entrepreneurial state: the schumpeterian theory of …...entrepreneurial state: the schumpeterian...

Entrepreneurial state: The schumpeterian theoryof industrial policy and the East Asian “Miracle”

Alexander Ebner

Abstract Current debates on the policy orientation of Schumpeteriantheorizing tend to highlight industrial policy as a controversial matter that isassociated with government intervention in the process of technological inno-vation and industrial evolution. This paper presents a distinctly Schumpete-rian approach to industrial policy, which is meant to overcome some basicmisunderstandings in these controversies. It highlights Schumpeter’s origi-nal position on the institutional specificity of entrepreneurship, involving thetemporary exercise of industrial leadership by the state, thus underlining thecontextual character of industrial policy. The corresponding Schumpeteriannotion of the entrepreneurial state points to institutional modes of coordi-nation between public and private sector that shape industrial capabilitiesfor generating and absorbing new technologies in the process of economicdevelopment. This involves a reconsideration of crucial aspects such as polit-ical guidance and institutional learning. In examining the analytical impact ofthis reconstructed Schumpeterian approach, the paper addresses the ongoingdebate on the institutional substance of industrial policy in the East Asianeconomies.

Keywords Schumpeter · Economic development · Entrepreneurship ·Industrial policy · Entrepreneurial state · East Asia

JEL Classification B25 · B52 · O25 · O38

Paper presented to the Eleventh International Schumpeter Society Conference, “Innovation,Competition and Growth: Schumpeterian Perspectives”, 21–24 June 2006, Sophia Antipolis,France

Substantially Revised Draft for Publication with the Conference Proceedings, 7 July 2008

A. Ebner (�)Chair of Socio-Economics, Faculty of Social Sciences, Goethe University, Frankfurt,Robert-Mayer-Str. 1, D-60054 Frankfurt am Main, Germany

U. Cantner et al. (eds.), Schumpeterian Perspectives on Innovation, Competition and Growth,DOI 10.1007/978-3-540-93777-7_20, © Springer-Verlag Berlin Heidelberg 2009

A. Ebner

1 Introduction

Current debates on the policy orientation of Schumpeterian theorizing tendto highlight industrial policy as a controversial matter that is associatedwith government intervention in the process of technological innovation andindustrial evolution. This paper presents a distinctly Schumpeterian approachto industrial policy, which is meant to overcome some basic misunderstand-ings in these controversies. Beyond static considerations of failure in mar-ket and government activity, this paper perceives an entrepreneurial roleof the state as an integrated component of economic evolution. This argu-mentation is rooted in Schumpeter’s original position on the historical speci-ficity of entrepreneurship, which underlines the variability of entrepreneurialfunctions and their institutional carriers, involving the temporary exercise ofindustrial leadership by the state. Indeed, in Schumpeter’s line of reason-ing, the entrepreneurial function is defined by the introduction of technolog-ical novelty into an established economic setting, focusing on the carryingout of epochal innovations with economy-wide effects for structural change.As outlined most extensively in Business Cycles, Schumpeter maintainsthat the state may exercise this entrepreneurial function in two ways: first-order entrepreneurship involves the enforcing of rules that promote innova-tion activities of the private sector, whereas second-order entrepreneurshipreflects selective policy interventions and the promotion of innovation in pub-lic enterprises.

A conceptual reformulation of these propositions may outline anentrepreneurial state in terms of specific institutional modes of coordinationbetween the public and private sectors that shape industrial capabilities forgenerating and absorbing new technologies. These modes of coordinationand governance constitute the institutional terrain for the design and imple-mentation of industrial policy. This leads to a reconsideration of the complexinstitutional challenges associated with the introduction of technological andorganizational novelty in an established socio-economic setting. It points toaspects of political leadership and institutional learning that are articulatedby the institutional configurations of national and regional innovation sys-tems. In particular, the temporary character of entrepreneurship implies thatstrategic initiatives in industrial policy need to account for the dynamism ofchanging functions of the state in the course of political-economic develop-ment. The analytical relevance of these considerations is well reflected byongoing debates on the institutional substance of industrial policy in the EastAsian economies. The East Asian development experience thus provides thebackground for approaching the institutional evolution of the entrepreneurialstate from a Schumpeterian perspective.

In elaborating on these topics, the paper proceeds as follows. First,Schumpeter’s original perspective on the historical specificity of the entre-preneurial function is brought to the fore, outlining the profile of industrialpolicy as exercised by an entrepreneurial state in certain institutional con-

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stellations. Second, the institutional substance of industrial policy is exploredwith respect to the experiences of East Asian developmental states andtheir distinct policy patterns, involving industrial policy as a key feature ofcatch-up growth that is currently confronted with challenges of industrialmaturity and globalization pressures. Third, the evaluation of changes inthe set up of industrial policy in East Asia serves as an illustration for theinstitutional evolution of the entrepreneurial state. The underlying transfor-mation of state-society relations, governance mechanisms, and policy orien-tations provides general lessons for a Schumpeterian theory of industrialpolicy that may be applicable to diverse institutional settings in economicdevelopment.

2 Schumpeter on industrial policy: Approachingthe entrepreneurial state

Schumpeter’s theory of economic development deals with innovation as theinternal force of discontinuous change, basically addressing the introduc-tion of new combinations of productive factors carried out by the meansof entrepreneurial leadership (Schumpeter 1926: 100–102). This argument isframed by the idea that novelty does not evolve harmoniously from within anestablished economic setting, but places itself alongside established patternsand competes with them (Schumpeter 1939: 241). However, despite its crucialrole in the explanation of capitalist development, this logic of Schumpeterianentrepreneurship is not associated exclusively with the institutional setting ofcapitalist market economies, as it represents a general principle that is alsoof utmost relevance for other historical formations and in different areasof social life. Hence, Schumpeter claims that the entrepreneurial functioncould be fulfilled by the organs of a socialist commonwealth or by the chiefof a primitive horde, that is, by those agents who would hold the leadingand commanding position in their particular social and institutional envi-ronments, enabling them to enforce the dynamism of change by introduc-ing novelty (Schumpeter 1926: 111). This aspect of the historical specificity ofentrepreneurship is framed by Schumpeter’s delineation of specific phases ofcapitalist development, namely “competitive” capitalism during the 19th cen-tury and “trustified” capitalism in the 20th century, derived from institutionalpatterns that could be identified in Western Europe and the United Statesinvolving distinct types of economic and political organization (Ebner 2006b:322–324). Just as the diverse institutional expressions of entrepreneurialleadership in the private sector are a historically-specific feature of capi-talism, so is the modern state an element of the capitalist process, shapedby distinct forces of economic and socio-cultural evolution (Schumpeter1918/1953: 3).

The institutional evolution of the state thus complements the dynamismof entrepreneurship in capitalist development, a topic that has informed

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Entrepreneurial State Rentier State

Economic Foundations Innovation-Driven Routine-Based Nature of Wealth New Wealth Established WealthDevelopmental Tendency Accumulation Stagnation

Fig. 1 Schumpeter’s Typology of the StateSource: adapted from Ebner (2006a: 510, Table 2)

Schumpeter’s distinct theory of the state, as put forward in a most elabo-rate manner in the essay Die Krise des Steuerstaates (Schumpeter 1918/1953).Country-specific features of the state are derived from institutional settingsand social structures, as well as from the nature of wealth that reflects thepattern of the development process. Differentiating between old and newforms of wealth, Schumpeter even stylizes “entrepreneurial states” that con-trast with “rentier states” in terms of the underlying dynamism of innovation,as outlined in Fig. 1.

These types reflect a distinction of economic scenarios, involving novelty-based accumulation versus developmental stagnation. In this context,Schumpeter even hints at the impact of institutional constraints that couldobstruct the entrepreneurial orientation of government activity, includingexcessive military expenditures, an overhang of debt services, an inadequatemoral spirit of bureaucracy, and a strong degree of etatism in the populace(Schumpeter 1918/1953: 22–23). Thus, the Schumpeterian theory of the stateaddresses policy concerns that pinpoint the problems of selective governmentinterventions, associated with the concept of an entrepreneurial state thatrests its political-economic position on the accumulation of wealth throughnovelty (Ebner 2006a).

This image of government acting as an entrepreneurial agent is already out-lined in the first German edition of the Theorie der wirtschaftlichen Entwick-lung, set in the context of debates on the possible shape of a socialist econ-omy in which innovation would result from administrative command, notto be mediated by the monetary means of credit, capital, and interest thatwould lose their function as monetary levers of change. Government couldcarry out the entrepreneurial function in a socialist system quite logicallyby exercising economic leadership in the shape of socialist planning bodies(Schumpeter 1912: 173). The institutional implications of that perspective areclosely related with a reconsideration of the developmental tendency of cap-italist evolution. Thus, in a pioneering elaboration on “the opportunities ofsocialism”, Schumpeter claims that organizational change in capitalist evolu-tion gradually deprives individual entrepreneurship of its heroic attributes,as technological progress becomes a professional business routine, subject toautomation and bureaucratization (Schumpeter 1920/1921: 318n).

These arguments are reiterated two decades later in Capitalism, Socialism,and Democracy, relating an obsolescence of the entrepreneurial function inits capitalist format with the thesis that employees in large corporations couldact as entrepreneurs; they would need to exhibit the entrepreneurial blend of

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charismatic leadership only temporarily in the context of professional routinetasks, while coping with innovation as an increasingly predictable procedure.Therefore the “democratization” of the innovation process renders obsoletethe original leadership function of entrepreneurship in the institutional set-ting of capitalism (Schumpeter 1942: 132–133). Yet the matter of socialisttransformation, still implicit in these arguments, still leads to a further recon-sideration of Schumpeter’s original thesis that even government may carryout the entrepreneurial function.

Corresponding government initiatives in the area of innovation, whichcould be singled out as entrepreneurial activities, would actually focus onstimulating the assimilation of innovative processes or products. In this con-text, Schumpeter highlights the traditionalism of the agrarian sector as anexample for that kind of collective action in the innovation process, claim-ing that the generation of externalities by government intervention wouldbe consistent with a primacy of entrepreneurship in private business firms:“Industrial evolution inspires collective action in order to force improve-ment in lethargic strata. Of this kind was, and is, Government action onthe Continent for improving agricultural methods of peasants” (Schumpeter1928: 377).

Furthermore, Schumpeter suggests that the entrepreneurial function ofteaching the use of certain new processes and products to producers, users,and consumers could be exercised by government agencies. In this case,Schumpeter illustrates his point of view by invoking the diffusion of new tech-nologies in the context of agricultural policies in the United States, involvingmajor efforts in communication, education, and training:

Every social environment has its own ways of filling the entrepreneurialfunction. For instance, the practice of farmers in this country has beenrevolutionised again and again by the introduction of methods workedout in the Department of Agriculture and by the Department of Agri-culture’s success in teaching these methods. In this case then it was theDepartment of Agriculture that acted as an entrepreneur. (Schumpeter1949/1951: 255).

This perspective on the role of government agencies as entrepreneurialagents is of course historically conditioned and context-specific. Historically,following Schumpeter’s line of reasoning, the case of cameralist strategies foreconomic development after the Thirty Years War in Germany provides anadequate example for understanding constellations in which the state carriedout the entrepreneurial function before the emergence of competitive capi-talism in the 19th century:

Was it not – again, in Germany – the state rather than the entrepreneurwhich initiated modern industry? The answer is (. . .) in the affirmative,and with the dosing appropriate to each case, similar answers wouldhave to be returned for other countries. The German principality inmany cases (. . .) directly filled the entrepreneurial function, particularly

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in mining. Beyond that it conditioned enterprise by reshaping the insti-tutional framework (legal reforms and so on) and improving the envi-ronment (canal and road building and the like), and by fostering it invarious ways, some of which in fact come within what we usually under-stand by mercantilist policy (Schumpeter 1939: 235).

Thus, an articulation of the entrepreneurial function by organs of the statepoints primarily to interventions in the economic process, basically by settingup public enterprises in certain industries that proceed with the introductionof innovations. Moreover, an entrepreneurial conditioning of the economicprocess by means of restructuring institutional and physical infrastructures,among other possibilities, could accompany that type of entrepreneurial activ-ity. Consequently, from Schumpeter’s point of view, statecraft is not to beunderstood as a distinct factor in the development process, but either as aparticular kind of entrepreneurship or as a specific power in shaping socio-economic data (Schumpeter 1939: 235).

Although Schumpeter acknowledges the entrepreneurial intervention ofgovernments as a historical variant, he remained sceptical on its sustained effi-cacy. For instance, the discussion of government involvement in the “railroad-ization” of whole economies, Schumpeter’s favored example of an epochalinnovation, underlines problems of finance and investment under uncertainty.In this situation, the planning and execution of innovations could be car-ried out quite successfully by state enterprises, as witnessed in the case ofRussia, although the establishment of state enterprises in the early develop-ment of the railroad sector in the United States had proven to be a failure(Schumpeter 1939: 328). Indeed, when exploring Schumpeter’s perception ofindustrial policy as a component of his theory of capitalist evolution, it needsto be kept in mind that he tended to opt persistently for the long-run primacyof market forces in establishing economic structures. More precisely, Schum-peter claims that no government had been able to create sustainable economicstructures that would not have evolved out of the market process in simi-lar terms (Schumpeter 1918/1953: 371). However, apart form the matter ofshort-term interventions, the entrepreneurial state has a developmental roleto play even in the long term. Indeed, according to Schumpeter, the aspectof conditioning private sector entrepreneurship by adequate policies couldprovide most promising perspectives. Underlining the persistent relevance ofthis aspect, Schumpeter emphasizes that the persistence of innovation in mod-ern capitalism results from a distinct type of entrepreneurial behavior in theprivate sector of the economy that would be encouraged by an appropriateinstitutional environment, including government (Schumpeter 1939: 86).

This differentiation between intervention and conditioning as policydevices also applies to the analysis of industrial policies for import substi-tution, usually perceived as a negative factor under static welfare consider-ations, yet viewed more positively as a dynamic force of prosperity in the

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development process. The case of German industrial policy towards achievingautarky from 1933 onwards provides a historical illustration, as discussed inBusiness Cycles. In this context, Schumpeter differentiates between “creativeadaptation” and “passive adaptation” as specific responses to the develop-mental opportunities offered by import substitution. German industrial pol-icy is portrayed as a case of conditioning innovation by offering investmentopportunities beyond established patterns of industrial specialization, henceallowing for entrepreneurial activities in new product areas such as syn-thetic rubber. This constellation represents a creative adaptation to changingeconomic conditions. Passive adaptation, in contrast, is reflected by a mereexpansion on the grounds of established patterns, as for instance to be wit-nessed in wool production (Schumpeter 1939: 973).

Schumpeter then suggests on the role of government in that approach toindustrial policy:

By stating that the policy of autarky, as such, conditioned but did notmore than condition a certain type of innovation, we do not mean thatthe government did not do more than that. It gave leads. It exerted pres-sure. It helped in various ways in financing and promoting. (. . .) Andthere were many cases of pure state enterprise. This active leadershipwas, of course, something very different from mere ‘control’ or ‘regula-tion’ and also from mere conditioning. But it must be distinguished fromthe policy of autarky as such (Schumpeter 1939: 973).

Accordingly, the provision of financial resources as well as the establish-ment of state enterprises and government-related holdings in strategicallyimportant industries represents particular components of an entrepreneurialfunction exercised by the state. Still, Schumpeter also remarks that a condi-tioning of entrepreneurial efforts would not imply that an absence of thesepolicies corresponds with a lack of private sector entrepreneurship in theindustry under consideration. Moreover, the possibility of arriving at dam-aging results due to the potentially distorting impact of policy measuresthat support certain industries while deliberately neglecting others shouldbe taken into account, as reflecting the opportunity costs of industrial policy(Schumpeter 1939: 973n).

From these reconsiderations of Schumpeterian positions follows the needfor reconsideration of the institutional structuration of industrial policy,that is, the analytical requirement of addressing the relationship betweencertain types of government activity in the domain of industrial policyand their institutional articulation. In particular, the Schumpeterian con-cern with the entrepreneurial character of these policies – either directlyin terms of discretionary interventions involving innovation in the publicsector, or in terms of the establishment of institutional frameworks thatare conducive to entrepreneurship and innovation in the private sector –points to the examination of causal institutional constellations that promotethese kinds of policies in the process of economic development. In recent

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debates on industrial policy, these aspects are usually set in the context ofthe rapid growth of the East Asian economies. Indeed, the latter case hasbecome a prominent field of analysis among theorists of industrial policy,who associate themselves with a Schumpeterian perspective on economicdevelopment.

3 Debating industrial policy: the East Asian “Miracle” revisited

Industrial policy may be defined as a policy that affects a particular indus-try, or a set of industries, with the intention to promote economic growthby strengthening international competitiveness. The conventional economicdebate on the prospects and limits of industrial policy, which is usuallyinformed by neoclassical reasoning, is primarily concerned with problems ofmarket failure due to factors such as externalities, public goods, and increasingreturns. In countering the case for industrial policy, persistent market distor-tion, rent-seeking, as well as problems of informational asymmetries favor-ing industry over government remain significant. For instance, a historicallymost prominent effort in industrial policy, namely the case of infant indus-try protection as a strategy for facilitating advances on learning curves underconditions of regulated inward competition, is held accountable for possiblyresulting in a persistent rent-seeking of uncompetitive industries. The under-lying problem is: how and when can governments lift protectionist measuresagainst the potential resistance of industrial interest groups that fear the lossof their protective rents? This political-economic problem is accompanied bythe even more generic matter of uncertainty that is associated with innova-tion. Industrial policy under conditions of catch-up growth may rely on estab-lished technological paradigms, which tend to reduce uncertainty. Yet thesepolicy options will be diminished by the challenge of creating new paradigmsin approaching the technological frontier. In policy-related terms, this prob-lem is paralleled by the general impact of globalization as a constraint onindustry policies (Hart 2004: 48–49).

These arguments already indicate that the performance of industrial pol-icy is closely related with the distinct role of the state in economy and soci-ety. In this context, then, the state is not to be stylized as a homogenousactor that pursues a coherent strategy in its own right. Rather, the stateneeds to be perceived as an institutional terrain for the bargaining proce-dures among political-economic groups and factions, which pursues conflict-ing strategic interests. Whether or not the resulting policies actually servethe common good is thus dependent on the institutional constellations inwhich state-society relations are embedded (Ebner 2008). At this point, thenotion of the developmental state has been decisive in persisting controver-sies regarding observable variations in industrial policies – with a focus onthe East Asian pattern of late industrialization and catch-up growth (Hart2004: 45–46). Especially, the World Bank’s 1993 policy research report on

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the “East Asian Miracle” has provided influential arguments on the role ofindustrial policy in economic development. In attempting to uncover the insti-tutional underpinnings of the East Asian development trajectory, it suggeststhat growth-promoting market interventions in the domain of industrial pol-icy resemble a coherent set of policy measures with clear cost-benefit con-siderations and performance criteria, which considerably moderate the dis-tortion of market prices (World Bank 1993: 5–8). The institutional basis forthese policies is associated with a cooperative type of government-businessrelations that benefits persistent communication and learning efforts betweenpublic and private sector, framed by a common developmental orientation(World Bank 1993: 13–14).

Critics of this line of reasoning deny the sustainability of the East Asiandevelopment pattern, for the mere accumulation of input factors as anallegedly dominant feature of the East Asian growth process would soonbecome subject to diminishing returns, thus obstructing further efforts ingrowth promotion through industrial policy (Krugman 1994: 70–71). Yet sev-eral methodological problems apply to these types of critiques. First, theactual prevalence of specific styles of industrial policy needs to be consid-ered, which requires institutional analyses of government and administration(Lall 2000, Rodrik 1994). Second, empirical concepts for measuring the effi-cacy of industrial policy, such as total factor productivity, are methodologi-cally unsound – in particular when it comes to the modelling of technology(Nelson and Pack 1999, Felipe 1999). Both aspects pinpoint the comprehen-sive problems in assessing the relationship between institutions, knowledge,entrepreneurship, and innovation – the key components of economic devel-opment – for they are not easily subject to formalization and quantification.Thus, in accounting for these qualitative dimensions, the positive develop-mental impact of industrial policy in facilitating East Asian catch-up growthhas been basically reaffirmed (Stiglitz 2001: 519–520). Still, the reconsider-ation of the institutional substance of industrial policy remains at stake. Inparticular, the developmental relationship between industrial policy and theevolution of firms and industries needs to be outlined, as it provides decisivelessons of the East Asian development experience.

At this point, Schumpeter’s perspective on the industrial policy of theentrepreneurial state may be set in relation with the notion of late indus-trialization that is a prominent topic of Schumpeterian approaches indevelopment studies. Intellectually, it is intimately related with AlexanderGerschenkron’s analysis of industrialization in backward economies. Sucheconomies are said to be characterized by a specific constellation of dispersedcapital, the lack of entrepreneurial talent, and pressure for industrial cen-tralization that induces banks to organize large enterprises and cartels fit tomanage large-scale technology transfers from advanced economies. Govern-ment could carry out entrepreneurial functions in the stimulation of economicdevelopment by mobilizing and coordinating the use of industrial and finan-cial resources to the benefit of large-scale production, thus contributing to

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the realization of increasing returns while substituting for a lack of marketsand entrepreneurial capabilities in the private sector. (Gerschenkron 1962:14–15). This emphasis on the entrepreneurial function of the state in resourcemobilization and coordination already points to basic features of industrialpolicy as a reflection of particular state-market relations that have been preva-lent in the East Asian developmental context too.

A corresponding issue is provided by the concept of the “developmen-tal state”, as put forward in Chalmers Johnson’s work on Japanese devel-opment. Johnson maintains that the regulatory function of states in Westerneconomies, which pioneered the historical advent of industrialization, wouldactually focus on rules governing the economic process, whereas states inlate industrializing economies such as Japan would exhibit a developmentalfunction in leading the national drive for industrialization. Accordingly, theeconomic policy of regulatory states exhibits a market-rational orientationthat differs markedly from that of developmental states, which is oriented atplan-rational, goal-oriented strategies for enhancing industrial competitive-ness by means of administratively guiding industries and markets (Johnson1982: 19–20). Industrial policy is differentiated in terms of industrial ratio-nalization policy addressing the regulation of productive organization withinfirms and industries, and industrial structure policy as the decisive format thataddresses support for selected industries, which are subject to policy-basednurturing or restructuring (Johnson 1982: 27–28). As exemplified by Japan’sMinistry of International Trade and Industry, the quality of these policiesis reflected by the coherence of the economic bureaucracy, which stands ina close relationship with large enterprises of the private sector while main-taining its relative autonomy from organized interest groups (Johnson 1982:20–21). Indeed, public-private cooperation may sustain market-compatiblepolicy instruments, such as the selective access to government-administeredfinancial resources, framed by an institutionalization of knowledge flowsthrough industrial deliberation councils that promote communicationbetween the state executive and private firms (Johnson 1982: 312–313).

The functional imperatives of catch-up growth are also characteristic offurther efforts in elaborating on a theory of industrial policy that are wellrepresented by Alice Amsden’s approach to late industrialization as a processthat is driven by gradual industrial upgrading and learning how to improveforeign technologies (Amsden 1989: 3–4). Pinpointing the case of SouthKorea, Amsden argues that the efficacy of developmental states relies ontheir enforcement of performance standards on private sector firms, whichreceive targeted subsidies in a reciprocal relationship of support and perfor-mance (Amsden 1989: 8). The state shapes market processes as it providesincentives for investment and exports, and by doing so deliberately “gettingthe prices wrong” (Amsden 1989: 13–14). According to Amsden, this deliber-ate reconfiguration of market signals is the key domain of entrepreneurship,defined as deciding on production and innovation. An entrepreneurial statemay carry out this function by means of strategic planning (Amsden 1989:

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79–80). Still, the process of state-guided adaptive technological learning inlate industrialization may face stagnation as soon as the technology frontieris approached. In this setting, the formation of local innovation capabilitiesbecomes crucial (Amsden and Hikino, 1993: 259). Thus, the rationale ofindustrial policy shifts emphasis from resource mobilization to the buildingof innovation infrastructures – yet with a persistent role of government asa stimulating factor (Amsden 1995: 27n). The transitory character of thedevelopmental state thus reflects its relative economic success in movingfirms and industries towards the technological frontier.

In a further specification of these arguments, Robert Wade’s approach to“governed markets” addresses the catch-up growth of Japan, South Korea,and Taiwan as an outcome of concentrated investment in strategic indus-tries, stimulated by economic policies that provide rules and regulations forgoverning the market process. As exemplified by the case of Taiwan, corre-sponding attempts in leading the market by political means associate inno-vative initiatives with government, which then stimulates the private sectorto follow its leadership position (Wade 1990: 28–29). However, this hierarchi-cal mode of industrial policy has recently given way to a more cooperativeapproach, involving an extended participation of large local enterprises thatparallels established policy links with foreign capital (Wade 1990: 276–278).Problems of foresight and planning in catch-up growth are confronted bylearning strategies that highlight the study of policies implemented in indus-trially leading as well as competing countries (Wade 1990: 334). Governingmarkets thus requires both an institutional capacity for inducing industrialevolution as well as shared knowledge regarding the developmental tenden-cies of the global economy.

In elaborating on the corresponding problems of steering structural changeby means of industrial policy, Peter Evans highlights the transformative roleof the state as a carrier of entrepreneurship (Evans 1995: 5–6). State capacityserves as the institutional basis of developmental states, the long term orien-tation of which involves the promotion of transformative investments and thereduction of associated risks (Evans 1989: 562–563). Moreover, the industrialpolicy of developmental states advances investment projects exhibiting anentrepreneurial character in terms of social leadership, for they reach beyondpolitical demand. These projects are dependent on the dynamism of capitalaccumulation, and so their implementation calls for close interactions with theprivate sector (Evans 1995: 248, Evans 1989: 569). The corresponding institu-tional set up is based on a Weberian type of rational bureaucracy, which isnot insulated from society, but embedded in social relationships that allowfor continuous state-society synergies. This pattern of “embedded autonomy”marks the internal organization of developmental states and their capacity forindustrial transformation (Evans 1995: 12). Yet this feeds back upon the stateitself, as witnessed by the shifting balance of powers between an increasinglyindependent and internationalized private sector and a self-transforming state(Evans 1995: 234).

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This line of reasoning is taken up by Linda Weiss, who argues that the deci-sive economic aspect of state capacity is its transformative capacity, that is,the ability to coordinate industrial change in accordance with internationalcompetition, based upon the governance of domestic linkages (Weiss 1998:7–8). The Post-War developmental state of Japan is viewed as an exampleof this kind of “governed interdependence” between a seemingly insulatedstate, which exercises leadership through consultation and coordination, andan organized private sector that becomes a strong partner in tightly structurednegotiations (Weiss 1998: 38–39). Upholding transformative capacity thenimplies that government-business cooperation is adaptively efficient, subjectto a country-specific transformation in which state capacity approaches a lesshierarchical mode of coordination (Weiss 1998: 64–65). For the East Asianeconomies, in particular, the further upgrading of skills and technologies inthe context of globalization is at stake – as witnessed by the maturing ofJapanese and Taiwanese industries the restructuring of which is orchestratedby a “transformative state” that reaches beyond the rationale of catch-upgrowth (Weiss 2000: 27–29).

Accounting for these changes points to another crucial facet of the devel-opmental state: its capacity in implementing a developmental vision throughthe management of conflicts among involved interest groups. The state thenfunctions as a “historical animateur” of economic change, framed by the ide-ology of developmentalism as a national project of industrialization (Whiteand Wade 1988: 1). Indeed, when reconsidering the logic of industrial pol-icy, this kind of mediation of special interests is not to be distinguished formthe matter of economic governance as such (Chang 1999: 192–197). Yet theprovision of a coherent set of industrial policies that are in accordance witha promising developmental vision becomes ever more difficult as technologygaps are reduced. Experimentation and learning represent ever more deci-sive entrepreneurial activities in both the private and public sector. Hence,both states and markets serve as an institutional terrain for entrepreneurialefforts in reducing uncertainty and coordinating economic change (Changand Kozul-Wright 1994: 862–863). These institutionalist arguments resonatewith the Schumpeterian perspective on entrepreneurship, with its emphasison the paradigmatic character of innovation and social leadership (Ebner2005: 267–268). They also point to the transformation of industrial policy.Entrepreneurial aspects of state activity that have been already prevalent withthe East Asian developmental states currently turn out as hegemonic policyfeatures.

Indeed, current World Bank policy discussions on East Asian develop-ment highlight the promotion of innovation. Public-private interactions, localcoherence, and the international connectedness of industries and R&D orga-nizations are brought to the fore. Decisively, major policy challenges are asso-ciated with the cultivation of creativity as a precondition for innovativeness(Yusuf et al. 2003: 29). The underlying policy challenge mirrors the dynamismof late industrialization: latecomer firms enter the international product life

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cycle in the phase of standardization, reversing its usual sequence until theyapproach the phase of fully developed productive capabilities combined withincreasing R&D efforts (Hobday 1995: 40–41). The state has a major role toplay in the corresponding stimulation and coordination of technological capa-bilities, for their evolution is embedded in nation-specific institutional frame-works that are subject to specific governance patterns (Lall 2000: 14). Sus-taining competitiveness then implies continuous technological upgrading –involving combined endeavors in institutional change, industrial upscaling,and the realization of agglomeration economies, as exemplified by the caseof Taiwan (Amsden and Chu 2003: 1–2).

Decisively, this pattern of change implies a reconfiguration of the simul-taneously present “developmental” and “regulatory” state functions, asdefined by Chalmers Johnson. Indeed, they are actually co-evolving in thestate apparatus, while the economy proceeds along its particular trajectory.Developmental components of state functions then cope with aspects suchas the promotion of high-tech industries and innovation networks, whereasregulatory components cover liberalized services as well as deregulation ofselected markets and industries (Amsden and Chu 2003: 167–172). Bothtendencies reinforce one another, and in so doing they affect the financialaspects of innovation: beyond the mechanism of credit channels allocationthat had been prevalent in the bank-based developmental state model, theavailability of diverse funding schemes, in particular regarding venture capitalfunds, now becomes a strategic requirement (Beeson 2004: 35–36). Yet thisreconfiguration remains tied to the institutional specificity of the nationaldevelopment trajectories and their underlying political and social forces. Thismay be exemplified by the dismantling of the developmental state in Koreathat stands quite in contrast with its revitalization in Taiwan (Wade 2000: 12).Accordingly, as states and markets co-evolve, the diversity of developmenttrajectories results in different modes of adapting the institutional gover-nance structures of industrial policy. Accounting for this specificity is a keyproposition of a Schumpeterian theory of industrial policy.

4 Towards a Schumpeterian theory of industrial policy

As a point of departure for reconstructing a Schumpeterian theory of indus-trial policy, it is necessary to comprehend the role of the state in innova-tion processes in theoretical terms. Primarily, then, it is useful to accountfor the fact that innovation requires embedding institutional arrangementsfor its support, which may be denoted as systems of innovation, consisting ofinstitutional networks that promote the generation and assimilation of inno-vations within a territorial setting. The Schumpeterian strand of innovationstudies had adopted this perspective in order to emphasize the systemic andevolutionary character of innovation processes. Remarkably, it was originallypresented in an elaborate format to tackle the institutional foundations of

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Japanese technology policy in the context of catch-up growth (Freeman 1987:4, Freeman 2002: 193–194). More specifically, the systems of innovation per-spective suggests that – in addition to firms as a principal terrain for inno-vation – further institutional elements such as R&D facilities, education andtraining programmes as well as legal frameworks and even cultural normsshould be taken into account as components of the institutional networks inthe private and public sector, the interactions of which initiate and diffusenew technologies (Freeman 1987: 1). In this perspective, knowledge is viewedas a fundamental resource of an evolving “learning economy”, in which inter-active learning is the crucial characteristic of the economic process at large(Lundvall 1992, Lundvall, Johnson, Andersen and Dalum 2002).

Applied to the East Asian “Miracle” of rapid catch-up growth, the institu-tional configurations of the national innovation systems of these East Asianeconomies are singled out as critical performance factors. Although they per-sist in national variety, these systems have exhibited commonly shared fea-tures, such as expanding educational systems, with an emphasis on tertiaryeducation and engineering, a rapid development of science and technologyinfrastructures, and the formation of business in-house R&D (Freeman 1996:178). At first glance, it may be sufficient to highlight the public good char-acteristics of these institutional components to emphasize the fact that thestate plays a decisive role in the creation and maintenance of these nationalinnovation systems. More specifically, the assimilation of new technologies incatch-up growth requires an implementation of matching institutions that canbe portrayed as social technologies the design and modification of which aredecisively shaped by government and public policy (Nelson 2004). For thesereasons, theorizing on policy issues from a system of innovation perspectivehas consistently focused on a systemic level of institutionalized interactionsamong organizational actors, allowing for the co-evolution of technologiesand institutions (Edquist 2001). However, in order to grasp the correspond-ing dynamism of industrial policy, a further reconsideration of the notion ofan entrepreneurial state is required.

Novelty and uncertainty constitute basic features of entrepreneurship –and thus also of the entrepreneurial state, defined as the exercise ofentrepreneurial functions by organs of the state. Indeed, a decisive prob-lem of industrial policy is associated with the uncertainty arising from thedevelopmental move to technology generation, as government and privatesectors engage in communicative interaction to identify promising technolog-ical trends with their specific organizational implications (Chang 2001: 73–75,Freeman 2002: 208–209). In this manner, globalization serves both as a con-straining and enabling factor in the orientation of industrial policy, copingwith the uncertainty that is caused by the achievements of late industrializa-tion (Weiss 2003: 15–17). Dani Rodrik’s social learning approach to industrialpolicy pinpoints policy experimentation in coping with the uncertainty of mar-ket failures, while the collaboration of public and private sector communicatesknowledge on externalities. Industrial policy as a discovery process involves

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government and enterprises as learning agents; thus the structuration of inde-terminate policy processes becomes decisive (Rodrik 2004: 2–4). The insti-tutional architecture of that entrepreneurial-experimental governance typeentails political leadership, mechanisms of accountability and transparency,and policy coordination in deliberation councils (Rodrik 2004: 18–21). In fact,deliberation councils as government-sponsored intermediary institutions forprivate sector coordination may be well designed to address lacking knowl-edge of coordination failures in the assessment of technological opportunities(Aoki et al. 1997: 8–9).

In line with an evolutionary perception of industrial policy, this argumentinvokes knowledge and learning as key components of the development pro-cess, confirming its embeddedness in the institutional interactions of the pub-lic and private sectors. However, in addressing the dynamism in the underly-ing co-evolutionary relationships, it is necessary to recognize the specificity ofstate functions in the process of economic development. Again, the transitionfrom technology assimilation in late industrialization towards the potentialfor technology generation in a position of industrial leadership is at stake, forit is at the root of shifts in state functions and policy orientations, involvingthe creation, assimilation, and even commercialization of innovations. In anideal typical manner it may be argued that three sets of state functions shapethe process of economic development, as outlined in Fig. 2. They are simulta-neously present, yet the overall outlook of the state will depend on the hege-monic type of function, which is subject to historically specific variation inthe development process. Thus, every national innovation system involves adistinct pattern of state functions and types.

The commercialization of technology resembles the operations of a regu-latory state, which is typical for the model of liberal market economies thatis most relevant in Anglo-Saxon economies. The policy rationale of regula-tory states highlights resource coordination through an institutional enforce-ment of the market order, which implies a rule-based governance mode thatis ideologically required to be in line with the market process. Accordingly,the industrial policies of regulatory states tend to emphasize the guidance

Type of State

Regulatory Developmental EntrepreneurialPolicy Rationale Resource

CoordinationFactor Mobilization

Innovation

Ideology Market Liberalism

Developmentalism Entrepreneurialism

Governance Mode Rule-BasedHierarchical

Interventionist Hierarchical

Communicative Horizontal

Innovation Style Commercialization Assimilation Creation

Fig. 2 A typology of state functions and industrial policies

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of the market forces in the innovation process, which may be termed as aninnovation style of commercialization. In contrast, the developmental state,which has been prevalent in the East Asian newly industrializing economies,combines its policy rationale of factor mobilization with a “developmental-ist” ideology that promotes long-run goals of national industrial development.The corresponding governance mode is highly interventionist in its attemptsto support the local assimilation of new technologies as a key requirementof catch-up growth. The concern with entrepreneurship in the generation oftechnological innovations resembles a distinct set of state functions, whichis represented by the notion of the entrepreneurial state. It points to recenttransformations of the state throughout the OECD countries – and beyond.The rationale of industrial policy is to promote innovation as the source ofinternational competitiveness, which is reflected in the ideological underpin-nings of “entrepreneurialism” that pinpoints the values of creativity, competi-tion, and change. In contrast to the regulatory and developmental types ofstates, the entrepreneurial state may be associated with a less hierarchicalmode of governance that puts the emphasis on communication and policylearning to the benefit of a creative style of innovation that is to be nurturedall over economy and society.

Building on Schumpeter’s original ideas regarding the entrepreneurial roleof government and related initiatives of industrial policy, a Schumpeterianperspective on industrial policy needs to cope with this institutional transfor-mation of the polity and economy. Thus, the notion of the entrepreneurialstate as institutional carrier of an innovation-oriented type of industrial pol-icy entails the following set of preliminary propositions that may be subject tofurther scrutiny:

• The concern with the formation of entrepreneurial capacity in thegeneration and carrying out of innovations becomes a crucial feature ofindustrial policy. This involves both direct measures that include selectiveinterventions into the market process and indirect measures involving themolding of formal and informal institutions that shape innovation effortsof private and public sector alike.

• Policy efforts shift from catching up within an established technologicalparadigm to a rationale of paradigm creation that involves a potentialfor technological leadership in an uncertain environment. State capacityremains crucial for mediating between interest groups and for communi-cating broad developmental orientations.

• The reorientation of policy concerns towards self-sustaining knowledge-based interactions in promoting competitiveness co-evolves with an insti-tutional transformation of government and administration. Framed bya common discourse on entrepreneurship and innovation, governancestructures evolve as complex policy networks.

• The institutional architecture of the entrepreneurial state emphasizes therole of knowledge transfers and communication in state-society relations

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that form reflexive policy modes. Experimentation, learning, and innova-tion characterize the paradigmatic efforts in government and administra-tion for problem-solving efforts.

• The policy rationale of entrepreneurial states reflects the diversity ofstructural, institutional and spatial patterns of globalization, highlightingthe combination of global production networks and local agglomerationsof knowledge-intensive innovation activities. The spatial dimension ofinnovation becomes a crucial component of industrial policy.

• The policy orientation of entrepreneurial states combines interna-tional competitiveness, capability-building, and locational strategies thataddress the entrepreneurial orientation of both local and foreign firms.The formation of local science and knowledge bases becomes a key ele-ment of related policy efforts.

This set of propositions is meant to underline the complexity of the notionof the entrepreneurial state. In accounting for this complexity, it differs fromrather narrow notions of an emerging “entrepreneurial society” in which thefounding of new firms is said to become the defining activity for a knowledge-based and innovation-driven global economy (Audretsch 2007: 136). Whilethe focus on business start-ups and their employment effects covers relevantempirical insights, it still addresses only one aspect of the current transforma-tion of economy, society, and polity. Indeed, there is a high degree of institu-tional variety in distinct national and regional models of development to betaken into account, involving varieties of entrepreneurial activity in diversetypes of private and public sector organizations that are coping with noveltyand uncertainty (Ebner 2009).

In summary, the notion of the entrepreneurial state addresses the policy-related matter of technological innovation, institutional change, and political-economic governance. The actual capacity of the entrepreneurial stateaddresses the potential for exercising policies that promote innovation as asocio-economic process on an economy-wide scale. In Schumpeterian terms,it defines the performance of the entrepreneurial state in the carrying outthe entrepreneurial function of introducing novelty in an economic system –either by direct interventions in the economic process or by its conditioningthrough institutional and physical infrastructures. Governing innovation thenimplies the reconsideration of various institutional coordination mechanisms,involving context-specific ensembles of markets, hierarchies, and networks.In this variety of governance structures, the entrepreneurial state becomes amoderating agent that coordinates public-private interactions. This exerciseof governance requires persistent knowledge flows as a condition for experi-mentation and learning. Thus, stated in terms of Schumpeter’s original theoryof the state, the institutional dynamism of the entrepreneurial state reflectsthe co-evolution of state and market in the process of economic development(Ebner 2006a: 511–512).

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Again, these propositions may be illustrated by current policy patternsin the East Asian economies. Entrepreneurial aspects of state activity thathad been already prevalent with the East Asian developmental states cur-rently dominate, thus changing the dominant rationale of government in anentrepreneurial direction. In discussing these topics, the emphasis will be onJapan as pioneering latecomer economy and Singapore as an increasinglyknowledge-based city-state economy, for both represent crucial features ofthe anticipated rise of the entrepreneurial state (Ebner 2007). The restructur-ing of government and administration lies at the heart of Japan’s reorientationtowards a more open, competitive, and entrepreneurial setting that includes arefurbished mode of governing state-society synergies (Aoki 2002: 2, Johnson2001: 8–10). Basically, the economic success of late industrialization breedsthe political decline of the developmental state: internationally competitivefirms have outgrown the institutional conditions of MITI’s industrial policiesalready since the 1990s (Callon 1995: 147–148). At the same time, the selectivecharacter of the Japanese innovation system, which privileged large businessgroups in export-oriented industries, has become subject to major revisionsthat aim at a broadening of innovative competences all over the economy(Imai and Yamazaki 1994: 247–248, Imai 2006). MITI itself has been reorga-nized as Ministry of Economy, Trade and Industry – an institutional changethat could be interpreted as a reflection of the branching out of industrial poli-cies towards economy-wide concerns with competitiveness and innovation. Itsentrepreneurship strategies address cluster aspects of innovation that are alsoinformed by the internationalization of Japanese R&D (Ibata-Arens 2004:4–5, Elder 2000: 5–6). Thus, the rationale of generating innovations through aflexibilization, decentralization and competitive reorientation of governancestructures has become a most prominent feature of policy reform (Whittaker2003: 80–81).

The need for an effective combination of local and global resourcesalso marks Singapore’s self-stylized vision of a local knowledge agglomera-tion in a global knowledge-based economy. Singapore’s developmental statehas pursued a development strategy that leveraged foreign direct invest-ment as a means of technological upgrading and learning (Wong 2001:564). Multinational enterprises have thus repeatedly introduced technolog-ical and organizational novelty into the local system; yet also government-linked companies as well as government boards have been actively promot-ing innovation-driven economic change. Therefore, Singapore represents aparadigmatic case of an evolving entrepreneurial state (Ebner 2004: 56–59).Current attempts at entrepreneurial self-transformation involve the supportof high technology start-ups as well as an intensification of university-industrylinkages in an attempt to strengthen the knowledge base of the Singaporeaninnovation system (Low 2004: 166n). Yet these tendencies are prevalent in allthe East Asian economies – and elsewhere in the developing and developedworld: they reflect the increasing relevance of entrepreneurial functions in theoperations of state.

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5 Conclusion

The concern with an entrepreneurial introduction of novelty – that is, withSchumpeterian entrepreneurship in the creation and adaptation of techno-logical and organizational novelty – resembles a distinct set of state functions.It requires a conceptual framework of its own, namely the notion of theentrepreneurial state, which may be reconstructed by invoking Schumpeter’soriginal contributions to the theory of the state that frame his correspondingarguments on the prospects and limits of industrial policy. The policy-relateddistinction of direct and indirect modes of exercising the entrepreneurial func-tion addresses direct interventions in the economic process, for instance in theshape of public ventures, accompanied by indirect means through the pro-vision of infrastructures and institutional incentives. These entrepreneurialaspects of state activity that can be traced throughout the evolution of capi-talism, involving the co-evolution of modern state and market economy, cur-rently turn out as dominant policy features, thus shifting the rationale of gov-ernment towards an entrepreneurial direction. In particular in the case of theEast Asian economies, the developmental motive of technology assimilationin catch up growth is currently replaced by a strategic concern with the gen-eration of innovation in an internationalizing competitive setting. The corre-sponding rationale of industrial policy shifts to the building of differentiatedinnovation networks with a crucial role for the state in molding the underlyinginstitutional relationships.

All of these tendencies imply an increasing complexity of institutionaland structural features of the development process. For an assessment ofindustrial policy, then, the co-evolution of the state and the innovation net-works of systems of innovation on a sectoral, regional, national, and supra-national level of interaction and governance becomes decisive. In this setting,the entrepreneurial state may be viewed as an internal factor of innovationprocesses. These aspects also point to the matter of governance structuresas a means for cultivating sustainable innovation capabilities. Knowledge,learning, and communication thus excel as crucial aspects of an innovation-oriented type of industrial policy. Therefore, the rise of the entrepreneurialstate is closely related with far-reaching institutional reforms.

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