnovation became progressively lower

Also, funds (esp. after dot-com crash) shifted toincreasingly speculative and Ponzi investment

Risk existed through the boom, became greatlyexposed through fundamental uncertainty

Innovation framework suddenly turned into avicious circle of lower investment, reduced AD,falling T; stymieing innovation


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GFC and Institutional Settings

Stylised facts unfold differently due to specificinstitutional settings for susceptibility exposure

Sheehan (2009) recently identified diversetransmission mechanisms by which the GFC

unfolds in different economiessee Table 1 US, EU, Japan & Korea impact through financial

and wealth effects

Other S. East Asian and Australia impact throughexport shockssee Charts 1, 2 & Table 2

China mixture of consumer & exports (mild)

Susceptibility hitallviaexpectations


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GFC and Institutional Settings APEC member countries not in Table 1 reflect

significant aspects of some groups in the table

Canada is in the same category as Australia -both having weathered the financial storm betterdue to relatively less deregulated financialsystems, but commodity exports and terms oftrade affected with a time lag

All Latin American APEC have been affected like

the export-oriented S.E Asian economies Mexico most exposed and Peru the least

All economic drivers specified derive from cheapmoney and cheap polluted energy -

neither driver is viable anymore


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GFC and Institutional Settings

APEC is made up of members with as vast arange of capitalist institutional settings as existon the global stage, from very advanced (e.g.USA) to very underdeveloped (e.g. PNG).

Diverse institutions within capitalism determinethe specific nature of entrepreneurship andinnovation within different types of capitalisteconomies: distinctive patterns of relations arise

Two research literatures, comparative capitalism

and varieties of capitalism, develop theseconcepts in detail

Thus, differences in institutional settingsinfluence strategies outlined next


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Climate Change Crisisand

Innovation: Post-GFC Need paradigm shift to ecological sustainability

with a low-emissions economy: innovation policy

Focus on stabilising greenhouse gas (GHG)emissions to avoid most dangerous climate

change aspects Need to guarantee safe climate and CO2 levels,

sufficient to retain - ice sheets, large ecosystems(esp. water), developing countries livelihoods

and coastal megacities Impossible to secure this guarantee with current

knowledge, need to act to avoid dangerousoutcomes now and learn-by-doing


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Innovation: Post-GFC Entrepreneurship operates on the same principle;

acting now when the moment is opportune andlearn as entrepreneurs proceed, iterativelyadjusting business strategy with knowledge from

doing GFC provides opportunity for eco-innovation

Van Berkel (2007) defines eco-innovation asenvironment-informed and -driven

improvements and innovations in products,services and processes that deliver more value toproducers and/or consumers while progressivelyreducing net environmental impacts.


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Innovation: Post-GFC Jones & Sheehan (2009) estimates, working from

10% reduction of emissions and fossil fuels in2010 due to GFC-reduced production, with fullrecovery in 2025 no direct long term benefit if

no eco-innovation paradigm shift GFC can provide springboard to lower emissions

path by eco-innovation now, reducing risks anduncertainty through entrepreneurial activity

Begin with applying the Obama US emissionsreduction policy as a target (-14/-83% GHG by2020/50) across OECD, with developing APECeconomies following with lagsee Jones & Sheehan (2009) estimate charts


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Strategy out of the Two Crises

Need more than stimulus as strategy out of GFCand GHG crisesneed public innovation policy

Much more than structural policies - need toincorporate targets (or goals) well into the long

term future, and be democratically implemented(people are committed)

Establish the eco-sustainable framework whichincorporates public innovation policy to induce

paradigm shift in the private sector (like: grid forelectricity, war for mass production, defencecomputer system for ICT)

Assist in ameliorating susceptibility


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Eco-sustainable Framework fourelementsof innovation policy

1. Agreed ecological sustainable rules (orconventions) precautionary principle

2. Perspective (iterative) planning flexible,

local-based democratic motivation and localvoluntary conformity towards regionalecologically appropriate goalslearn-by-doing

3. Cumulative effective demand with strong local

niche market share for environmental-basedgoods & servicesstimulus support

4. Investment and finance planningunderpinning above


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Role of APEC MemberNations in

Eco-sustainability Strategy

Due to the varieties of capitalism covered underthe APEC umbrella, this innovation framework foreco-sustainability must be applied differentlyaccording to institutional settings

Clear USA and China must lead - signs are there:Obamas emission policy and Chinas politicalstatementsboth their R&D is more important

Krugman (2009) whole game is about tochange: ecological rules setting

Planning is too slow link to stimulus

Strong local ecological niche marketsmatter, not export markets


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Role of APEC MemberNations in


APEC is committed to information sharingmechanisms-vital set out & assist implementingthe innovation framework for eco-sustainability

APEC is committed to accelerating regionaleconomic integration (REI) - better to work forsub-regional integration within a broader APECREI eco-sustainability agenda

Governments need to inspire & lead -entrepreneurs will follow (not the other way around) see New Deal, Post-War Reconstruction, Marshall Plan,Dirigisme East Asian Industrialisation


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Role ofSMEs in APEC in

Eco-sustainability Strategy 45 m. SMEs in APEC account for over 90% of

all firms, employ 60-80% of workforce, butonly 30-35% of exports (APEC fact sheet SMEs, Feb. 09)

Post-GFC recovery requires entrepreneurs in

SMEs to follow eco-sustainability path SMEs are flexible and able to develop eco-

innovation much better than the large deadgiants of 20th Century capitalism (e.g. GM)

SMEs have relative advantage in APEC, homegrown and address domestic niche mkts. first Export-orient model for SMEs no longer

appropriate. Consumerism is dead(credit and climate have changed)


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Role ofSMEs in APEC in


APEC needs to support these SMEs by:

Addressing eco-sustainable infrastructure needs

Implement structural reforms already set up

(anti-corruption, customs, strict IPRs limits) Education and training for women (more eco-

sensitive), minorities (reduce immigration from APECs lessdeveloped), eco-creativity (how to go green)

Institutional lending - ameliorate susceptibility

Chart shows small business activity (strength ofentrepreneurial activity in APEC emerging)


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Total entrepreneurial activity by country and region in 2005Source: Schaper and Volery (2007, p.16)


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Conclusion: Role of APEC Shift innovation focus from minor incremental

(powered by previous boom) to radical &incremental (powered by anti-GHG emissiontechnology)

Supportive structures for radical and incrementaleco-innovation to shift economies out ofrecession need to be grasped and enhanced

Accept carbon tariff (ETS or tax) to reflect actualcosts

Not enough to simply resist restrictions on trade

and investment No longer export-orientation model

(raw materials and consumerism) Amelioration of susceptibility in

this strategic shift


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Conclusion: Role of APEC

Strength in diversity:

USA to lead reduction emissionsChinas energy use to offer climate change

empowermentAdvanced Commodity Exporters (Aus, NZ, CA)

to lead shift towards niche renewable energymarketsAsia Developed to finance & provide ICT

support for eco-innovationAsia Emerging and Latin American to follow

through with micro-enterprises in eco-innovationSmaller Other to develop domestic eco-

niche with much APEC assistance


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Selected BibliographyEntrepreneurship and SMEs Schumpeter, J.A. (1911/1938), The Theory ofEconomic Development,

Cambridge, MA.: Harvard University Press [Germanoriginal 1911]. Schumpeter, J.A. (1939), Business Cycles: A Theoretical, Historical and

Statistical Analysis ofthe Capitalist Process, Volumes I & II, New York:McGraw-Hill.

Schaper, M. and Volery, T. (2007), Entrepreneurship and SmallBusiness:2nd Pacific Rim Edition, Milton, Qld: JohnWiley & Sons Australia.

Dirigiste Government Policy Keynes, J.M. (1936), The General Theory of Employment, Interest and

Money, Macmillan, London. Kalecki, M. (1971), Selected Essays onthe Dynamics ofthe Capitalist

Economy, 1933-1970, Cambridge: Cambridge UniversityPress. Cornwall, J. (1983), The Conditions for Economic Recovery: A Post-

KeynesianAnalysis, Oxford: Martin Robertson.

Wade, R. (1990), Governing the Market: Economic Theoryand the Role ofGovernmentin East Asian Industrialization, Princeton, N.J.: PrincetonUniversityPress.

Bell, S. (ed.) (2000), The Unemployment Crisis inAustralia: Which WayOut?, Cambridge, Cambridge UniversityPress.

Bernanke, B. (2000), Essays on The Great Depression, Princeton, N.J.:PrincetonUniversityPress.


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Selected Bibliography

Climate Change

Van Berkel, R. (2007), Eco-innovation: Opportunities for advancing wasteprevention, International Journal of Environmental TechnologyandManagement, Vol. 7 (5-6), pp. 527-50.

Jones, R. and Sheehan, P. (2009), New Strategies for Adaptation andMitigation, paper presented at the Conference Emerging fromthe GlobalStorm: Growthand Climate Change Policies in Australia, Victoria University,Melbourne, 15 April.

Eco-sustainable Framework Courvisanos, J. (2005), A post-Keynesian Innovation Policyfor Sustainable

Development, International Journal of Environment, Workplace andEmployment, Volume 1 (2), pp. 187-202.

Courvisanos, J. (2009), Regional Innovation for Sustainable Development:An Australian Perspective, Journal ofInnovation Economics, Volume 3 (1),pp. 119-43.

Courvisanos, J. (2009), Innovation Policyand Social Learning: An EconomicFramework for Sustainable Development in Regional Australia, in J. Martin,B. Jorgensen and S. Taylor (eds), Climate Change and Social Learning,Ballarat: VURRN Press.

Courvisanos, J. and Jain, A. (2006), A Framework for SustainableEcotourism: Application to Costa Rica, Tourismand Hospitality: Planningand Development, Volume 3 (2), pp. 131-42

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Entrepreneurship and Innovation as Strategies to Manage the Crisis