Mark Sanders, Max Planck Institute for Research on Economic Systems International Conference of the IT&FA, Istanbul, May 21 st, 2005slide 1 of 15 Globalisation,

Mark Sanders, Max Planck Institute for Research on Economic SystemsInternational Conference of the IT&FA, Istanbul, May 21st , 2005 slide 1 of 15

Globalisation, Entrepreneurship and the

Product Life CycleDavid Audretsch

and

Mark Sanders*Max Planck Institute of Economics

Entrepreneurship, Economic Growth and Public Policy

Kahlaische Strasse 10

D-07745, Jena, Germany

[email protected]


Motivation

Stylized Facts:

-Rising Skill Premia in OECDKatz&Autor (1999), Nickell&Bell (1992) etc.

-Increasing importance of OutsourcingFeenstra&Hanson (1999, 2001)

-Shift to „Knowledge Economy“

-Spectacular performance India-China

-Shifting International Trade Pattern


Motivation

A unified framework for analysis in which:

Technology drives trade patterns…

… and comparative advantage drives

technical change…

… and their interaction explains

observed trade and labour market trends

in North and South.


The Model

nNH nN

L nSL

North South

Invention Development Outsourcing

LNH(wN

H) LSL(wS

L)LNL(wN

L)

EI EOED


The Basic Model

Basic Demand Structure as in Krugman (1979) and Grossman and Helpman (1991)

Consumers:Identical CIESSavingsIdentical LOVIso-Elastic Demand


The Basic Model

Basic Production Structure as in Grossman and Helpman (1991)

Producers:Monopolistic Competition+Linear Production Function in LPrice is set as fixed mark-up over wageProfits are positive Not 2 (G&H, 1991) but 3 different types of labor, LN

H, LNL and LS

L

not 2 but 3 wage, price and profit levels not 1 but 2 potential binding price constraints not 2 but 4 constellations of price, wage and profit levels


The Static Equilibrium

wNH wN

L

LNH* LN

L*

wSL

LSL*

LSLLN

LLNH


The Dynamic Model

How do Entrepreneurs move products over the life cycle?

Entrepreneurs Invent, Develop and Outsource according to:

*EEEE

Enn

nEnn

nnEnn

ODI

γOD

NL

S

LSγ

DHN

LN

LS

LNγ

IA

HN


The Dynamic Model

Entrepreneurs Invent, Develop and Outsource to gain:

Why do Entrepreneurs move products over the life cycle?

LN

LS

LS

LS

LS

HN

LN

LS

LN

LN

LN

HN

LS

LN

HN

HN

tt

HNtτr

HN

vψnnXXr

tπv

vnnnXXr

tπv

nnnnXXr

tπIτdτπeEv

//

)(

/)(/)(

/)(/

)()()(


The Dynamic Model

E E

wT nn /

G*

LN

LN nn /

LS

LS nn /

HN

HN nn /

EO

ED

EIEO

ED

EI

E*

wT*


The Dynamic Model

Comparative Statics:Higher LS

L (Globalisation)1. Reduces wages in South2. Increases Profits in South3. Re-allocates Entrepreneurs towards outsourcing4. Increases rate of outsourcing5. Causes higher SS size of foreign sector6. Reduces low skilled wages/employment in North7. Reduces wages in South8. Increases returns to Entrepreneurship


The Dynamic Model

Comparative Statics:Higher nA or g (General Purpose Tecnology)

1. Increases productivity of Innovators2. Re-allocates Entrepreneurs towards innovating3. Increases rate of innovating4. Causes higher SS size of „new“ sector5. Increases high skilled wages/employment in North6. Increases intra- and international income inequality7. Increases returns to Entrepreneurship


The Dynamic Model

Comparative Statics:Higher Ψ (Reduction in Risk)

1. Reduces discount rate for outsourcing2. Re-allocates Entrepreneurs towards outsourcing3. Increases rate of outsourcing4. Causes higher SS size of foreign sector5. Decreases low skilled wages/employment in North6. Increases wages in South7. Increases returns to Entrepreneurship


Policy Implications

Income Inequality vs Wage Inequality

Impact of Entrepreneurship and R&D Policy

Intranational vs International Wage Inequality

The Knowledge Economy vs Industrial Economy

Comparative Advantages in Entrepreneurship


Concluding Remarks

Managing globalisation poses the biggest 21st century challenge to policy makers.

Western politicians should focus on entrepreneurship policies, not only to maximise growth at home but also to moderate wage divergence and build comparative advantage.

Smart redistribution is necessary to make globalisation a pareto-improvement.

Documents

Mark Sanders, Max Planck Institute for Research on Economic Systems International Conference of the IT&FA, Istanbul, May 21 st, 2005slide 1 of 15 Globalisation,