Measuring Schumpeterian activity using a composite indicator

Date13 April 2015
Published date13 April 2015
AuthorJohn Mann,David Shideler
Subject MatterStrategy,Entrepreneurship,Business climate/policy
Measuring Schumpeterian
activity using a composite
John Mann
Sam Houston State University, Huntsville, Texas, USA, and
David Shideler
Oklahoma State University, Stillwater, Oklahoma, USA
Purpose As an economic development strategy, entrepreneurship policies should target innovative
activities those which Schumpeter described as leading to new goods, production methods, markets,
input sources, or new industries. However, popular entrepreneurship proxies, such as firm births
(o500 employees) and sole proprietorships, capture multiple types of entrepreneurship which may
have conflicting qualities. To address the need for more accurate measures of Schumpeterian activity,
indices are constructed to specifically measure the relative amount of Schumpeterian activity among
US states. The paper aims to discuss these issues.
Design/methodology/approach Four compositeindices of Schumpeterian activity areconstructed
using different methods to combine variables related to innovative activity into single indicator, since
there is uncertainty about the weighting of dimensions: principal component analysis (PCA), factor
analysis (FA), data envelopment analysis and equal weights. Robustness checks were used to compare
state rankings across indices. These indices were also compared to common entrepreneurship proxies
and real GDP to demonstrate and justify their measurement of Schumpeterian activity.
Findings The results show that the Schumpeterian Activity Indices (SAIs) similarly rank states
and measure phenomena different from the common proxies of entrepreneurship. Furthermore, these
indices better predict GDP than the common proxies. Lastly, state rankings based upon the SAIs
support previous research suggesting that innovation and agglomeration economies are interrelated.
Originality/value The paper demonstrates a methodology for constructing a measure of innovative
activity, which is necessary to develop and evaluate entrepreneurship policy for economic
Keywords Innovation, Composite indicator, Entrepreneur measurement, Schumpeterian activity
Paper type Research paper
1. Introduction
There is a growing concern about how entrepreneurship is affected by government
policy within the economic literature. As the emphasis of firm size on economic growth
has shifted from large firms to small- and medium-sized start-ups, government policies
have been devised to encourage entrepreneurship. Within the analysis framework of
many of these policies, however, entrepreneurship has been characterized as a one size
fits allconcept. This has led to some confusion about the impact that governmental
policies can have on the creation of entrepreneurship, as well as uncertainty about what
exactly US policies should be trying to encourage.
One part of theproblem with relying on a generalcharacterization ofentrepreneurship
is its multidimensional nature. Despite the many years of research focussing on
entrepreneurship, two reflections on the research best capture this multidimensionalit y.
First, no one definition of entrepreneurship exists; instead, entrepreneurs are classified
across a number of characteristics, such as their motivation, degree of innovation,
Journal of Entrepreneurship and
Public Policy
Vol. 4 No. 1, 2015
pp. 57-84
©Emerald Group Publis hing Limited
DOI 10.1108/JEPP-07-2013-0029
Received 17 July 2013
Revised 2 October 2013
Accepted 4 October 2013
The current issue and full text archive of this journal is available on Emerald Insight at:
product/industry, firm size and age, etc. Second, the outcomes associated with popular
proxies, such as the ranking of nations or states, yield inconsistent results which
are highly dependent upon the specific proxy used. As a result, caution should be used
when developing policies based upon the results of research using one-size-fits-all
measures of entrepreneurship; the policies will likely have unintended consequences.
Another part of the pro blem with the one-siz e-fits-all charact erization of
entrepreneurship is the inability to prescribe potential policies due to proxy selection.
Some researchers argue that as a developed nation, policies in the USA should be
focussed on specifically encouraging innovation-based entrepreneurship (which we
characterize here as Schumpeterian activity). This is the case because many believe
that Schumpeterian activity is the only way to ensure long-term sustainable growth.
This belief appears to be embraced by much of the literature which relies heavily on
Schumpeterian-type definitions of entrepreneurship, though many of these empirical
works use proxies of entrepreneurship that are broadly defined and are not necessarily
consistent with their Schumpeterian-type definitions. As a result, the intent of a policy
can be somewhat blurred by the mischaracterization of the entrepreneurship type in the
The chief contributor to both aspects of the entrepreneurship characteriza tion
problem is that measures of speci fic entrepreneurship types, in parti cular Schumpeterian
activity, are not readily available. This leads to the main concern addressed in this
study: developing a suitable measure of Schumpeterian activity. Rather than rely on a
single proxy of entrepreneurship, the measure constructed uses data aggregation
techniquesto combine several factorsunderstood to be highly correlated with the concept
of Schumpeterian activity, in particular human capital, research and development (R&D)
capital, R&D output, and knowledge and technology intensive (KTI) entrepreneurship, to
generate an index of Schumpeterian activity for each of the 50 US states.
While the primary objective of this stu dy is to construct a measure of
Schumpeterian activity, it is also important to establish some baseline credibility
regarding the performance of the measure. Credibility will be established by testin g the
following hypotheses:
H1. The new measure ranks states differently than commonly used proxies of
H2. The new measure is positively correlated with real GDP, an indicator of
Schumpeterian activity.
H3. The new measure more effectively predicts real GDP, relative to the more
general entrepreneurship proxies.
What follows is: additional background about developing a measure of Schumpeterian
activity; the methods and procedures employed in this study; the empirical results; and
a discussion of policy recommendations and future research. The background section
includes a further discussion of what Schumpeterian entrepreneurship is and its role in
economic development. This is followed by a brief discussion of why multidimensional
measures of entrepreneurship are needed and are superior to unidimensional measures.
In the methods and procedures section, a set of variables related to Schumpeterian
activity is presented and these are aggregated using four distinct methods to generate
unique rankings of Schumpeterian activity across the US states. This section
incorporates the discussion about the inputs used to generate the composite indicators
including summary statistics and input sources. In the results section, the constructed

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