The 1970s were a shock to the American psyche. Since the close of the Second World War, economic growth was remarkably robust, resulting in unemployment rates that were negligible in the 1960s and a rise in the standard of living that was seemingly guaranteed. That all changed with a jolt. Not only did economic growth stall, but unemployment reached post-world war highs, rising above 10% by 1982. Inflation spiked, exceeding 12% in 1975 and 14% in 1980.
The great stalwart industries driving American economic prosperity in the post-war era, such as automobile and steel manufacturing, were under siege. Imports flooded in from Japan and Europe. The great manufacturing industries that had provided the backbone of prosperity in the United States were no longer competitive. America was no longer competitive. Thurow (1985, p. 23) pointed out, “Today it’s very hard to find an industrial corporation in America that isn’t in really serious trouble basically because of trade problems…The systematic erosion of our competitiveness comes from having lower rates of growth of manufacturing productivity year after year, as compared with the rest of the world.”
According to Abernathy et al. (2013, p. 9), “The happy illusion lies shattered. Like a rich child away at school whose allowance – received weekly in the mail – has suddenly and mysteriously been cut off, all those who believed in the unquestioned primacy of American Manufacturing now find themselves abandoned by events. The harsh truth is that the industrial landscape in America is already littered with the remains of once-successful companies that could not adapt their strategic vision to altered conditions of competition.”
In 1987, Business Week devoted an entire issue to the perplexing concern, “Can America Compete?”2 Emerging from the Second World War as a victor, “The U.S. was virtually unchallenged as industrial leader. Americans could make anything, and because their products were the best, they could sell whatever they made, both at home and abroad. But somewhere around 1973, the gravy train was derailed – and it has never really gotten back on track. It may have been a combination of things: Vietnam, the OPEC price shock, the inflation spiral. U.S. producers met fierce competition from foreign industries that churned out high-quality goods made by low-wage workers.”3
Just two years later, an influential study, Made in America, was published by the Massachusetts Institute of Technology (MIT) Commission on Industrial Productivity, providing a road map for restoring American prosperity and competitiveness through a renaissance in manufacturing (Derouzos et al. 1989). In fact, economic growth and prosperity were reignited in what Stiglitz (2004) termed as “the world’s most prosperous decade” of “the roaring nineties” in the United States.
The renaissance of the American economy did not stem from a resurgence of manufacturing in the traditional industries. Rather, bold entrepreneurs like Steve Jobs, Bill Gates, and Mark Zuckerberg founding the new startups of Apple Computer, Microsoft, and Facebook, and ultimately entirely new industries, such as personal computers, software, and social networks ignited economic growth and prosperity (Audretsch 2007). The Silicon Valley model of entrepreneurship revolves around high technology firms that are launched on the basis of a potential innovation that is more radical than incremental in nature. The opportunities to start the new firm emanate from research and development, or more generally ideas, created in the organizational context of an incumbent firm or organization, such as a university. An abundance of new ideas drives a flourishing startup environment or ecosystem. However, only a subset of entrepreneurial ventures survives by actualizing innovative activity and generating vigorous growth rates, while the remainder stagnate and ultimately exit from the industry. Audretsch (1995) characterizes the industry structure in an entrepreneurial industry as a conical revolving door, where the base of the cone is driven by a high rate of startups that come and go with rapidity, while displacement at the higher end of the firm-size distribution is less frequent. Finance is typically from risk-capital sources, such as venture capital and angel capital (Lerner et al. 2012). Employees as well as employers expect short-term employment contracts, so that mobility and fluidity are more the rule than the exception (Audretsch 1995). As the founder of Intel, Gordon Moore, describes the requisite conditions providing the catalyst for the Silicon Valley model of entrepreneurship, “Combine liberal amounts of technology, capital and sunshine. Add one (1) university. Stir vigorously” (Moore and Davis 2004).
However, it took more than sunshine to ignite the entrepreneurially driven economy. Fundamental but often subtle modifications and changes redirected and refocused policy and institutions away from the managed economy with its priority on mass-production manufacturing in the traditional industries to supporting and facilitating the requisite functions providing a catalyst for entrepreneurship. Taken together, those policies and institutions form the basis for the entrepreneurial society.
For example, the knowledge produced by universities did not play a major role in the managed economy with its focus on manufacturing. As the managed economy receded, knowledge replaced physical capital as the driving force underlying economic growth and prosperity (Romer 1986, 1994 and 1990; and Lucas 1988 and 1993). However, despite the assumptions inherent in the endogenous growth models, investments in new knowledge did not automatically spill over for commercialization and innovation, leading a United States Senator, Birch Bayh, lamented, “What sense does it make to spend billions of dollars each year on government-supported research and then prevent new developments from benefitting the American people because of dumb bureaucratic red tape.”4 The enactment of the Bayh-Dole Act5 not only significantly altered the role of a fundamental institution, universities, but also opened the flood gates for knowledge spillovers from university research that provided a catalyst for entrepreneurial startups.
Systematic studies provide compelling empirical evidence that refocusing the role of universities away from the managed economy to the entrepreneurial society made key contributions as a catalyst for entrepreneurship (Mowery et al. 2004), “Possibly the most inspired piece of legislation to be enacted in America over the past half-century was the Bayh-Dole Act of 1980. Together with amendments in 1984 and augmentation in 1986, this unlocked all the inventions and discoveries that had been made in laboratories through the United States with the help of taxpayers’ money. More than anything, this single policy measure helped to reverse America’s precipitous slide into industrial irrelevance. Before Bayh-Dole, the fruits of research supported by government agencies had gone strictly to the federal government. Nobody could exploit such research without tedious negotiations with a federal agency concerned. Worse, companies found it nigh impossible to acquire exclusive rights to a government owned patent. And without that, few firms were willing to invest millions more of their own money to turn a basic research idea into a marketable product.”6
Knowledge spillover entrepreneurship (Audretsch 1995), or new-firm startups founded on the basis of research and ideas generated at universities and incumbent firms, drove economic growth and prosperity, “The Bayh-Dole Act turned out to be the Viagra for campus innovation. Universities that would previously have let their intellectual property lie fallow began filing for – and getting patents at unprecedented rates. Coupled with other legal, economic and political developments that also spurred patenting and licensing, the results seem nothing less than a major boom to national economic growth.”7
Another example illustrative of the policy shift away from the managed economy to the entrepreneurial economy was passage of the Small Business Innovation Research (SBIR) program. The United States Congress made an explicit mandate for promoting innovation and economic growth by facilitating knowledge spillovers in enacting the SBIR program in 1982 (Audretsch 2011). A robust set of studies has confirmed the positive impact of the SBIR not just on entrepreneurial activity but also on innovation and economic growth (Audretsch 2011). While the impact of a program such as the SBIR might have been negligible in the era of the managed economy, it was far reaching and pervasive as a catalyst of the entrepreneurial economy.
Other pervasive and fundamental changes in institutions, policies, and culture included the emergence of financial institutions, such as angel and venture capital, but also crowdfunding, that is more oriented towards funding entrepreneurship than large manufacturing corporations, along with the evolution of role models and norms celebrating rather disdaining entrepreneurial values and thinking (Audretsch 2007).
In the decade of the 1990s, Europe seemed far away from Silicon Valley. The economic performance of Europe in the 1990 was dismal, with stagnant economic growth and unemployment ratcheting higher throughout the decade. The policy prescription posited by the new growth theory of endogenous growth (Romer 1986 and 1990; and Lucas 1988 and 1993) had resulted in first the Swedish Paradox and subsequently the European paradox, where high investments in knowledge failed to generate the predicted corresponding robust levels of employment growth and reduction in unemployment (Audretsch and Lehmann 2016). For example, the standard of living, measured in terms of per capita GDP, was roughly at parity between the United States and Germany at the beginning of the decade. However, by the end of the decade, per capita GDP in the United States had surged ahead by $12,000 more than in Germany (Audretsch and Lehmann 2016).
After a decade of divergent trajectories between the entrepreneurially driven American economy and the European economies, with their managed economies in traditional manufacturing industries, a new view coalesced among thought leaders in business and policy about the driving force underlying competitiveness and economic performance in the rapidly globalizing economy, “In particular, what most of the world, including the Americans themselves had learned by the end of that decade that they did not know or understand in any fundamental way at its beginning, was the crucial role played by knowledge and ideas along with entrepreneurship as a key vehicle to transform that knowledge and ideas into innovation, growth, employment and competitiveness in a rapidly globalizing economy” (Audretsch and Lehmann 2016, p. 8).
The European Council of Lisbon in 2000 responded by reprioritizing the European policy approach to emphasize innovation and entrepreneurship. The primacy of entrepreneurship as a policy priority was echoed by the President of the European Union, Romano Prodi (2002), “Our lacunae in the field of entrepreneurship needs to be taken seriously because there is mounting evidence that the key to economic growth and productivity improvements lies in the entrepreneurial capacity of an economy.”
The Silicon Valley model of entrepreneurship has become synonymous with entrepreneurship not just to policy makers throughout the world but also in much of the scholarly literature on entrepreneurship. According to Shane and Venkataraman (2000, p. 217) entrepreneurship is the “discovery and exploitation of profitable opportunities,” which is increasingly interpreted as singularly and exclusively emanating from high-growth innovative companies in high-tech industries (Shane and Venkataraman 2000; Wiklund et al. 2011). For example, Lerner (2012) refers to venture capital–financed ventures as entrepreneurship. Similarly, Stuart and Sorenson (2003) interpret initial public offerings (IPOs) as entrepreneurship. McKelvie and Wiklund (2002) follow suit by viewing entrepreneurship in terms of firm innovative performance. This reflects the growing trend in the literature is to distinguish entrepreneurial from non-entrepreneurial firms on the basis of firm growth (World Economic Forum 2011; Markman and Gartner 2003).