The Handbook of Technology and Innovation Management

14.4. The Knowledge Spillover Theory OF Entrepreneurship

14.4.1. The endogenous entrepreneurship hypothesis

Resolution to the Innovation Paradox came after rethinking not the validity of the model of the knowledge production function, but rather the implicit assumptions of independence and separability underlying the decision-making analytical units of observation – the established incumbent firm and the new entrepreneurial firm. Just as the prevailing theories of entrepreneurship have generally focused on the cognitive process of individuals in making the decision to start a new firm, so that the decision-making criterion are essentially internal to the decision-making unit – in this case the individual, the model of the knowledge production function generally limited the impact of the firm's investments in creating new knowledge to that decision-making unit – in this case the firm.

That these decision-making units – the firm and the individual – might actually not be totally separable and independent, particularly with respect to assessing the outcome of knowledge investments, was first considered by Audretsch (1995), who introduced The Knowledge Spillover Theory of Entrepreneurship.

The reason for challenging the assumptions of independence and separability between (potential) entrepreneurs and firms emanates from a fundamental characteristic of knowledge that differentiates it from the more traditional firm resources of physical capital and (unskilled) labor. Arrow (1962) ...