Low Returns in R&D Due to the Lack of Entrepreneurial Skills

This studyendorses a model of endogenous growththat combines the work of researchers—producing inventions—and the work ofentrepreneurs—implementing them. An innovation requires the matching of anentrepreneur with a successful invention. Individuals face the choice ofwhether to become researchers (producers of inventions) or entrepreneurs(implementers of inventions). Therefore, an economy that allocates too manyindividuals to the research sector produces too many inventions that risk beingwasted since there will not be enough entrepreneurs to put them intopractice. Suggesting that innovation requires the random matching of entrepreneurswith valuable inventions, this growthmodel borrows elements from thestandard model, with several changes: (1) a technical externality isintroduced, which is generated by firm creation and leads to endogenous growth;and (2) the author allows the skills allocation to be endogenous by permittingagents to decide on whether to become an entrepreneur or a researcher. Theproposed model shows that restoring efficiency under the presence oftechnological externalities requires research to have more bargainingpower. A keyfinding of this economic analysisis that the innovationprocess can suffer because of the lack of either research effort orentrepreneurial skill. The model has implications for the recent literatureanalyzing the relation between growth and the scale of the economy. The studyalso shows theoretically that the returns to R&D might be decreasing ifthey are the result of an inefficient equilibrium shift that increases theamount of research effort to the detriment of more socially usefulentrepreneurial skills. The study's model provides some foundations to theSchumpeterian warning that the "state of decay of the capitalistsociety" may ultimately be caused by the lack of entrepreneurialskills.(CBS)