Ann Reg Sci (2005) 39:457–469

DOI: 10.1007/s00168-005-0246-9

Entrepreneurship capital and regional growth

David B. Audretsch1, Max Keilbach2
1
Indiana University, CEPR and Max Planck Institute for Economics, Kahlaische Str. 10, 07745
Jena, Germany
2
Max Planck Institute for Economics, Kahlaische Str. 10, 07745 Jena Germany (e-mail:
Keilbach@econ.mpg.de)

Abstract. This paper introduces the concept of entrepreneurship capital and

links it to the economic performance of regions. We give a definition of
entrepreneurship capital and suggest different measures of this variable.
Economic performance of regions is measured by the stock and the growth
rate of regions, labor productivity. We find that entrepreneurship capital is
stronger in urban areas and spatially correlated. Using regressions of pro-
duction functions and growth equations, we find evidence that entrepre-
neurship capital has a positive and large impact on region’s labor
productivity. However for growth, this result holds only for risk-oriented
measures of entrepreneurship capital and for densely populated regions. We
derive policy implications from these findings.

JEL classification: M13, O32, O47

1. Introduction

The concept of social capital theory injected a new and strong challenge to the
prevailing theories of economic growth. The most prevalent and widely
accepted theory was the neoclassical growth model, introduced by Robert
Solow, identified physical capital as the sources of economic growth. While
the endogenous growth theory, triggered by Paul Romer (1986) injected a
new factor, knowledge, into growth models, their was still no recognition that
anything resembling social capital made a difference in generating growth.
However, recent work by Putnam (1993, 2002), building on the earlier
contributions of Jacobs (1961) and Coleman (1988), identified the importance
and role of social capital. However, an important limitation of social capital
is that the impact on economic performance is not unambiguous. This is
because of the encompassing nature of social capital. In particular, the same
social capital that may promote preservation of the status quo may also serve
as a barrier to change and entrepreneurship.
The purpose of this paper is to introduce the concept of a somewhat
analogous, albeit decidedly different concept, that of entrepreneurship capital.
Entrepreneurship capital is a specific type of social capital and refers to the
458 D. B. Audretsch, M. Keilbach

capacity of a society to generate entrepreneurial activity. In particular, we

suggest that a high endowment of entrepreneurship capital has a positive
impact on regional economic performance.
In the second section of this paper we introduce the concept of entre-
preneurship capital and explain why it should promote economic growth at
the regional level. In the third section we present how we measure the impact
of entrepreneurship capital on regional economic performance. Empirical
results are presented in the fifth section, based on data described in the fourth
section. In the final section we make conclusions. In particular, we find
compelling evidence linking entrepreneurship capital to regional labor pro-
ductivity. However, only R&D-oriented measures of entrepreneurship capital
lead to a long-term effect and we can observe this effect only in densely
populated regions.

2. Entrepreneurship capital and regional growth

Introducing the concept of entrepreneurship capital is analogous to that of

social capital introduced by Jacobs (1961), Bourdieu (1983), Coleman (1988)
and Putnam (1993; 2000). According to Putnam (2000, p. 19), ‘‘Whereas
physical capital refers to physical objects and human capital refers to the
properties of individuals, social capital refers to connections among indi-
viduals – social networks and the norms of reciprocity and trustworthiness
that arise from them. In that sense social capital is closely related to what
some have called ‘‘civic virtue.’’ The difference is that ‘‘social capital’’ calls
attention to the fact that civic virtue is most powerful when embedded in a
sense network of reciprocal social relations. A society of many virtues but
isolated individuals is not necessarily rich in social capital.’’
The main contribution of the social capital literature is that factor
endowments are not sufficient to adequately explain economic performance.
Rather, as Putnam explains, interaction enables people to build communities,
to make personal commitments, and to knit the social fabric. A sense of
belonging and the concrete experience of social networks, which involves
relationships of trust and tolerance, generate significant benefits to the entire
population at that location.
By entrepreneurship capital we mean the capacity of a society to generate
new firms. This involves a number of aspects. First of all it involves creating
new firms, hence it involves creative individuals who are willing to deal with
the risk of creating a new firm. As Gartner and Carter (2003) state, ‘‘Entre-
preneurial behavior involves the activities of individuals who are associated
with creating new organizations rather than the activities of individuals who
are involved with maintaining or changing the operations of on-going
established organizations.’’ However, the process of creating new firms is not
the isolated action of a single economic agent. It also involves a regional
milieu of agents that is conducive to the creation of new firms such as social
acceptance of entrepreneurial behavior and bankers or venture capital firms
who are willing to share the risk and the benefits. Hence it reflects a number
of different factors and forces, legal, institutional and social, which create a
capacity for this activity (Hofstede et al. 2002). Therefore the notion of
entrepreneurship capital goes beyond the usual notion of entrepreneurship as
being an action, a process, or an activity.
Entrepreneurship capital and regional growth 459

Saxenian (1990,1994) attributes the high economic performance of Silicon

Valley to a rich endowment of what could be termed as entrepreneurship
capital, ‘‘It is not simply the concentration of skilled labor, suppliers and
information that distinguish the region. A variety of regional institutions –
including Stanford University, several trade associations and local business
organizations, and a myriad of specialized consulting, market research, public
relations and venture capital firms – provide technical, financial, and net-
working services which the region’s enterprises often cannot afford individ-
ually. These networks defy sectoral barriers: individuals move easily from
semiconductor to disk drive firms or from computer to network makers. They
move from established firms to startups (or vice versa) and even to market
research or consulting firms, and from consulting firms back into startups.
And they continue to meet at trade shows, industry conferences, and the
scores of seminars, talks, and social activities organized by local business
organizations and trade associations. In these forums, relationships are easily
formed and maintained, technical and market information is exchanged,
business contacts are established, and new enterprises are conceived. . . This
decentralized and fluid environment also promotes the diffusion of intangible
technological capabilities and understandings’’1 (Saxenian 1990, pp. 96–97).
Such contexts generating a high propensity for economic agents to start
new firms can be characterized as being rich in entrepreneurship capital.
Other contexts, where the startup of new firms is inhibited, can be charac-
terized as being weak in entrepreneurship capital. However, entrepreneurship
capital should not be confused with social capital. Not all social capital may
be conducive to economic performance, let alone entrepreneurial activity.
Some types of social capital may be more focused on preserving the status
quo rather than fostering challenges to the status quo. By contrast, entre-
preneurship capital could be considered to constitute one particular type of
social capital. In contrast to the broader concept of social capital, entrepre-
neurship capital, by its very definition, must foster entrepreneurial activity.
However, in an article in the Harvard Business Review, Ferguson (1988, p.
61), actually argued that entrepreneurship would have a negative impact on
economic performance in Silicon Valley, because the ‘‘fragmentation, insta-
bility, and entrepreneurialism are not signs of well-being. In fact, they are
symptoms of the larger structural problems that afflict U.S. industry. In
semiconductors, a combination of personnel mobility, ineffective intellectual
property protection, risk aversion in large companies, and tax subsidies for
the formation of new companies contribute to a fragmented ‘chronically
entrepreneurial’ industry. U.S. semiconductor companies are unable to
sustain the large, long-term investments required for continued U.S. com-
petitiveness. Companies avoid long-term R&D, personnel training, and long-
term cooperative relationships because these are presume, often correctly, to
yield no benefit to the original investors. Economies of scale are not suffi-
ciently developed. An elaborate infrastructure of small subcontractors has
sprung up in Silicon Valley. Personnel turnover in the American merchant

1
Saxenian (1990, pp. 97–98) claims that even the language and vocabulary used by technical
specialists can be specific to a region: ‘‘. . .a distinct language has evolved in the region and certain
technical terms used by semiconductor production engineers in Silicon Valley would not even be
understood by their counterparts in Boston’s Route 128.’’
460 D. B. Audretsch, M. Keilbach

semiconductor industry has risen to 20% compared with less than 5 percent in
IBM and Japanese corporations. . . Fragmentation discouraged badly needed
coordinated action – to develop process technology and also to demand better
government support.’’
The above analysis leads to the hypothesis that entrepreneurial capital is
conducive to economic growth hence that a region with a higher endowment
of entrepreneurial capital shows a higher economic performance. This is far
from clear-cut as the quote by Ferguson suggests. The aim of this paper is to
investigate this hypothesis.
Inclusion of entrepreneurship capital in a regional growth model raises
two key questions, (1) Why should endowments of entrepreneurship capital
generate economic growth and, (2) why should this impact of entrepreneurial
capital be spatially bounded?
The growth models by Solow (1956) and Romer (1986) are neutral vis-à-
vis entrepreneurial capital which implies that entrepreneurship capital should
have a neutral impact on economic growth, unless indirectly through impacts
on physical capital or knowledge capital. The theoretical case for linking
entrepreneurship capital to economic growth is that it serves as a conduit of
knowledge spillovers. As Acs et al. (2004) point out, an assumption implicit
in the endogenous growth models is that the spillover of knowledge is
automatic within the relevantly defined geographic unit of observation. By
contrast, Arrow (1962) argued that knowledge is not automatically trans-
mitted into economic knowledge. Rather, there exists what Acs et al. (2004)
refer to as a knowledge filter between knowledge and economically useful
knowledge. Entrepreneurship capital is one such mechanism, albeit certainly
not the only mechanism, facilitating the spillover of knowledge from the
source creating that knowledge to its commercialization in a third-party firm.
This mechanism leading to growth is different to the direct effects through
investment and creation of employment by new firms as analyzed by Birch
(1979,1981) and e.g., Geroski (1995).
The second theoretical issue involves the spatial dimension of the im-
pact of entrepreneurship capital on economic growth. Why should that
impact be spatially bounded and more regional in nature, rather than
unbounded, and therefore global in nature? As Thorton and Flynne (2003)
document, a rich and compelling literature has documented how knowledge
spillovers are spatially constrained, thus giving rise to geographic clusters
and agglomerations. As Glaeser et al. (1992: 1126) have observed, ‘‘intel-
lectual breakthroughs must cross hallways and streets more easily than
oceans and continents.’’ To the degree that entrepreneurship is a mecha-
nism for knowledge spillovers, entrepreneurship capital should also be
spatially localized, along with its impact on economic growth.
Thus, there are at least theoretical reasons to believe that entrepreneurship
capital exists, has a positive impact on economic growth, and that this impact
is spatially bounded. The validity of these three hypotheses will be tested in
the next section.

3. Measuring the impact of entrepreneurship capital

The main hypothesis of this paper suggests that there is a positive rela-
tionship between entrepreneurship capital and regional economic
Entrepreneurship capital and regional growth 461

performance. More specifically, we want to take a look at entrepreneur-

ship’s impact on regional labor productivity and on the regional growth of
labor productivity. Since our aim is to provide first evidence, we keep this
analysis simple and base it on existing frameworks. A straightforward ap-
proach is to measure the impact of entrepreneurship capital on regional
economic performance on the basis of a production function of the Cobb-
Douglas type. To measure the impact of entrepreneurship capital on labor
productivity we divide a standard Cobb-Douglas function by labor L, to
obtain its intensive form assuming that production elasticities of capital an
labor sum to unity, hence
b b
ðYi =Li Þ ¼ aðKi =Li Þb1 Ri 2 Ei 3 eei : ð1Þ
In Eq. (1), K represents physical capital, L represents labor, R represents
knowledge capital and E represents entrepreneurship capital. The subscript i
refers to regions. Put in a simplified way, a positive coefficient on capital
intensity (b1 ) is consistent with the neoclassical growth theory as posited by
Solow (1956) and a positive b2 is consistent with the endogenous growth
theory, as posited by Romer (1986). A positive b3 would support the
hypothesis that entrepreneurial capital has a positive impact on regional
economic performance, here expressed as regional labor productivity.
Regional labor productivity being a stock variable, we are also interested
in the impact of entrepreneurship capital on the growth of this variable. To
do so, we estimate the following simple growth equation2



log yi;t1 =yi;t0 ¼ a
1
e
b logðyi;t0 Þ þ Xc þ ui;t1 ; ð2Þ
where i denotes again regions, yi is region i’s labor productivity, t0, t1 are time
instances (in our case 1992 and 2000) and X is a set of variables that might
account for regional differences in the growth rate of labor productivity3.
Here, we use the role of R&D employees and a measure of human capital as
well as different measures of entrepreneurship capital. The following section
briefly describes the data.

4. Data

The empirical analysis is based on German data. We compiled a database

consisting of 327 West-German regions or Kreise for the year 1992 if not
indicated otherwise. Sources and construction of the data is as follows.
Output is measured as Gross Value Added corrected for purchases of
goods and services, VAT and shipping costs. Statistics are published every
two years for Kreise by the Working Group of the Statistical Offices of the
German Länder, under ‘‘Volkswirtschaftliche Gesamtrechnungen der Län-
der’’. Data on labor is published by the Federal Labor Office, Nürnberg that
reports number of employees liable to social insurance by Kreise. Labor

2
This equation has been heavily used in the empirical literature on convergence of regional labor
productivity (e.g., Barro and Sala-I-Martin 1995, p.384). We use this equation to explain regional
growth of labor productivity and do not intend to address the convergence debate with this paper.
3
See Barro and Sala-I-Martin (1992, 1995) and Mankiw et al. (1992) for a further discussion of
this approach.
462 D. B. Audretsch, M. Keilbach

productivity is simply computed dividing output by labor. Its growth rate is

computed as depicted on the left hand side of Eq. 2.
The stock of capital used in the manufacturing sector of the Kreise has
been estimated using a perpetual inventory method that computes the stock
of capital as a weighted sum of past investments. Data on investment at the
level of German Kreise is published annually by the Federal Statistical Office,
however limited to firms of the producing sector, excluding the mining
industry, with more than 20 employees. The vector of the producing sector as
a whole has been estimated by multiplying these values such that the value of
the capital stock of Western Germany - as published in the Statistical
Yearbook - was attained. This procedure implies that estimates for Kreise
with a high proportion of mining might be biased. The level of this bias is
however rather low.
Knowledge Capital is expressed as number of employees engaged in R&D in
the public (1992) and in the private sector (1991). With this approach we
follow the examples of Griliches (1979), Jaffe (1989), and Audretsch and
Feldman (1996). Data has been communicated by the Stifterverband für die
Wissenschaft under obligation of secrecy. With these data, it was impossible
to make a distinction between R&D-employees in the producing and non-
producing sectors. Regression results therefore will implicitly include spill-
overs from R&D of the non-producing sector to the producing sectors. We
presume however that this effect is rather low.
Entrepreneurship capital as defined above involves a number of qualita-
tive aspects that are difficult to assess quantitatively. However, entrepre-
neurship capital manifests itself in a singular way – the startup of new
enterprises. We therefore measure a region’s entrepreneurship capital as its
number of startups relative to its population. Ceteris paribus, higher startup
rates reflect higher levels of entrepreneurship capital. One might argue that
with this measure there might be a causality issue. More specifically,
entrepreneurship capital could be endogenous, in that the number of newly
created firms depends on the regional economic performance rather than
vice versa or that entrepreneurs will move to locations with superior eco-
nomic performance which would even reinforce the interdependence be-
tween input and output variable. However, this argument would certainly
apply to physical capital as well, probably even more, since monetary
investments (which build up capital) will flow across regions more easily
than persons. We therefore consider our measurement as consistent with the
chosen empirical approach. We address this causality issue by using
observations on startup rates of periods prior to our measurements of
output and the other production factors, we avoid a reverse causality
problem making sure that economic performance is caused by entrepre-
neurship capital and not vice versa.
In constructing the indicators of entrepreneurship there are two more
important qualifications. One is based on the observation that because
startup activity is subject to a greater level of stochastic disturbance over
short time periods, it is prudent to compute the measure of entrepreneurship
capital based on startup rates over a longer time period. We therefore used
the number of startups between 1989–1992. The second qualification is that
the causality between economic growth and entrepreneurship may run both
ways.
Entrepreneurship capital and regional growth 463

The third qualification involves the assumption of heterogeneity of

entrepreneurship implicit in this measure of entrepreneurship capital. All
startups are assumed to have an equal impact on economic growth,
regardless of the type of entrepreneurship. However, entrepreneurship is not
homogeneous, but rather an inherently heterogeneous phenomenon. To
reflect heterogeneity in entrepreneurship capital, we therefore distinguish
among three distinct types of entrepreneurship – startups in all industries
(consisting at some 50% of startups in retail and food and catering
industries), high-technology startups and startups in the ICT industries. The
interesting aspect of this differentiation is that the two latter measures

Fig. 1. Density of entrepreneurship capital (startups in ICT industries rel. to population) for
W-Germany. Values show number of startups in ICT industries between 1989 and 1992 per 1000
of population
464 D. B. Audretsch, M. Keilbach

Table 1. Correlation of different measures of regional entrepreneurship capital with population

density and its respective spatial lagged value. P-values on brackets denote probabilities of
correlations not to differ significantly from zero

Population Respective
density spatial lag

General e-cap 0.3376 0.6839

(p-value) (0.000) (0.000)
High-Tech e-cap 0.0276 0.5518
(p-value) (0.619) (0.000)
ICT e-cap 0.2870 0.7505
(p-value) (0.000) (0.000)

involve R&D activities as well as larger financial risks and therefore are
more pertinent to the aspect of dealing with risk by the entrepreneur. The
data on startups is taken from the ZEW foundation panels that are based
on data provided twice a year by Creditreform, the largest German credit-
rating agency. This data contains virtually all entries – hence startups – in
the German Trade Register, especially for firms with large credit require-
ments as e.g. high-technology firms.4
Figure 1 shows the spatial distribution of entrepreneurship capital, mea-
sured as startups in ICT industries in West German Kreise between 1989 and
1992. A similar picture emerges for our alternative measurements of entre-
preneurship capital. This Figure suggests that entrepreneurship capital is
stronger in densely populated regions. Also, it seems that the regions neigh-
boring these densely populated areas also display a high endowment of
entrepreneurship capital, which would imply spatial correlations of our
measures of entrepreneurship capital.5 Table 1 makes this evident. A simple
bivariate correlation between the measures of entrepreneurship and popula-
tion density is significantly positive at a ¼ 0:01 with the exception of high-tech
entrepreneurship capital. Also, bivariate correlations of our measures of
entrepreneurship capital with their respective spatial lag are all significantly
positive at a ¼ 0:01.

5. Empirical results

The empirical results from estimating equation (1) are shown in Table 2. The
positive and statistically significant coefficient of capital intensity in column
(1) is consistent with the Solow model and indicates that a region’s labor
productivity is positively related to the capital intensity of that region. In this
first regression, the estimated production elasticity for capital is roughly one
third and implicit estimate of labor’s production elasticity is 1
0.332 =

4
Firms with low credit requirements, with a low number of employees or with illimited legal
forms are registered only with a time lag. These are typically retail stores or catering firms. See
Harhoff and Steil (1997) for more detail on the ZEW foundation panels.
5
On the concept of spatial autocorrelation of data and its measurement, see e.g., Anselin (1988)
or Keilbach (2000).
Entrepreneurship capital and regional growth 465

Table 2. Regression estimates for the model of labor productivity in german regions

(1) (2) (3) (4) (5)

Constant
1.888
2.234
1.701
1.478
1.380

(0.000) (0.000) (0.000) (0.000) (0.000)
Capital intensity 0.332 0.266 0.257 0.261 0.265
(0.000) (0.000) (0.000) (0.000) (0.000)
R&D Input 0.039 0.032 0.024 0.025
(0.000) (0.001) (0.001) (0.015)
E-cap urban regions 0.101
(0.069)
E-cap rural areas 0.109
(0.041)
High-tech E urban 0.088
(0.006)
High-tech E rural 0.094
(0.003)
ICT E urban 0.098
(0.003)
ICT E rural 0.102
(0.001)
Adjusted R2 0.122 0.170 0.179 0.190 0.193

Notes: P-values in brackets denote the probability of the parameter estimate to not differ
significantly from zero, based on a two sided t-test.
Tests on spatial autocorrelation in the error term based on Moran’s I do not reject the null at the
99% level

0.668, a value that corresponds to the usual findings. The positive and
statistically significant coefficient of the measure of knowledge capital in
column (2) is consistent with the Romer model suggesting that investments in
knowledge capital are positively related to higher levels of productivity.
Columns 3 to 5 include our measures of entrepreneurship. To deal with
the different characteristics of densely populated regions with respect to
entrepreneurship capital, we allow for a variation in b3 , the entrepreneurship
coefficient. To do so we split the sample such that the regions with higher
population density (those above 1300 inhabitants per square kilometer) build
a subsample that corresponds to 20% of the dataset.6 We denote this subset
as urban regions and the remaining part as rural areas.
All three measures of entrepreneurship capital as reported in columns 3 to
5 are significant at the 90% level. This applies for estimation results for rural
areas and for urban regions. In rural areas, the coefficient is slightly larger for
all three measures of entrepreneurship capital, although the differences are
not statistically significant. In all cases, the estimated output elasticity is
roughly 0.1, which suggests that an increase in the region’s entrepreneurship
capital by 10% increases the region’s labor productivity by 1%. It seems
noteworthy that the estimated impact of R&D input, measured in terms of
R&D employees is roughly at around one fourth to third of the impact
entrepreneurship capital. This suggests, that an increase in entrepreneurship

6
Alternatively, we chose critical values different to 1300. The following findings are not sensitive
with respect to the choice of this critical value.
466 D. B. Audretsch, M. Keilbach

Table 3. Regression Results Estimating Growth Equation (2) including different measures for
entrepreneurship capital

(1) (2) (3) (4) (5) (6)

Constant 0.0816 0.1311 0.1189
0.1227 0.1172 0.1134

(0.000) (0.000) (0.000) (0.000) (0.000) (0.000)
log(Y/L 92)
0.0158
0.0305
0.0263
0.0243
0.0268
0.0254
(0.004) (0.000) (0.000) (0.000) (0.000) (0.000)
Capital 0.0024
(0.000)
R&D Emp. 0.0023
(0.000)
E-Cap urban regions 0.1302
(0.872)
E-Cap rural
0.0115
(0.221)
High-Tech E urban 16.288
(0.000)
High-Tech E rural 4.922
(0.061)
ICT E urban 19.217
(0.000)
ICT E rural 4.072
(0.229)
Adjusted R2 0.022 0.119 0.090 0.072 0.082 0.075

Note: p-values in brackets denote probabilities of parameters to not differ significantly from zero,
based on a two-sided t-test.
Again, tests on spatial autocorrelation in the error term based on Moran’s I do not reject the null
at the 99% level.

by a given percentage has three to four time the impact of an increase of

R&D-inputs by the same percentage. This gives some indications with respect
to policy measures, suggesting that funding of entrepreneurship capital is
more efficient as compared to R&D funding. However, this statement does
not imply any cost-benefit assessment or any more sophisticated evaluation
analysis of funding entrepreneurship capital as a policy measure. Nevertheless
we take this as first evidence that motivates further research in that direction.
Note that for all regressions, a test on spatial autocorrelation based on
Moran’s I does not rejected the null hypothesis of no autocorrelation at
a ¼ 0:01.7 This suggests, that the estimation results are not biased by spatial
autocorrelation.
Let us turn to the other measure of regional economic performance, the
growth of labor productivity. Table 3 reports the regression results from
estimating Eq. 2, giving six different specifications. Over all these specifica-
tions, the estimated coefficient for log(Y/L 92) fluctuates around
0.025. This
finding is consistent with those of the convergence literature (e.g., Barro and
Sala-i-Martin 1993 or Mankiw et al. 1992) suggesting that regions’ labor
productivities converge by roughly 2 to 3% every year.
It is interesting to take a more detailed look at the impact of entrepre-
neurship capital (columns 4 to 6). The estimates for our general measure of

7
See e.g., Anselin (1988, p.102) or Keilbach (2000, p.129) for a description of this procedure.
Entrepreneurship capital and regional growth 467

entrepreneurship capital being statistically insignificant (column 4), we cannot

find a long-term impact here. Apparently (from Table 2) general entrepre-
neurship capital has a positive immediate impact on labor productivity but
not a persistent one.
This is different for our more R&D and risk-oriented measures of entre-
preneurship capital (columns 5 and 6). Here, it is interesting to observe that
the impact is roughly four times larger in urban regions as compared to rural
areas. For our high-tech oriented measure the impact is only significant at the
90% level for rural areas where for our ICT oriented measure, it is even
insignificant here. Again, for all regressions, the null of a test on spatial
autocorrelation based on Moran’s I is not rejected at a ¼ 0:01.
Overall, we find that entrepreneurship capital has a large and positive
impact on the regions’ labor productivity, but only the more R&D and
knowledge oriented measures have a long-term impact on this measure of
regional economic performance. More so, this is only the case in densely
populated urban regions. We take this as evidence in favor of the spatial
aspects of entrepreneurship capital as discussed above. This findings suggest
that policy measures towards supporting entrepreneurship capital in R&D
oriented industries and densely populated regions would have a strong and
lasting impact on the labor productivity of these regions. However, again we
take this only as first evidence in that direction and as an indicator for fruitful
further research since this statement did not involve detailed evaluation
analyses.

6. Conclusions

Wide-spread recognition and acceptance of the Solow growth model had

strong implications for regional economic policy. The public policy debate
to generate economic growth generally revolved around instruments that
would promote investments in physical capital and access to (inexpensive)
labor. Much of this debate involved macroeconomic policy instruments,
such as money supply and interest rates. While the primacy of macroeco-
nomic policy instruments to generate economic growth seemed to render
regional economic policy instruments as less important, a second debate
emerged focusing on those types of instruments, including subsidies and
preferential tax treatment that would attract investments in physical capital
into the region.
With the emergence of the endogenous growth theory, the focus of public
policy shifted to instruments that would increase investments in knowledge
generally, and in particular, human capital and research and development. In
contrast to the earlier neoclassical growth theory, the public policy relevance
was shared between the national and regional levels.
The results of this paper suggest that a very different set of public policy
instruments to promote regional economic growth and performance may be
appropriate. The empirical results of this paper indicate that not only are the
traditional factors important, but in addition, entrepreneurial activity also
plays an important role in generating economic productivity. This may ex-
plain the emergence of a broad range of policies and initiatives being
undertaken at the regional level to foster entrepreneurial activity. While this
paper provides no insight as to which of these policies may be the most
468 D. B. Audretsch, M. Keilbach

effective, there is at least some evidence suggesting that fostering entrepre-

neurship in R&D-oriented industries may have a greater long-run impact
than other types of startups. Subsequent research will have to identify more
explicitly what exactly constitutes entrepreneurship capital and how public
policy can contribute to entrepreneurship capital. This is an important re-
search agenda, because as this paper makes clear, entrepreneurship capital
seems to have an important impact on regional economic performance.

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