Innovation, Entrepreneurship and the Economy – Where Are They Headed in the US, China & India?
By Rajiv R. Shah
Innovation and entrepreneurship have transformed the western world, and especially the US, from agricultural economies of the past, through the industrial revolution into the information age of today. The impact on the US economy has been to transform the US into the most dominant economic power of today with the world’s largest GDP. However, the information revolution and globalization that we are experiencing today is also transforming the world. Fundamental economics, easy and rapid access to information, ease of global travel and opening up of societies, although in some cases to a limited extent, that were previously completely closed to the West, are sowing seeds of change that have the potential of creating a future somewhat different from what we have been used to in the recent past.
Most significant among these changes is the rapid growth in the economies in other parts of the world – BRICS countries, as well as in the Asia-Pacific region, in general. China and India have especially received the most mention in the recent past, particularly during the recent economic downturn in the US and the resultant job losses. China, and perhaps to some extent India, has become a global engine of economic growth, while the growth in the US has been sputtering. Both China and India are today world’s biggest emerging economies with high GDP growth rates. However, the case of China is especially compelling, given that by most accounts, its economy is expected to surpass that of the US in the not too distant future.
While innovation and entrepreneurship have driven the US to its present status as the most dominant economic power of today, can the US continue on that path? What are some of the key issues and concerns? China and India used to be dominant economic powers several centuries ago, when the US was not even on the map or was not very heavily populated. With the rise of the West, and due to a number of social and political reasons, these two nations lost their economic clout, and their economies were dwarfed by western economies. While both these countries have shown significant growth in recent decades, can that growth be sustained? If we believe in the premise that innovation and entrepreneurship are indeed vital for long term growth of a country, can these two nations exhibit that? That brings one to the question of what are the factors that are important for innovation and entrepreneurship to thrive. We need to look at these factors and compare them between the US, China and India, and look at the evolution of these factors in the past, and assesses the pointers they give us about the future, and hence about the likelihood for continued growth in these economies.
A lot is known and has been written about in the context of innovation and entrepreneurship in the West, and the US in particular. But the same is not true about China and India – not a lot is known in the West either about their distant past or about the recent evolution and the present state of affairs with regard to the fundamentals that drive innovation and entrepreneurship. What has been written about innovation and entrepreneurship in these two countries very recently, given the recent growth in their economies, is either very anecdotal or very prescriptive, and very often also with highly romanticized perspectives on the state of affairs in those countries in the areas of innovation and entrepreneurship, without taking into account some fundamental challenges these countries face.
The importance of innovation and entrepreneurship to any economy has been recognized since the pioneering work of Joseph Schumpeter. Number of books have been written on the subject of “Innovation and Entrepreneurship” since the landmark book by Peter Drucker on this subject. The importance of innovation has been studied and written about, especially radical, transformative, or disruptive innovation by a number of authors in recent years, most notably, Clayton Christensen. However, while the impact and the results of innovation and entrepreneurship on the economy are generally easy to see, the task of mathematically relating them is extremely challenging. This is further complicated by the fact that macroeconomic theory for the best part of the 20th century has been divided into two opposing philosophical and mathematical camps which have not shown a sign of coming together until recently and has been discussed by Greg Mankiw. While it is well known that a large number of other factors – monetary and fiscal policies, budget and trade deficits, inflation, unemployment, exchange rates, and a host of others – affect the economy in the near term, the long-term vector, an area of macroeconomics which is now known as Economic Growth, is driven by innovation and entrepreneurship.
Since the early and pioneering work of Solow, the impact of innovation and other factors on economic growth has been mathematically modeled by a number of economists. A number of authors have also attempted to model the impact of entrepreneurship. These authors and a number of organizations, such as the World Bank and the OECD, have collected data on entrepreneurship and published Entrepreneurial Indices. Given the qualitative nature of the factors responsible for innovation and entrepreneurship, the task of modeling the impact on the economy is next to impossible and new methods and approaches need to be explored to model these and relate these to empirical data. Until such a model becomes available, what is needed is a comparative assessment of the various qualitative factors that are necessary for innovation and entrepreneurship to thrive, rather than romanticized anecdotal perspectives on what is happening in these three economies, in order to make educated guesses about how these economies might evolve in the future.
Dr. Rajiv R. Shah is Clinical Professor, Naveen Jindal School of Management, UT Dallas, and is the Founder and Program Director for the Systems Engineering and Management (SEM) Program. At UT Dallas he teaches Innovation and Entrepreneurship, Corporate Entrepreneurship and Venturing, Technology and New Product Development, as well as Quantitative and Numerical Methods in Finance and Macroeconomics. He co-founded and is a Managing Partner at Timmaron Capital Advisors, a firm that provides advisory services to CEOs, BoDs, and PE firms. He also founded The indusLotus Group and provided high-level consulting to private equity firms and others on Wall Street.