Where Einstein Meets Edison

Steven Klepper wins prominent award in Entrepreneurship Research

Steven Klepper wins prominent award in Entrepreneurship Research

Mar 8, 2011

While many practitioners pontificate about the secrets to entrepreneurial success, few have been able to find theories that stand up to scrutiny when applied to data. Entrepreneurship as an academic field struggles to deal with the fact that reality is context-specific and seemingly intractable forces like “culture” and “passion” might have first-order effects, so much so that any attempts to find generally valid truths might be ultimately futile.

Steven Klepper of Carnegie Mellon is one prominent academic in the field whose work clearly stands out as an exception. Last month, Steven Klepper was awarded the “Global Award for Entrepreneurship Research”, a distinction CBS professor Nikolai Foss titles the “Entrepreneurship Nobel”. The prize is administered by a variety of Swedish agencies in the field including the Swedish Entrepreneurship Forum, the Swedish Agency for Economic and Regional Growth and the Research Institute of Industrial Economics (IFN). The prize is awarded annually and consists of the statuette “The Hand of God” created by Swedish Sculptor Carl Milles, and a Prize sum of 100,000 euros.

The prize citation “for his significant contributions to our understanding of the role of new firm entry in innovation and economic growth” does little justice to Prof. Klepper’s extensive theoretical and empirical research that reveals starling patterns in the evolution of prominent industries critical to economic growth.

Where do successful firms come from? Why do successful firms coexist in clusters? Why do some firms survive while others do not? And what explains the difference between the innovative outputs of large, older firms and new, smaller firms when they are often co-located and have access to similar resources? Dr. Klepper’s theory of “spinoffs” is a significant advance in our understanding of these questions.

Consider one of Klepper’s well-known studies: “Disagreements, spinoffs, and the evolution of Detroit as the capital of the US automobile industry”. In this study he carefully documents the evolution of the automobile industry with year-level data on automobile firms and their activities. Why does an industry that had over 250 active auto-assembly firms in its heyday (~1910) have fewer than 20 today? And what explains agglomeration of this industry around Detroit? In the 1990s Paul Krugman pioneered what is today known as the “New Economic Geography”, a theory of local agglomeration based on the principles of “increasing returns, trade costs and factor price differences”.

In contrast to this dominant view, Dr. Klepper contends that a central force driving agglomeration in addition to increasing returns is the movement of human capital from large firms to smaller, more dynamic firms. Disagreement over innovative ideas causes employees to leave large firms and found “spinoffs” which are in the same industry and co-located, thereby creating patterns of industrial agglomeration. This was indeed the case in the automobile industry (and many others that Klepper and co-authors have carefully documented). His most cited work “Entry, Exit, Growth, and Innovation over the Product Life Cycle” develops theory that predicts the nature of industry evolution. The model Klepper presents makes simple assumptions about the nature of the innovation process to obtain a prediction that is close to empirical regularities: firms devote increasing effort to process innovation (innovation that makes manufacturing processes more efficient) and the number of firms and the rate and diversity of product innovation eventually wither in a given industry.

Be it empirical work in diverse industries like lasers, tires and automobiles or theoretical work agnostic to the specific nature of an industry Klepper’s work is characterised by a point-of-view that MIT Sloan Alvin J. Siteman (1984) Professor of Entrepreneurship Matt Marx thinks is distinctive and rare — “Hardly anyone does what he does”, he said in reply to an email asking for comments about Dr. Klepper’s work. Marx continues: “Not only do Steve’s theories represent significant contributions to our understanding of entrepreneurial dynamics; how he arrives at those theories is equally notable. Steve routinely undertakes extensive data-gathering projects, assembling censuses of entire industries. By this I don’t mean that he downloads the CRSP data on public companies; rather, he scours industry newsletters, sales volumes, and other archival sources to reconstruct the origins of all automotive firms, all laser firms, you get the idea. He does not take the easy route of working with publicly-accessible data, and as such comes up with insights few others have been able to attain.”

As part of MITER, I would like to congratulate Steven Klepper on this notable recognition! Prof. Klepper’s work is best summarised by the motivation given by the committee itself for his choice:

“Steven Klepper has made significant contributions to our understanding of the role of new firm entry in innovation and economic growth. His work is theoretical and integrative, firmly rooted in empirical observation of historical innovative processes, focusing on explaining “empirical regularities.” Klepper’s work integrates elements of traditional neoclassical models with evolutionary theory, bridging some of the gaps between neoclassical and evolutionary theory and between entrepreneurship research and mainstream economics.”

Click here for full citation: http://www.e-award.org/web/2011_Steven_Klepper.aspx