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Full text available at: http://dx.doi.org/10.1561/0300000025 Foundations of High Impact Entrepreneurship Full text available at: http://dx.doi.org/10.1561/0300000025 Foundations of High Impact Entrepreneurship Zoltan J. Acs School of Public Policy George Mason University Fairfax, VA 22030-4444 USA [email protected] Boston – Delft Full text available at: http://dx.doi.org/10.1561/0300000025 Foundations and Trends R in Entrepreneurship Published, sold and distributed by: now Publishers Inc. PO Box 1024 Hanover, MA 02339 USA Tel. +1-781-985-4510 www.nowpublishers.com [email protected] Outside North America: now Publishers Inc. PO Box 179 2600 AD Delft The Netherlands Tel. +31-6-51115274 The preferred citation for this publication is Z. J. Acs, Foundations of High Impact Entrepreneurship, Foundations and Trends R in Entrepreneurship, vol 4, no 6, pp 535–620, 2008 ISBN: 978-1-60198-142-4 c 2008 Z. J. Acs All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, mechanical, photocopying, recording or otherwise, without prior written permission of the publishers. Photocopying. In the USA: This journal is registered at the Copyright Clearance Cen- ter, Inc., 222 Rosewood Drive, Danvers, MA 01923. Authorization to photocopy items for internal or personal use, or the internal or personal use of specific clients, is granted by now Publishers Inc for users registered with the Copyright Clearance Center (CCC). The ‘services’ for users can be found on the internet at: www.copyright.com For those organizations that have been granted a photocopy license, a separate system of payment has been arranged. Authorization does not extend to other kinds of copy- ing, such as that for general distribution, for advertising or promotional purposes, for creating new collective works, or for resale. In the rest of the world: Permission to pho- tocopy must be obtained from the copyright owner. Please apply to now Publishers Inc., PO Box 1024, Hanover, MA 02339, USA; Tel. +1-781-871-0245; www.nowpublishers.com; [email protected] now Publishers Inc. has an exclusive license to publish this material worldwide. Permission to use this content must be obtained from the copyright license holder. Please apply to now Publishers, PO Box 179, 2600 AD Delft, The Netherlands, www.nowpublishers.com; e-mail: [email protected] Full text available at: http://dx.doi.org/10.1561/0300000025 Foundations and Trends R in Entrepreneurship Volume 4 Issue 6, 2008 Editorial Board Editors-in-Chief: Zoltan J. Acs George Mason University [email protected] David B. Audretsch Max Planck Institut [email protected] Indiana University [email protected] Editors Howard Aldrich, University of North Carolina Sharon Alvarez, Ohio State University Mark Casson, University of Reading Per Davidsson, Queensland University of Technology William B. Gartner, Clemson University Sharon Gifford, Rutgers University Magnus Henrekson, The Research Institute of Industrial Economics Michael A. Hitt, Texas A&M University Joshua Lerner, Harvard University Simon Parker, University of Durham Paul Reynolds, Florida International University Kelly G. Shaver, College of William and Mary David Storey, University of Warwick Patricia Thornton, Duke University Roy Thurik, Erasmus University Gregory Udell, Indiana University Sankaran Venkataraman, Batten Institute Paul Westhead, Nottingham University Business School Shaker Zahra, University of Minnesota Full text available at: http://dx.doi.org/10.1561/0300000025 Editorial Scope Foundations and Trends R in Entrepreneurship will publish sur- vey and tutorial articles in the following topics: • Nascent and start-up • Business angels entrepreneurs • Bank financing, debt, and trade • Opportunity recognition credit • New venture creation process • Venture capital and private equity • Business formation capital • Firm ownership • Public equity and IPO’s • Market value and firm growth • Family-owned firms • Franchising • Management structure, governance and performance • Managerial characteristics and behavior of entrepreneurs • Corporate entrepreneurship • Strategic alliances and networks • High technology • Government programs and public • Technology-based new firms policy • High-tech clusters • Gender and ethnicity • Small business and economic • New business financing: growth Information for Librarians Foundations and Trends R in Entrepreneurship, 2008, Volume 4, 6 issues. ISSN paper version 1551-3114. ISSN online version 1551-3122. Also available as a combined paper and online subscription. Full text available at: http://dx.doi.org/10.1561/0300000025 Foundations and Trends R in Entrepreneurship Vol. 4, No. 6 (2008) 535–620 c 2008 Z. J. Acs DOI: 10.1561/0300000025 Foundations of High Impact Entrepreneurship∗ Zoltan J. Acs School of Public Policy, George Mason University, 4400 University Drive, Fairfax, VA 22030-4444, USA, [email protected] Abstract This survey reviews the theoretical literature on high impact entrepreneurship. The survey is guided in part by the recent classi- fication changes at the Journal of Economic Literature (JEL) regard- ing entrepreneurship. The board voted to create a new classification code, L26, for entrepreneurship. The JEL intends to use this code for all articles and books that focus on economic questions related to entrepreneurial activity. Publications related to questions on occupa- tional choice issues will be cross classified with J23; those focusing on innovation and entrepreneurship will be cross classified with O31; those focusing on finance will be cross classified with G24 Investment * This project was conceived while I was a scholar in residence at the Kauffman Foundation. I would like to thank Robert E. Litan, Robert J. Strom, William J. Baumol, and Carl J. Schramm for their valuable insights on the early stage of this project and Alyse Freilich for valuable assistance with the manuscript. Sameeksha Desai, Lawrence Plummer, Siri Terjesen and Robert Wuebker assembled the literature and offered valuable insights on several drafts of the manuscript. Section 4 has benefited greatly from my long-term collab- oration with David B. Audretsch and our recent project on entrepreneurship and growth with Bo Carlson and Pontus Braunerhjelm. The policy section draws heavily on the Kauf- man Roadmap for Entrepreneurship Policy. The Kauffman Foundation provided generous financial support. Full text available at: http://dx.doi.org/10.1561/0300000025 Banking, venture capital, brokerage and rating agencies; those focus- ing on new firms, start ups; and business related publications on how to be an entrepreneur will be cross classified (or solely classified) with M13. What does this economic literature tell us about entrepreneur- ship? In order to answer the questions this review covers the intersec- tion of entrepreneurship with labor markets, innovation, and capital markets — the three pillars of high impact entrepreneurship. Keywords: Entrepreneurship; high impact firms; occupational choice; innovation; finance; policy; leveraged start-ups. JEL codes: L26, O31, J23, G24 Full text available at: http://dx.doi.org/10.1561/0300000025 Contents Introduction 1 1 Definition of High Impact Entrepreneurship 5 2 Stylized Facts 9 2.1 Entrepreneurship Data Over Time 9 2.2 High Impact Firms 12 3 Entrepreneurship and Occupational Choice (J24–L26) 17 3.1 Occupational Choice 17 3.2 Non-financial Factors in Occupational Choice 19 3.3 Human Capital Theories and the Decision to Become an Entrepreneur 20 3.4 Likelihood of Entrepreneurial Success 24 4 Entrepreneurship, Innovation, and Technological Change (O3-L2) 27 4.1 The Knowledge Production Function 27 4.2 The Knowledge Spillover Theory of Entrepreneurship 29 ix Full text available at: http://dx.doi.org/10.1561/0300000025 4.3 Entrepreneurship as a Conduit for Knowledge Spillovers 31 4.4 The Knowledge Filter 34 5 High Impact Entrepreneurship and Capital Markets (G24-L26) 37 5.1 Liquidity Constraints 38 5.2 Information Asymmetries 39 5.3 Debt vs. Equity Financing 41 5.4 Private Equity and Venture Capital 43 5.5 Exit Strategies for Innovative Entrepreneurial Firms 46 5.6 The Globalization of the Venture Capital Market 49 6 Public Policy in an Entrepreneurial Economy 51 6.1 Defining “Entrepreneurship Policy” 52 6.2 Policies Relating to Fostering Occupational Choice 54 6.3 Policies Promoting Innovation and Entrepreneurship 63 6.4 Capital Markets Regulation and Finance 65 6.5 Regulation, Litigation, and the Rule of Law 67 7 Concluding Observations on the Literature on Entrepreneurship 69 References 71 Full text available at: http://dx.doi.org/10.1561/0300000025 Introduction Entrepreneurs recognize the latent power and utility of inventions and play a crucial role in bringing those inventions to market. These entrepreneurs — those that Schumpeter described as “the promoters of new combinations” — are individuals who can both see new possibili- ties and assess market needs (Acs and Audretsch, 2003). High Impact Entrepreneurship (HIE) is fundamentally the study of the actions of individuals responding to market opportunities by bringing inventions to market that create wealth and growth. These entrepreneurs are dis- tinct from mere creators of new firms, those that replicate thousands of other establishments. According to Leibenstein (1968, pp. 72, 73, emphasis added):1 “We may distinguish two broad types of entrepreneurial activity: at one pole there is routine entrepreneurship, which is really a type of management, and for the rest of the spectrum