Introduction: Competitive Capitalism and the Role of Capital Investment

In Joseph Schumpeter’s account, arguably the most persistent set of economic propositions on entrepreneurship and its role in economic growth, the entrepreneur is of necessity a net debtor prior to the generation of revenues: “[As] innovation, being discontinuous and involving considerable change and being, in competitive capitalism, typically embodied in new firms, requires large expenditure previous to the emergence of any revenue, credit becomes an essential element of the process … saving usually lags behind requirements” (1991a: 66). One of the principal challenges for the economic system, especially if the economy is enacted as self-regulating and self-monitoring, as in the Austrian school of economics tradition of thinking, is how to match the supply of capital and entrepreneurial demands for funding of enterprises. Supporting this proposition, research reported by Brown, Fazzari and Petersen (2009) suggests that the boom of research and development (R&D) in the American economy in the 1994–2004 period can be explained on basis of the inflow of capital in the high-tech industry: “The financial coefficients are large enough that the financial cycles for young high-tech firms along can explain about 75% of the aggregate R&D boom and subsequent decline” (152). For instance, during the dot-corn boom of the 1998–2000 period, young firms in the United States increased their net stock issues by nearly 265%, indicating the role of capital as the principal driver of innovation. Brown, Fazzari and Petersen (2009: 181) consequently suggest that “finance, financial development, and the institutional structure of financial markets are important factors driving economic growth.”