The Role of Innovation and Entrepreneurship
in Economic Growth

An NBER conference on The Role of Innovation and Entrepreneurship in Economic Growth took place in Mountain View, California January 7-8. Research Associates Aaron Chatterji of Duke University, Josh Lerner of Harvard University, Scott Stern of MIT, and Michael J. Andrews of NBER organized the meeting, sponsored by the Ewing Marion Kauffman Foundation. These researchers' papers were presented and discussed:

Erica Fuchs, Carnegie Mellon University and NBER; Kate S. Whitefoot and Christophe B. Combemale, Carnegie Mellon University; and Britta M. Glennon, University of Pennsylvania

The "Weighty" Manufacturing Sector: Transforming Raw Materials into Physical Goods

The manufacturing sector encompasses a diverse set of industries that are involved in the transformation of raw materials into physical goods. Over the last two decades, the US' manufacturing value added (MVA) has slightly grown, however, the US' percentage of global MVA has declined due to China's exponential rise. Likewise, in contrast to net employment in the US economy, which has increased, net employment in manufacturing (while growing slightly since 2010) is significantly lower than in the 1980s. As a whole, the manufacturing sector involves higher value added per capita employed, a greater proportion of the labor force with education at the high school level or below while having on average higher wages for that labor force, higher industry spending on R&D, and fewer private equity / venture capital deals financing new ventures than non-manufacturing industries such as services (including software). The US' relatively high R&D spending on manufacturing (66% of industrial R&D) and comparatively low manufacturing value added (14%) is at least in part due to the globalization of manufacturing facilities in the last decade. The above said, drawing implications from sector-wide trends can be misleading because of the variation in these indicators across sub-sectors. At the five-digit NAICS code level, the top sources of employment are animal processing, aerospace products, and printing (on various materials including textile, metal, plastics), the top sources of revenue are petroleum refineries and automotive, and the top source of R&D spending is pharmaceuticals. Considering the sector's diversity will be critical to understanding productivity and labor outcome effects, and appropriate policy responses, if any.

Joel Waldfogel, University of Minnesota and NBER

Digitization and its Consequences for Creative-Industry Product and Labor Markets

Digitization has transformed many of the creative industries by reducing the costs of creating new products and bringing them to market. This chapter asks two related questions. First, how large are the welfare benefits of new digitization-enabled new products? Traditionally, the benefits of digitization have been evaluated through a “long tail” lens, in which digitization’s benefit is infinite shelf space, so that consumers have access to all existing products. Aguiar and Waldfogel (2018) provide a different characterization focusing on the effect of newly created products. Because product success is unpredictable, an increase in the number of new products can bring forth a mix of products, including valuable products which otherwise would not have come to market. This research adapts this approach to measure the welfare benefits of the new digitization-enabled products in movies, books, and television. Available data on movies, television, and books confirm earlier findings for music that the random long tail is large compared with the conventional long tail. Related, the welfare benefit of new creative products is substantial. The research also examines the labor-market consequences of digitization for creators. Available evidence on creative labor markets confirms increased activity evidence in product market creation data. And while total earnings of creative workers are rising, average earnings per worker are falling, primarily at the low end of the earnings distribution.

Joshua R. Bruce, University of Illinois at Urbana-Champaign, and John M. de Figueiredo, Duke University and NBER

Innovation in the U.S. Federal Government (slides)

Francine Lafontaine and Jagadeesh Sivadasan, University of Michigan

The Recent Evolution of Physical Retail Markets: Online Retailing, Big Box Stores, and the Rise of Restaurants

Lafontaine and Sivadasan examine changes in the retail sector in the US over the period 1999 to 2017, a period during which new technologies and forms of competition have been associated with what has been dubbed a "retail apocalypse" in the trade press and beyond. Consistent with this notion of "retail apocalypse," the researchers begin by confirming a sizable decline in the number of establishments in the retail sector defined per the currently used NAICS classification scheme. They further document a strong increase in e-commerce sales from non-store retailers, and find suggestive evidence that sectors experiencing greater penetration of e-commerce exhibited larger relative decline in sales, number of physical stores, employment, and total payroll. However, the growth of Big Box stores (NAICS 45291), the second main factor often blamed for the reduction in number of retail establishments, flattened starkly after 2009, and the researchers find that changes in other retail activity in a county is, on average, positively correlated with increases in the presence of Big Box stores. Moreover, despite the documented lower number of physical stores in 2017 compared to the start of the period, it is found that both employment levels, real sales, real value added and real payroll of brick and mortar retailers had recovered to their pre-Great Recession peaks by 2017. Interestingly, the researchers document that including restaurants (NAICS 722) as part of the retail industry -- per the earlier Standard Industrial Classification (SIC) and consistent with the notion that these types of businesses use similar labor and real estate inputs -- yields much stronger physical retail activity in terms of aggregate establishments, employment, sales, value added and payroll throughout the period, propelled by remarkably strong growth in the restaurant sector. This growth in number of restaurants is widespread, both across the country (across counties at different income quintiles), and in terms of format (full service and limited service). Lafontaine and Sivadasan examine two channels for the rise of restaurants: they find no evidence for the first, i.e. the idea that this growth was propelled by a reduction in costs induced by the decline of other physical retail. Instead, they find suggestive evidence that two-thirds (one-half) of the growth in restaurant establishments (employment) can be attributed to the relative increase in consumer expenditure share for restaurant food. The researchers briefly summarize emerging trends, and significant venture capital funding for delivery and other services that may complement traditional physical retail stores.

Chris Forman, Cornell University, and Avi Goldfarb, University of Toronto and NBER

Concentration and agglomeration of IT innovation: Evidence from patenting (slides)

Information technology (IT) matters to prosperity. The top patenters are increasingly IT companies. Forman and Goldfarb use data on US patents to document four trends in IT patenting. First, they show that firm-level concentration in IT patenting is increasing over time. Second, they show that geographic concentration in IT patenting is increasing over time. Third, the researchers show that most technology classes experienced a decline in new patenters from 19802000. This was not true of new IT patents. Since 2000, the trend in new IT patenters looks like other classes and is declining over time. Fourth, there is increased geographic concentration of new IT patenters. The researchers do not identify the reasons behind these trends nor whether they are related to overall changes in industry concentration, agglomeration, or prosperity.

Edward Kung, California State University, Northridge

Innovation and Entrepreneurship in Housing and Real Estate

Kung discusses innovation and entrepreneurship in residential real estate and construction (housing). Based on R&D spending and patent statistics, housing does not appear to be a very innovative sector. But in the last two decades, there has been a significant increase in the amount of investment going to real estate technology companies. Kung discusses the companies and technologies which have drawn the most attention from investors and then reviews the literature on two major innovation trends in housing: the growth of the internet as a tool for housing search, and the development of home-sharing platforms which allow homeowners to use their homes as short-term rentals. These innovations have likely increased the efficiency of housing markets, leading to higher quality matches between buyers and sellers, and more efficient utilization of space. However, the effects are hard to measure due to the difficulty of separating quality changes from price changes. In comparison to residential real estate, there appears to have been less recent innovation in residential construction. In many areas, residential construction is artificially constrained by local land use policies, and estimates from the literature suggest that relaxing these constraints could increase economic growth significantly. Finally, Kung discusses anti-competitive practices in real estate which may hinder entrepreneurship and the adoption of new innovations, and how innovation and entrepreneurship in other sectors may affect the housing market.

David Popp, Syracuse University and NBER; Jacquelyn Pless, MIT; and Ivan Hascic and Nick Johnstone, OECD

Innovation and Entrepreneurship in the Energy Sector

Innovation in the energy sector often proceeds slowly, and entrepreneurial start-up firms have historically played a minor role. Popp, Pless, Hascic, and Johnstone argue that this may be changing. Energy markets are going through a period of profound structural change. The rise of hydrofracturing lowered fossil fuel prices so much that natural gas is now the primary fuel for electricity generation in the US. Renewable energy technologies have also experienced significant cost and performance improvements. However, integrating intermittent resources creates additional grid management challenges requiring more innovation, which must be achieved quickly if climate policy goals are to be met. The researchers document the evolving roles of innovation and entrepreneurship in the energy sector. First, they provide an overview of the energy industry, noting that many new energy technologies are smaller, more modular, and increasingly rely on innovation in other high-tech sectors where innovation typically moves more rapidly. They then conduct two descriptive data analyses, documenting a sharp decline in both clean energy patenting and start-up activity from about 2010 onwards. The researchers discuss potential explanations and provide some evidence that innovation in existing technologies may simply have been successful, whereas continued innovation may be needed in enabling technologies that are more likely to depend on innovation in other sectors. They conclude that the increased complementarity of energy and high-tech innovations provides potential for faster paced energy innovation moving forward. However, understanding the impact of venture capital funding on such progress requires more rigorous evaluation.

Derrick Choe and Robert Seamans, New York University, and Alexander Oettl, Georgia Institute of Technology and NBER

What's Driving Entrepreneurship and Innovation in the Transportation Sector?

Choe, Oettl, and Seamans draw from prior literature and a range of statistics to describe economic, entrepreneurial, and innovative activities in the transportation sector. Analysis of recent trends suggest that warehousing is playing an increasingly important role. The researchers argue for more research on the role of warehousing in particular. They also review several new technologies, including autonomous vehicles, drones, and robots, that are starting to affect transportation and warehousing.

Mercedes Delgado, MIT; Daniel Kim, University of Pennsylvania; and Karen G. Mills, Harvard University

The Servicification of the U.S. Economy: The Role of Startups versus Incumbent Firms

Barbara Biasi, Yale University and NBER; David J. Deming, Harvard University and NBER; and Petra Moser, New York University and NBER

Education and Innovation

Biasi, Deming, and Moser survey the literature to establish a link between education and innovation. The researchers start by reviewing theories of endogenous growth and they outline the potential theoretical effects of education and access to knowledge on the production of innovation and ideas. Next, they use existing empirical evidence to explore the impact on innovation of three sets of policies: those aimed at improving access to early, basic education, those that increase investments in research universities and improve access to them, and those that give potential innovators the type of education that is most useful to them. The researchers conclude that all three have the potential of mending a “leaky pipeline” that allows talented individuals to become innovators, regardless of their background.

Julian Alston, University of California, Davis, and Phillip Pardey, University of Minnesota

Innovation, Growth and Structural Change in American Agriculture

US agriculture was transformed during the 20th century by waves of innovation with mechanical, biological, chemical, and information technologies. Compared with a few decades ago, today's agriculture is much less labor intensive and farms are much larger and more specialized, supplying a much-evolved market for farm products. Over recent decades, the global landscape for agricultural R&D has shifted away from farms, away from the public sector toward the private sector, and away from the United States toward agriculturally important middle-income countries, especially China, India and Brazil. US investments in agricultural R&D are stalling even though meta-evidence shows that past US investments in agricultural R&D have yielded very favorable returns: median reported benefit cost-ratios in the range of 12:1. Continuing US investment and innovation will be required to preserve past productivity gains in the face of climate change, coevolving pests and diseases, and changing technological regulations — let alone increase productivity. Great potential exists for innovation in crop and livestock genetics and digital farming technologies to generate new products and production processes, but innovators have to overcome increasingly strong headwinds from social and political forces that seek to dictate technology choices.

Amitabh Chandra, Harvard University and NBER

Innovation and Entrepreneurship in Health Care

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