- 1 - Entrepreneurship and Economic Growth: What GEM Has Revealed 1 Howard H. Frederick New Zealand Centre for Innovation & Entrepreneurship CONTACT: Howard H. Frederick, Professor of Innovation & Entrepreneurship, New Zealand Centre for Innovation & Entrepreneurship, and Ten 3 New Zealand Ltd., Auckland ABSTRACT The idea that entrepreneurship and economic growth are very closely and positively linked comes to us from Josef Schumpeter. Today, a number of OECD countries have implemented initiatives to increase the contribution of entrepreneurship to economic growth. This paper examines evidence associating Total Entrepreneurial Activity (TEA) as measured by the Global Entrepreneurship Monitor (GEM) project with measures of subsequent national economic growth. We hypothesise and find evidence for a positive correlation between TEA and OECD as well as IMF GDP growth measures. We conclude that evidence as measured by these variables points to a significant and positive association between entrepreneurial activity and national growth. Furthermore, this association increases from the zero (concurrent) year through to year three and then tends to drop off. These findings confirm previous studies. We have verified them with three different measures of growth. THEORETICAL FOUNDATIONS The idea that entrepreneurship and economic growth are closely and positively associated comes to us from the work of Josef Schumpeter originally written in 1911 (Schumpeter & Opie, 1936). In essence, Schumpeter separated himself from two hundred years of neo-classical economics, which had recognised only three factors of production: labour, natural resources and capital. Knowledge, productivity, education, and intellectual capital were all regarded as externalities or exogenous factors – that is, falling outside the neo-classical system. Neo- classical economics with their corollaries of perfect competition had no way to explain either quantum technological change or entrepreneurial activity (Solow, 1956). The entrepreneur simply does not exist in Solow’s model. In Schumpeter’s growth theory, entrepreneurs create and exploit disequilibrium and disturbances. Schumpeter calls this “creative destruction” and Aghion and Howitt have formulated a theoretical model that includes this process (Aghion & Howitt, 1992). The Internet is a classic “disruptive technology” that created opportunity to earn excess profits. It spilled over so that others could create ever new innovations. Although such innovations could be argued to be endogenous, the invention per se is taken as exogenous (Burton, 1999: 20.). “New growth theory” developed in earnest in the mid 1980’s through the work of Stanford economist Paul Romer and others, who have attempted to deal with the causes of long-term growth, something with which traditional economic models have had difficulty. Following Schumpeter, Romer saw knowledge and technology as an intrinsic part of the economic system (they endogenise knowledge and technology). In addition to natural resources, capital and labour, knowledge thus became a fourth production factor, a phenomenon that had become especially evident in leading economies (Romer, 1994) (Romer, 1986) (Romer, 1990).