Abstract
In The Microtheory of Innovative Entrepreneurship, William Bamoul makes the case that entrepreneurs play a critical role in the economy, but have often been overlooked by mainstream business and economic models of the firm. In making his case, Bamoul relies on economic theoretical models and historical case studies to convince readers that entrepreneurs contribute as much, if not more, economic stimuli than do large corporations.
In the introduction, Bamoul introduces a historical look at per capita gross domestic product (GDP) in China, Italy and the United Kingdom to illustrate how economic growth accelerated when new innovations were adopted by business and industry. Next, he offers economic models to illustrate that large manufacturing alone cannot account for the staggering increase to per capita income growth that the United States has experienced. This historical backdrop effectively provides support to Bamoul's case that entrepreneurs, with their penchant for invention, are the ones feeding economic expansion.
The book consists of 12 chapters organized into three sections: Agents of Innovation, Welfare Theory, and Historical Origins. In section one, Agents of Innovation, Bamoul divides the private sector into large and small firms. He then proceeds to argue that small entrepreneurial firms are more likely to generate ideas, while large firms favor commercialization over idea generation. Both parts of the equation, he argues, work together to grow the economy. This supposition serves as the linchpin to section one and the entire book.
In the first chapter, Bamoul salutes Joseph Schumpeter, a Harvard professor–who is credited with popularizing the term “creative destruction–for beginning the task of operationalizing entrepreneurship theory. Bamoul insists that the theory of entrepreneurship has not moved forward because it lacks the homogeneous elements that provide for mathematical analysis. Bamoul argues his book will provide the “theoretical structure” that can fit entrepreneurship into the mainstream microtheory of value and address the obstacles that have impeded its inclusion into standard theory. Bamoul concludes his first chapter by attempting to define the term “entrepreneur.”
Chapter 2 focuses on the environment surrounding innovation by discussing the division of labor between large and small firms. At this point, Bamoul disagrees with Schumpeter (1936), who argued that giant corporations would render small firms and individual entrepreneurs obsolete. Bamoul posits economic models that favor large organizations outsourcing innovation to small entrepreneurial firms because of the cost advantage over housing extensive Research and Development (R&D) departments.
In Chapter 3 Bamoul expands on why outsourcing provides a cost savings. He argues that for most independent entrepreneurs and inventors there will be low or negative profits. Bamoul suggests entrepreneurs psychic reward from inventing can help explain their willingness to accept these lower financial payouts. The argument in the chapter is centered on empirical evidence that the average self–employed individual is significantly lower paid than those employed by firms. Astebro's (2003) study and Nordhaus's (2004) study are cited as credible evidence that the average self–employed entrepreneur's earnings are significantly lower than those of workers with similar qualifications employed by large firms.
Chapter 4 introduces the concept of the Red Queen game based on Lewis Carroll's book, “Through the Looking Glass” (1902). The chapter begins with Carroll's quote “If you want to get somewhere else, you must run at least twice as fast as you can.” Bamoul argues that corporations play the Red Queen game by continually searching for new innovations for fear of falling behind in the new product race with their competitors. The outpouring of money into research and development (R&D) at large organizations, however, is held steady until one firm breaks rank and then all firms follow. The high cost of R&D at these large organizations curtails the level of risk organizations are willing to take and, therefore, in–house innovation tends to be incremental. Because small firms and independent entrepreneurs are willing to accept lower levels of monetary reward, these groups have become economical suppliers of breakthrough innovations for larger organizations. Bamoul's likens this to a “David–and–Goliath” partnership between large corporations and small independent innovators, reinforcing the premise he stated in chapter two.
Section two is entitled Welfare Theory and within chapters 5, 6 & 7 the primary point is to articulate how innovation contributes to the general welfare of society. Chapter 5 provides historical perspective and a financial analysis that suggests 90% of innovation actually benefits those who made no direct contribution to the innovation. This spillover effect is estimated by Bamoul to account for more than half of the growth in current GDP. This large spillover ratio helps bring a better life to citizens by improving their education, health care, and living standards. Chapter 6 continues that theme of welfare distribution by discussing how technology and patents have proven to be strong mechanisms for transferring innovations. The patent system created a means to encourage dissemination of new products and protects the innovator. In this scenario, society benefits because the inventor has less fear about sharing intellectual property, and therefore, imitation will allow the invention to multiply and spread faster. In Chapter 7 Bamoul addresses the risk of abandonment of older technology too soon and the impact on the owner of the older product.
Section three is entitled, “Historical Origins,” which weaves in Bamoul's theory that commerce and capitalism are an outgrowth of the Red Queen game. Bamoul offers historical case studies as the basis for his theory. The chapter begins by introducing the concepts of “productive wealth seeking” and “redistributive wealth seeking.” Productive wealth seeking is a concept of accumulating wealth by making the economy bigger through inventions that drive commerce. Redistributive wealth, on the other hand, refers to rearranging the riches by reallocating them. Redistributive activity is actually a negative sum game because, “while there are winners, society as a whole loses out” (p. 141).
Several case studies are detailed in Chapters 9, 10 and 11 to further illustrate Bamoul's theory that the patterns of entrepreneurial behavior are shaped by the payoffs offered by society and institutions during specific times and places. Bamoul's central thesis is that entrepreneurship can be productive or unproductive, depending on the structure of the rewards. Having laid this groundwork, Bamoul offers the premise that institutions can guide the flow of entrepreneurial payoffs and encourage productive activities that generate positive economic outcomes across society.
In his final chapter, Chapter 12, Bamoul once again calls for the entrepreneur to be given a place in educational textbooks and incorporated into teaching materials. Bamoul provides rationale for when and why entrepreneurial behavior emerges. He points out that the rules of the game determine whether productive activities or redistributive activities are favored and entrepreneurs shift their efforts accordingly. Furthermore, he argues institutions can adjust the rules of the game, which can in turn have a profound impact on the rate of economic growth.
This book is squarely aimed at educators who teach economics, entrepreneurship, and at business courses dealing with the theory of the firm. While the theme of the book appears narrow, the content is broad enough to appeal to human resource professionals who are accountable for hiring and retaining individuals who are engaged in new product development or business acquisition. Those engaged in human resources may also benefit from reading this book by gathering rationale for pursuing outsourcing and partnership strategies. This book could help HRD professionals shine the spotlight on the need for outside–in thinking, as well as generate dialogue on how large organizations can foster a more innovative environment.
In summary, Bamoul's book effectively makes the case for the role of entrepreneurship in microeconomic theory. His book provides visibility for innovative entrepreneurs who have played a key role in economic growth and improving societal welfare. Readers of new product development books will find Bamoul's “David–and–Goliath” view supported in A.G. Lafley's (2008) book, The Game Changer. While Bamoul uses theory and historical case studies to support his argument, Lafley, the former Chairman and CEO for Proctor & Gamble, detailed a current case study by sharing how P&G's open innovation approach sought ideas from “anybody, anywhere, anytime” (p. 131). In essence, P&G's open innovation strategy provides additional evidence to Bamoul's theory that smaller entrepreneurial firms are readily used by large organizations to facilitate innovation. As the former Director of Innovation at KFC, I recognize the importance of opening the doors to suppliers, franchisees, and customers to expand entrepreneurial thinking and stimulate innovation. Bamoul's book sheds light on the importance small firms and individual entrepreneurs’ have in driving economic growth and improving peoples’ lives.