As a result, economic development was redefined in terms of reduction or elimination of poverty, inequality, and unemployment within the perspective of a growing economy (Mamede & Davidsson, 2003).
Research indicates that entreprenuership can be both the cause and effect of economic development in the sense of wealth distribution. Countries in which wealth is concentrated in the hands of a small fraction of the population face greater difficulties in coordinating the major components of progress (Mamede & Davidsson, 2003). These three components are labor, capital, resources and innovation. According to Mamede and Davidsson (2003), considering that the three driving forces of entrepreneurial success - founders, opportunity recognition, and resource requirements - are more likely to occur in a combined way, there are better chances to prosper in regions in which wealth is more equitably distributed. These researchers have also observed that members of such societies are in a more favorable condition to get involved in entrepreneurial endeavors.
National and international research and development and innovation policies are being improved around the world, in order to increase economic growth and achieve higher living standards (Erskine, 2003). Understanding of the drivers of technological progress and the key factors that underlie successful research and development and innovation is intensifying (Erskine, 2003). A review of a large number of studies that assess the factors that have helped drive successful research and development and innovation in countries that are research and development and innovation leaders confirms a few general conclusions. First, it is very difficult to determine exactly what underlies a successful national research and development effort, and it is easy to conclude that everything depends on everything else, but it is clear that innovation systems and processes must be considered, not just specific technical issues with the promotion of research and development (Erskine, 2003). Culture, and in particular an entrepreneurial spirit and a willingness to risk and experience failure, is vital to innovation (Erskine, 2003).
Research indicates that it is still unknown how to change a nation's culture, but all the available evidence confirms that incentives that reward particular behavior do tend to have results and that education in processes not well understood. Private expenditure on research and development in any country will be insufficient to maximize the nation's productivity potential, unless it is subsidized, either through taxes or grants or some other mechanism (Erskine, 2003). International studies suggest that the social return for such subsidization is high. Research and development expenditures are likely to have a greater commercial impact if aggregate these funds are allocated with commercialization potential as a key criterion (Erskine, 2003). This is best fulfilled through competitive and market-driven or industry-driven mechanisms for allocating research and development funds (Erskine, 2003). Research indicates that education, tax and immigration policies that ensure availability of skilled and motivated labor are a feature of almost all the leading countries. A review of the literature reveals that the pace and intensity of global innovation is accelerating and that all the international evidence is that leadership from the top can make a critical difference.
Difficulties faced by poor countries, wherein low average income is a limiting factor of savings and investments, tend to reinforce each other in what is known as the vicious cycle of poverty, in which low savings and investment is followed by low pace of capital formation, that results in low levels of productivity, which does not all lead to improvements in the levels of average incomes (Mamede & Davidsson, 2003). The consequences of such cycles, usually worsened by significant inequalities in the distribution of wealth, negatively impact the level of entrepreneurial activity of a nation or region (Mamede & Davidsson, 2003). Baumol (1993) argues that even if entrepreneurs are not in complete control of their economic destiny, they influence its direction as few others are able to do. Baumol (2003) also sees the entrepreneur as responsible for a significant amount of historic growth of modern society. Baumol (2003) sees the entrepreneurial talent and motivational mechanisms of entrepreneurial activity as one of the main explanations for the successful growth of some economies in contrast with others.
Studies have been conducted to assess what the international best practices are, in order to identify the key factors in each of the countries that are critical for that success. It is now well accepted that innovation and research and development are positively associated with productivity growth. Research and development provides an important contribution to output and total factor productivity growth (Erskine, 2003). The empirical evidence typically shows that a 1% increase in the stock of research and development leads to a rise in output of 0.05-0.15% (Erskine, 2003). There is also evidence that research and development may play a different role in small and large economies (Griffith et al., 1998). In smaller economies, it primarily serves to facilitate technology transfer from abroad. The belief that less advanced countries would catch up with the technological world leaders as technological knowledge is diffused or transferred through the world has been severely shaken over the past decade by a widening in the productivity gap between countries (Erskine, 2003).
The opportunities for wealth creation in and the increasing economic importance of 'knowledge-based' industries has heightened the need to understand the processes underlying technological progress (Erskine, 2003). Firms, industries and countries are now engaged in very direct competition to produce technological progress, to create wealth, jobs and human and social well-being. Innovation and research and development have become vital activities in an increasingly knowledge-based world (Erskine, 2003). No country leads in every sphere of innovation, but some dominate in particular industries. Research indicates that considering research and development, the U.S.A. is the global leader; the UK also ranks highly, as a recent success in biotechnology leadership and because of its relevance to the development of Australia's education system and legal framework (Erskine, 2003). Other countries of interest would most likely include Singapore, South Korea and Taiwan, and even perhaps China, where research and development effort is intensifying most rapidly and the policy framework is developing the fastest (Erskine, 2003).
The question of whether east Asia can compete in global markets has recently been evaluated in a 2002 World Bank report. According to the report, the factors that determine whether or not countries such as China can compete include the building of research and development capital; the business environment, including ease of entry by firms, level of competition, and protection of intellectual property; and the effectiveness of the education system in producing an adequate supply of skilled and technical workers; the links among businesses, universities, and public and private research institutes that stimulate innovation and its commercialization (Yusuf & Evenett, 2002).
Also included among the factors are the interaction among firms and agglomeration economies in industrial clusters; the extent of technology generation and absorption by firms through their own research and development, licensing, assistance from lynchpin buyers in a production network, new equipment purchases, and support from equipment or component suppliers; the degree of access to an international pool of professionals and to centers of excellence in East Asia and the West; and the development status of production networking, supply chain management, and logistics (Erskine, 2003).
According to Stern et.al., (2000), innovative capacity depends on the overall technological sophistication of an economy and its labor force, but also on an array of investments and policy choices by both government and the private sector. Innovative capacity is related to but distinct from non-commercial scientific and technical advances, which do not necessarily involve the economic application of new technology (Stern et.al., 2000). Differences in national innovative capacity reflect variation in both economic geography and innovation policy.
Other researchers have examined finance and its influence on economic growth and technical progress, concluding that the fundamental financing problem for firms undertaking research and development is uncertainty over the outcome of the research and development. The firm and any financier suffer from a significant information asymmetry about the prospects for future income flows, and typically a financier will be unwilling to accept research and development as collateral to a debt (Hall, 2002). Equity finance is thus an imperative for research and development conducting firms. According to Hall (2002), this is an obvious limitation in economies with poor markets for venture capital. Finance and access to finance have become more important determinants of research and development effort as international capital has become more mobile across borders and as "research and development costs per invention" have increased (Hall, 2002).
Evidence on the "funding gap" for research and development has been surveyed, with a focus on financial market reasons for under investment in research and development that persist even in the absence of externality-induced under investment (Hall, 2002). The conclusions are: 1) small and new innovative firms experience high costs of capital that are only partly mitigated by the presence of venture capital; 2) evidence for high costs of R&D capital for large firms is mixed, although these firms do prefer internal funds for financing…