WHAT HAPPENS WHEN ENTREPRENEURS ACT?

It is now generally believed and accepted that entrepreneurship plays a key role in explaining and stimulating economic growth. The question remains however how exactly this relationship takes shape. In the literature, innovation is often suggested as the intermediary link. This thesis is among the first to research this proposition explicitly by modeling the intermediary role of innovation in the relation between entrepreneurship and economic growth. The Knowledge Spillover Theory of Entrepreneurship is employed as the general framework. For the empirical application a two-equation model is estimated using two-stage fixed effects panel estimation for 17 OECD countries over the period 1981-2011. The first equation models economic output (GDP) with entrepreneurship and innovation output as explanatory variables. The second equation models innovation output using innovation inputs and entrepreneurship as main explanatory variables. The distinction between innovation input and output is a contribution to the literature, allowing to empirically test the concept of the knowledge filter, i.e. the barriers to commercialize new knowledge. I provide a theoretical addition by arguing that an additional filter exists, the open society filter, which represents access to the knowledge stock. Results for the first equation are in line with the literature. I find positive results for labor, physical capital, education and entrepreneurship. This indicates a linear relation between entrepreneurship and economic output. Second, while previous studies use innovative input as an explanatory variable, this thesis finds a positive effect for innovative output. The results suggest evidence for the knowledge filter. Additionally, a U-shaped relation between entrepreneurship and innovative output is found. This suggests that only after a certain level of entrepreneurship (competition) the effect of entrepreneurship for innovation output is positive. I propose that lower rates of entrepreneurship negatively affect innovative output because knowledge investments (incentives) are negatively affected by more competition. Higher entrepreneurship rates however force firms to innovate in order to stay competitive. In summary, this indicates that entrepreneurship has a different influence on economic output (static efficiency) compared to innovation output (dynamic efficiency).