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Entrepreneurial Enterprises, Large Established Firms and Other Components of the Free-Market Growth Machine


  • William J. Baumol



The paper studies the principal influences accounting for the unprecedented growth and innovation performance of the free-market economies. It indicates that vigorous oligopolistic competition, particularly in high-tech industries, forces firms to keep innovating in order to survive. This leads them to internalize innovative activities rather than leaving them to independent inventors, and turns invention into an assembly-line process. The bulk of private R&D spending is shown to come from a tiny number of very large firms. Yet the revolutionary breakthroughs continue to come predominantly from small entrepreneurial enterprises, with large industry providing streams of incremental improvements that also add up to major contributions. Moreover, these firms voluntarily disseminate much of their innovative technology widely and rapidly, both as a major revenue source and in exchange for complementary technological property of other firms, including direct competitors. This helps to internalize the externalities of innovation and speeds elimination of obsolete technology. Some policy implications for industrialized and developing countries are also discussed.

Suggested Citation

  • William J. Baumol, 2004. "Entrepreneurial Enterprises, Large Established Firms and Other Components of the Free-Market Growth Machine," Small Business Economics, Springer, vol. 23(1), pages 9-21, August.
  • Handle: RePEc:kap:sbusec:v:23:y:2004:i:1:p:9-21

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    References listed on IDEAS

    1. Timothy J. Bartik, 2010. "Small Business Start-Ups in the United States: Estimates of the Effects of Characteristics of States," Book chapters authored by Upjohn Institute researchers,in: Zolton Acs (ed.), Entrepreneurship and regional Development, pages 155-169 W.E. Upjohn Institute for Employment Research.
    2. Ingrid Verheul & Sander Wennekers & David Audretsch & Roy Thurik, 2001. "An Eclectic Theory of Entrepreneurship: Policies, Institutions and Culture," Tinbergen Institute Discussion Papers 01-030/3, Tinbergen Institute.
    3. Davidsson, Per & Honig, Benson, 2003. "The role of social and human capital among nascent entrepreneurs," Journal of Business Venturing, Elsevier, vol. 18(3), pages 301-331, May.
    4. Robinson, Peter B. & Sexton, Edwin A., 1994. "The effect of education and experience on self-employment success," Journal of Business Venturing, Elsevier, vol. 9(2), pages 141-156, March.
    5. Michael Fritsch & Oliver Falck, 2003. "New Firm Formation by Industry over Space and Time: A Multi-Level Analysis," Discussion Papers of DIW Berlin 322, DIW Berlin, German Institute for Economic Research.
    6. Bates, Timothy, 1995. "Self-employment entry across industry groups," Journal of Business Venturing, Elsevier, vol. 10(2), pages 143-156, March.
    7. Paul Reynolds, 2005. "Understanding Business Creation: Serendipity and Scope in Two Decades of Business Creation Studies," Small Business Economics, Springer, vol. 24(4), pages 359-364, May.
    8. Hector Rocha & Rolf Sternberg, 2005. "Entrepreneurship: The Role of Clusters Theoretical Perspectives and Empirical Evidence from Germany," Small Business Economics, Springer, vol. 24(3), pages 267-292, February.
    9. Catherine Armington & Zoltan Acs, 2002. "The Determinants of Regional Variation in New Firm Formation," Regional Studies, Taylor & Francis Journals, vol. 36(1), pages 33-45.
    10. Feldman, Maryann P, 2001. "The Entrepreneurial Event Revisited: Firm Formation in a Regional Context," Industrial and Corporate Change, Oxford University Press, vol. 10(4), pages 861-891, December.
    11. Moulton, Brent R, 1990. "An Illustration of a Pitfall in Estimating the Effects of Aggregate Variables on Micro Unit," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 334-338, May.
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