ENTREPRENEURSHIP AND INNOVATION AS STRATEGIES TO MANAGE THE CRISIS

1. ENTREPRENEURSHIP AND INNOVATION AS STRATEGIES TO MANAGE THE CRISIS Jerry Courvisanos Centre for Regional Innovation and Competitiveness and the School of Business APEC Symposium on SME Strategies to Manage the Impacts of the Global Financial Crisis (GFC) 9 June 2009

2. “Human ingenuity and technological innovation can do the job for us, but only if there is genuine global commitment to change. As with addressing climate change, both developed and developing countries have to modify the trajectory of their impact on the natural environment.” Tanner, Lindsay. (2009), “Gear change on recovery road”, The Age, Business Day, April 16, p. 8).

3. Outline • Background: The GFC and post-GFC • Stimulus and innovation • SMEs and capitalism • Susceptibility in crisis • in previous global downturns • in East Asian financial crisis of 1997 • GFC and innovation • Climate change crisis and innovation • Strategy out of the two crises: eco-sustainable • Role of APEC member nations in this strategy • Role of SMEs in APEC in this strategy

4. Background: The GFC • IMF: “the great recession” – unusually long and severe with sluggish recovery • Stiglitz: new model of growth needs to replace the consumerist-debt model • Ed Kane: “Zombie banks gambling on resurrection”…result of bank bailouts • Deleveraging will take a very long time • Developing a new growth engine will take even longer & requires innovation

5. Background: Post-GFC Innovation for the new Post-GFC growth model needs to meet three requirements: 1. Long term investment in physical capital - not short-term financial capital - must underpin innovation (no cheap credit) 2. Consumption and trade need to support the physical investment, not drive growth (no massive consumerism) 3. Growth must be designed for ecologically sustainability, not high speed growth to the maximum (no inadequate pollution costing) Without these three, any attempt at innovation-based growth will be a “false dawn”

6. Stimulus and Innovation Two strategies for the recession have been implemented world-wide: 1.Monetary and fiscal stimulus consisting of increase money supply (m), cash benefits (s), tax cuts (m), improve training and education (m), bring forward infrastructure spending (l). Various short (s), medium (m) and long (l) term Keynesian macro reflation policies (Keynes, 1936) 2.Innovation consisting of new knowledge application - technology or organisation-based emerging in public (e.g. defence) & private (e.g. ICT) sectors (Kalecki, 1971)

7. Stimulus creates “floor” • Keynesian reflation stimulus aims to limit depth of downturn and provide some psychological confidence as precondition to the first phase in recovery, with prices beginning to rise • Problem: How to sustain reflation? • At cycle trough, there are many “false dawns” as investors, banks, consumers, economists and politicians react to stimulus measures with confidence that inevitably is short-lived…lack substance… • No new growth engine emerges to drive economy upwards

8. Innovation creates “engine” • Historically, engines of growth emerged out of innovation that latches on to the stimulus policies, like well-built train tracks (especially infrastructure & training), and provide the ability to “power” up the economic cycle • Post-1890s depression: US electricity generation • Post-1930s depression: WWII war machine & reconstruction (mechanical engines, consumerism) • Post-1989-91 recession: ICT & knowledge base • Post-GFC: (needs to be) eco-innovation Requirement: To chart path of post-GFC

9. SMEs and Capitalism • SMEs are a significant element in the path of post-GFC recovery • Schumpeter (1911) –’father of innovation studies’- identified SMEs - as they established R&D (technological) and marketing (organisational) power in post-1890s • Post-1930s, Schumpeter (1939) – large firms providing same two innovation powers but with negative impacts, complemented by SMEs • Post-1989-91, symbiotic relation between large hardware & software platforms and SMEs software services

10. Susceptibility in Crisis • How the engines of innovation develop, depends on a firm’s fragile confidence (or uncertainty), given level of investment orders • Susceptibility is the degree of fragility to investment commitments - related to financial risk, excess capacity and profits • Commercialising innovation requires serious investment commitment…which in crisis is problematic (with high debt & excess capacity; low profits) • Stimulus policies provide a floor, but do not directly address susceptibility...what is needed are structural policies (for innovation and investment)

11. Susceptibility in Crisis …in previous global downturns • Expansion out of 1970s downturn was weak with no industry structural change policies and little significant innovation • Susceptibility was only marginally ameliorated • Expansion out of the early 1990s downturn was strong with neo-liberal deregulatory policies that allowed structural change to information-based economy • Susceptibility was significantly ameliorated • but at the cost of building massive speculative investments following ‘dot.com’ crash

12. Susceptibility in Crisis …in East Asian financial crisis of 1997 • Exceptionally high susceptibility by East Asian economies in 1997 forced these economies to address fragile innovation, high investment susceptibility and speculation • Japan did not restructure industrial or financial systems, with zombie banks & highly susceptible industrial investment leading to a decade long poor economic growth (S. Korea to less extent) • Other East Asian economies directly addressed these concerns and reduced significantly susceptibility…structural change occurred

13. GFC and Innovation: Framework Set up a dynamic circular flow link between innovation () and investment (I):

14. GFC and Innovation: Stylised Facts Correspondence and contradiction in GFC: • GFC exposed by the impact of entrepreneurial innovation in increasingly deregulated neo-liberalised economies • Innovation cyclical framework operating in a ‘virtuous circle’ since the major recession of the early 1990s with the interaction of ‘ICT’ and ‘financial’ innovation • As innovation stimulated investment and AD; p grew through expansion phase to power diffusion of incremental RD and supporting investment

15. GFC and Innovation: Stylised Facts • As the boom gathered momentum, gearing ratios and, then, excess capacity both increased, while value creation from marginal incremental innovation became progressively lower • Also, funds (esp. after dot-com crash) shifted to increasingly speculative and ‘Ponzi’ investment • Risk existed through the boom, became greatly exposed through fundamental uncertainty • Innovation framework suddenly turned into a ‘vicious circle’ of lower investment, reduced AD, falling p; stymieing innovation

16. GFC and Institutional Settings • Stylised facts unfold differently due to specific institutional settings for susceptibility exposure • Sheehan (2009) recently identified diverse transmission mechanisms by which the GFC unfolds in different economies…see Table 1 • US, EU, Japan & Korea impact through financial and wealth effects • Other S. East Asian and Australia impact through export shocks…see Charts 1, 2 & Table 2 • China mixture of consumer & exports (mild) • Susceptibility hit all via expectations

21. GFC and Institutional Settings • APEC member countries not in Table 1 reflect significant aspects of some groups in the table • Canada is in the same category as Australia - both having weathered the financial storm better due to relatively less deregulated financial systems, but commodity exports and terms of trade affected with a time lag • All Latin American APEC have been affected like the export-oriented S.E Asian economies – Mexico most exposed and Peru the least • All economic drivers specified derive from cheap money and cheap polluted energy - neither driver is viable anymore

22. GFC and Institutional Settings • APEC is made up of members with as vast a range of capitalist institutional settings as exist on the global stage, from very advanced (e.g. USA) to very underdeveloped (e.g. PNG). • Diverse institutions within capitalism determine the specific nature of entrepreneurship and innovation within different types of capitalist economies: distinctive patterns of relations arise • Two research literatures, comparative capitalism and varieties of capitalism, develop these concepts in detail • Thus, differences in institutional settings influence strategies outlined next

23. Climate Change Crisis and Innovation: Post-GFC • Need paradigm shift to ecological sustainability with a low-emissions economy: innovation policy • Focus on stabilising greenhouse gas (GHG) emissions to avoid most dangerous climate change aspects • Need to guarantee “safe” climate and CO2 levels, sufficient to retain - ice sheets, large ecosystems (esp. water), developing countries’ livelihoods and coastal megacities • Impossible to secure this guarantee with current knowledge, need to act to avoid dangerous outcomes now and learn-by-doing

24. Climate Change Crisis and Innovation: Post-GFC • Entrepreneurship operates on the same principle; acting now when the moment is opportune and learn as entrepreneurs proceed, iteratively adjusting business strategy with knowledge from doing • GFC provides opportunity for eco-innovation • Van Berkel (2007) defines “eco-innovation” as “…environment-informed and -driven improvements and innovations in products, services and processes that deliver more value to producers and/or consumers while progressively reducing net environmental impacts.”

25. Climate Change Crisis and Innovation: Post-GFC • Jones & Sheehan (2009) estimates, working from 10% reduction of emissions and fossil fuels in 2010 due to GFC-reduced production, with full recovery in 2025 – no direct long term benefit if no eco-innovation paradigm shift • GFC can provide springboard to lower emissions path by eco-innovation now, reducing risks and uncertainty through entrepreneurial activity • Begin with applying the Obama US emissions reduction policy as a target (-14/-83% GHG by 2020/50) across OECD, with developing APEC economies following with lag… see Jones & Sheehan (2009) estimate charts…

28. Strategy out of the Two Crises • Need more than stimulus as strategy out of GFC and GHG crises…need public innovation policy • Much more than structural policies - need to incorporate targets (or goals) well into the long term future, and be democratically implemented (people are committed) • Establish the eco-sustainable framework which incorporates public innovation policy to induce paradigm shift in the private sector (like: grid for electricity, war for mass production, defence computer system for ICT) • Assist in ameliorating susceptibility

29. Eco-sustainable Framework – four elements of innovation policy 1. Agreed ecological sustainable rules (or conventions) – precautionary principle 2. Perspective (iterative) planning – flexible, local-based democratic motivation and local voluntary conformity towards regional ecologically appropriate goals…learn-by-doing 3. Cumulative effective demand with strong local niche market share for environmental-based goods & services…stimulus support 4. Investment and finance planning underpinning above

30. Role of APEC Member Nations in Eco-sustainability Strategy • Due to the varieties of capitalism covered under the APEC umbrella, this innovation framework for eco-sustainability must be applied differently according to institutional settings • Clear USA and China must lead - signs are there: Obama’s emission policy and China’s political statements…both their R&D is more important • Krugman (2009) “whole game is about to change”: ecological rules setting • Planning is too slow – link to stimulus • Strong local ecological niche markets matter, not export markets

31. Role of APEC Member Nations in Eco-sustainability Strategy • APEC is committed to information sharing mechanisms-vital set out & assist implementing the innovation framework for eco-sustainability • APEC is committed “to accelerating regional economic integration (REI)” - better to work for sub-regional integration within a broader APEC REI eco-sustainability agenda • Governments need to inspire & lead - entrepreneurs will follow (not the other way around)– see New Deal, Post-War Reconstruction, Marshall Plan, Dirigisme East Asian Industrialisation

32. Role of SMEs in APEC in Eco-sustainability Strategy • 45 m. SMEs in APEC account for over 90% of all firms, employ 60-80% of workforce, but only 30-35% of exports(APEC fact sheet SMEs, Feb. 09) • Post-GFC recovery requires entrepreneurs in SMEs to follow eco-sustainability path • SMEs are flexible and able to develop eco-innovation much better than the large “dead giants” of 20th Century capitalism (e.g. GM) • SMEs have relative advantage in APEC, home grown and address domestic niche mkts. first • Export-orient model for SMEs no longer appropriate. Consumerism is dead (credit and climate have changed)

33. Role of SMEs in APEC in Eco-sustainability Strategy APEC needs to support these SMEs by: • Addressing eco-sustainable infrastructure needs • Implement structural reforms already set up (anti-corruption, customs, strict IPRs limits) • Education and training for women (more eco-sensitive), minorities (reduce immigration from APEC’s less developed), eco-creativity (how to “go green”) • Institutional lending - ameliorate susceptibility • Chart shows small business activity (strength of entrepreneurial activity in APEC emerging)

34. Total entrepreneurial activity by country and region in 2005Source: Schaper and Volery (2007, p.16)

35. Conclusion: Role of APEC • Shift innovation focus from minor incremental (powered by previous boom) to radical & incremental (powered by anti-GHG emission technology) • Supportive structures for radical and incremental eco-innovation to shift economies out of recession need to be grasped and enhanced • Accept carbon tariff (ETS or tax) to reflect actual costs • Not enough to simply resist restrictions on trade and investment • No longer export-orientation model (raw materials and consumerism) • Amelioration of susceptibility in this strategic shift

36. Conclusion: Role of APEC • Strength in diversity: • USA to lead reduction emissions • China’s energy use to offer climate change empowerment • Advanced Commodity Exporters (Aus, NZ, CA) to lead shift towards niche renewable energy markets • Asia Developed to finance & provide ICT support for eco-innovation • Asia Emerging and Latin American to follow through with micro-enterprises in eco-innovation • Smaller Other to develop domestic eco- niche with much APEC assistance

37. Selected Bibliography Entrepreneurship and SMEs • Schumpeter, J.A. (1911/1938), The Theory of Economic Development,Cambridge, MA.: Harvard University Press [German original 1911]. • Schumpeter, J.A. (1939), Business Cycles: A Theoretical, Historical and Statistical Analysis of the Capitalist Process, Volumes I & II, New York: McGraw-Hill. • Schaper, M. and Volery, T. (2007), Entrepreneurship and Small Business: 2nd Pacific Rim Edition, Milton, Qld: John Wiley & Sons Australia. Dirigiste Government Policy • Keynes, J.M. (1936), The General Theory of Employment, Interest and Money, Macmillan, London. • Kalecki, M. (1971), Selected Essays on the Dynamics of the Capitalist Economy, 1933-1970, Cambridge: Cambridge University Press. • Cornwall, J. (1983), The Conditions for Economic Recovery: A Post-Keynesian Analysis, Oxford: Martin Robertson. • Wade, R. (1990), Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton, N.J.: Princeton University Press. • Bell, S. (ed.) (2000), The Unemployment Crisis in Australia: Which Way Out?, Cambridge, Cambridge University Press. • Bernanke, B. (2000), Essays on The Great Depression, Princeton, N.J.: Princeton University Press.

38. Selected Bibliography Varieties of Capitalism • Hall, P.A. and Soskice, D. (eds) (2001), Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford: Oxford University Press. • Hall, P.A. and Thelen, K. (2009), ‘Institutional Change in Varieties of Capitalism’, Socio-Economic Review, 7(1), 7-34. Global Financial Crisis • Keen, S. (2008), ‘What’s Really Going On? or…Why Did I See it Coming and “They” Didn’t? Part 2: The Models’, DebtWatch No. 29, December; access at: http://www.debtdeflation.com/blogs/page/2 • Kregel, J. (2008), Changes in the U.S. Financial System and the Subprime Crisis, Working Paper No. 530, The Levy Economics Institute of Bard College, New York, April. • Sheehan, P. (2009), ‘Understanding the Transmission Mechanisms: A Framework of Analysis’, paper presented at the Conference Emerging from the Global Storm: Growth and Climate Change Policies in Australia, Victoria University, Melbourne, 15 April. • Stiglitz, J. (2009), ‘Light on, but tunnel still long’, The Age, 12 May, Business p. 10 • Krugman, P. (2009), ‘Sure it’s unfair, but China will have to help save the planet’, The Age, 18 May, p. 11

39. Selected Bibliography Climate Change • Van Berkel, R. (2007), ‘Eco-innovation: Opportunities for advancing waste prevention’, International Journal of Environmental Technology and Management, Vol. 7 (5-6), pp. 527-50. • Jones, R. and Sheehan, P. (2009), ‘New Strategies for Adaptation and Mitigation’, paper presented at the Conference Emerging from the Global Storm: Growth and Climate Change Policies in Australia, Victoria University, Melbourne, 15 April. Eco-sustainable Framework • Courvisanos, J. (2005), ‘A post-Keynesian Innovation Policy for Sustainable Development’, International Journal of Environment, Workplace and Employment, Volume 1 (2), pp. 187-202. • Courvisanos, J. (2009), ‘Regional Innovation for Sustainable Development: An Australian Perspective’, Journal of Innovation Economics, Volume 3 (1), pp. 119-43. • Courvisanos, J. (2009), ‘Innovation Policy and Social Learning: An Economic Framework for Sustainable Development in Regional Australia’, in J. Martin, B. Jorgensen and S. Taylor (eds), Climate Change and Social Learning, Ballarat: VURRN Press. • Courvisanos, J. and Jain, A. (2006), ‘A Framework for Sustainable Ecotourism: Application to Costa Rica’, Tourism and Hospitality: Planning and Development, Volume 3 (2), pp. 131-42