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Intergenerational Fairness and the Crowding Out Effects of Well-Intended Environmental Policies

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Sustainability involves the drive to ensure intergenerational fairness. However, the results of actions taken to achieve sustainability often lie far into the future and efforts to promote the welfare of distant generations may or may not ultimately be successful. While both governmental policies and entrepreneurial innovation have been cited as being indispensable to the achievement of sustainability, the manner in which they co-exist and interact over very long periods of time remains unclear. Using a computational model spanning more than two centuries, this study asks: Do well-intended environmental policies facilitate or inhibit environmental entrepreneurship? By simultaneously considering both the ethical and economic consequences of efforts to arrest environmental degradation, our study answers the call to develop multi-disciplinary perspectives and integrative frameworks when addressing the challenges of sustainable existence. Contrary to widely held perceptions, our findings suggest that policy actions may, in the long run, result in less intergenerational fairness by crowding out environmentally desirable innovations and organizations. Our examination of the long-term interactions between policies and markets offers insights and opportunities for scholars, entrepreneurs, environmentalists, ethicists and policymakers to develop solutions that preserve and extend the essential contributions of both policy actions and entrepreneurial innovations. © 2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies.
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Intergenerational Fairness and the Crowding Out
Effects of Well-Intended Environmental Policies
Richard A. Hunt and Bret R. Fund
Virginia Polytechnic Institute; University of Colorado
ABSTRACT Sustainability involves the drive to ensure intergenerational fairness. However, the
results of actions taken to achieve sustainability often lie far into the future and efforts to
promote the welfare of distant generations may or may not ultimately be successful. While
both governmental policies and entrepreneurial innovation have been cited as being
indispensable to the achievement of sustainability, the manner in which they co-exist and
interact over very long periods of time remains unclear. Using a computational model
spanning more than two centuries, this study asks: Do well-intended environmental policies
facilitate or inhibit environmental entrepreneurship? By simultaneously considering both the
ethical and economic consequences of efforts to arrest environmental degradation, our study
answers the call to develop multi-disciplinary perspectives and integrative frameworks when
addressing the challenges of sustainable existence. Contrary to widely held perceptions, our
findings suggest that policy actions may, in the long run, result in less intergenerational
fairness by crowding out environmentally desirable innovations and organizations. Our
examination of the long-term interactions between policies and markets offers insights and
opportunities for scholars, entrepreneurs, environmentalists, ethicists and policymakers to
develop solutions that preserve and extend the essential contributions of both policy actions
and entrepreneurial innovations.
Keywords: crowding out, environmental entrepreneurship, intergenerational fairness,
sustainability
INTRODUCTION
The ethical underpinnings of sustainability hinge on the concept of intergenerational
fairness (Pezzey and Toman, 2002, 2005; Weiss, 1990; Woodward, 2000); meaning that
each successive generation harvests renewable resources, depletes non-renewable
resources, and generates waste in a fashion that can continue indefinitely (Daly, 1990).
Address for reprints: Richard A. Hunt, Virginia Polytechnic Institute, Pamplin College of Business,
Blacksburg, VA 24061, USA (rickhunt@vt.edu).
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Journal of Management Studies 53:5 July 2016
doi: 10.1111/joms.12202
Given the complexity of the sustainability challenge, arguments have been advanced
that a meaningful approach must include aggressive activation of public policy (e.g.,
Porter, 1991) and resolute enforcement by institutions through international coordina-
tion (e.g., Pezzey and Toman, 2005). Scholars have also convincingly asserted that inno-
vating entrepreneurs play a vital role through the agile pursuit of novel solution sets,
facilitated through an open arena of competing technologies and business models
(Anderson and Leal, 2001; Baumol and Oates, 1988). What is less certain, and what has
not been fully assessed, is the manner in which environmental policies and environmen-
tal entrepreneurship either coalesce or collide in the marketplace (Dean and McMullen,
2007; Hall, et al. 2010). While calls for transnational (Haas et al., 1993; Susskind and
Ali, 2014) and transgenerational (Padilla, 2002; Weiss, 1990) polices have continued to
gain momentum, the impact of policy on entrepreneurial action remains largely indeter-
minate (Anderson and Leal, 2001). If such policies unwittingly reduce the development
and commercialization of impactful entrepreneurial innovations (Anderson and Hug-
gins, 2008), then future generations may actually be worse off.
The purpose of this paper is to assess the extent to which well-intended environmental
policies facilitate or inhibit environmentally desirable entrepreneurship. Our contribu-
tions are fourfold. First, we develop and test the first expansive model that is able to pre-
dict how and why environmental policies impact environmental entrepreneurship.
While existing literature, primarily emanating from environmental economics (Jennings
and Zandbergen, 1995; Newell et al., 1999; Popp, 2010) and corporate social responsi-
bility (e.g., Bansal and Roth, 2000; Hoffman, 1999; Shrivastava, 1995) has related pub-
lic policy to corporate behaviours by incumbent firms, there are no predictive
frameworks regarding environmental policies that fundamentally change the incentive
structures (Baumol, 1993) and property rights (Anderson and McChesney, 2003; Brom-
ley, 1991) impacting new generations of innovating entrepreneurs.
Second, our conceptual framework contributes much-needed multi-disciplinary sub-
stance to the study of intergenerational fairness. Our approach reconciles and integrates
prior efforts to address sustainable existence from solely an ethical or economic perspec-
tive by adapting economics-based perspectives on environmental degradation (Jaffe and
Palmer, 1997; Newell et al., 1999; Popp, 2006, 2010) and crowding out (Ahmed, 1986;
Aschauer, 1985; Barro, 1987) to innovation management-based theories on path
dependency (Arthur, 2007; Dosi, 1982; Teece, 1986), and business ethics-based perspec-
tives on intergenerational fairness (Padilla, 2002; Pezzey and Toman, 2002, 2005;
Weiss, 1990; Woodward, 2000).
Third, we contribute to the range and sophistication of methodologies that scholars
can employ when assessing the consequences of complex interactions that occur well
into the future, such as those that characterize sustainability. Using a mathematical sim-
ulation, we are able to account simultaneously for the intergenerational effects of both
policy-based and market-based efforts to arrest environmental degradation. Although
computational modelling has witnessed extensive use in other fields (Hartmann, 2009),
it is less common in management research (Harrison et al., 2007). The viability of using
our model to integrate sustainability, ethics and entrepreneurship underscores and vali-
dates its importance as a complement to more mainstream tools, by providing an
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intermediation of research that is purely theoretical or empirical (Markman et al.,
2015), especially across very long timeframes.
Finally, we inject the critical dimension of time into the study of sustainability, ethics
and entrepreneurship. By focusing on far longer timeframes than prior research, our
approach invites a fuller assessment of the time-varying interactions between public pol-
icy and environmental entrepreneurship. Through this, we offer a clearer picture of the
trade-offs that accompany public and private efforts to address the intergenerational
impacts of resource depletion and environmental degradation.
In the following section, we discuss important ways in which the scholarship on entrepre-
neurial action can be more aptly reconciled with the literatures on sustainability and the
ethics of intergenerational fairness. We then develop a new framework and derive four prop-
ositions that are explored using a computational model. We conclude with a discussion of
implications from our study for policymakers, scholars and environmental entrepreneurs.
THEORETICAL DEVELOPMENT
Central to the aims of both well-intended environmental policy and environmental
entrepreneurship is the recognition that sustainability involves taking steps to address
‘intergenerational fairness’ in the actions society takes regarding finite resources and the
quality of life available to future generations (Padilla, 2002; Pezzey and Toman, 2002,
2005; Weiss, 1990; Woodward, 2000). Policies aim to affect change through institutional
sanctions and supports, actions that typically take the form of subsidies for desirable but
uneconomical goods and services, or taxes imposed upon practices and technologies
that are environmentally undesirable. Environmental entrepreneurship – which is
defined by Dean and McMullen (2007, p. 58) as ‘the process of discovering, evaluating,
and exploiting economic opportunities that are present in environmentally relevant
market failures’ – aims to develop and implement technological, organizational and
financial innovations as market-based responses to the mispricing of intergenerational
impacts. Far from being mutually exclusive, government policy and entrepreneurship
not only coexist (Lenox and York, 2011), but also significantly influence one another’s
ability to address intergenerational fairness (Dean and McMullen, 2007).
Developing and commercializing novel technologies (Popp, 2010) and business mod-
els (Zott et al., 2011) through entrepreneurial action is complex and fluid. In the context
of policy-driven commitments to specific technological and organizational paradigms, a
complex mixture of cooperation and competition emerges involving, on the one hand,
the fluid conditions characterizing entrepreneurial innovation and rent-seeking; and, on
the other hand, the aims of governmental policy measures that are intended to arrest
environmental degradation (Popp, 2010). Our investigation focuses on two effects that
are central to the shared fate of sustainability, entrepreneurship and intergenerational
fairness: crowding out and path dependency.
Crowding Out Effects
The study of crowding out effects originated in macroeconomics and refers to the phe-
nomenon in which the market participation of one party reduces or eliminates the
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participation of one or more other parties (Atiq, 2014). Research concerning crowding
out has examined it as a potent force affecting charitable giving (Abrams and Schitz,
1978), social welfare programmes (Kenworthy, 1999), education vouchers (Hoxby,
1996), foreign direct investment (De Backer and Sleuwaegen, 2003), technological inno-
vation (Czarnitzki and Fier, 2002), research and development (Lach, 2002; Loof and
Heshmati, 2005), and venture capital investing (Wallsten, 2001). In each of these con-
texts, crowding out results in a substitution effect as the participation of one party (often
government, but not necessarily so) fundamentally changes the incentive structure so
that one or more other parties partially or wholly withdraw from participation.
Crowding out effects in environmental entrepreneurship occur when government pol-
icies compete with entrepreneurs for the profits associated with solving the market fail-
ure of externalities. Externalities from the consumption of environmentally undesirable
products arise when costs are created that must be borne by future generations (Dean
and McMullen, 2007). For example, present-day consumption of non-biodegradable
plastic bottles or coal-generated electricity imposes costs on succeeding generations, peo-
ple who gain no benefit from the original consumption, but still bear the long-term envi-
ronmental burdens. In terms of both financial costs and quality-of-life considerations,
negative externalities stemming from the consumption of environmentally unsound
goods violate the principle of intergenerational fairness.
To the extent that entrepreneurs can commercialize alternatives to environmentally
undesirable goods, such as plastic bottles and coal-generated electricity, they can simul-
taneously derive profits from the solution and advance the cause of intergenerational
fairness. Resolution of negative externalities has been cast not only as ethically responsi-
ble (Barrett, 1996) but also entrepreneurially lucrative (Coase, 1974; Dean and
McMullen, 2007). The financial returns that environmental entrepreneurs can harvest
through their innovations is directly related to their ability to resolve the externality
problem (Baumol, 1993; Dean and McMullen, 2007). However, when governments
implement policies to address degradation, this calculus changes. Since well-intended
environmental policies also aim to address the negative externalities associated with deg-
radation, they inevitably impact the payoffs to innovating entrepreneurs who are devel-
oping market-based solutions to resolve those same externalities (Anderson and Leal,
2001). Even though the goal of subsidies and taxes is to safeguard the environment, not
generate financial profits, the unintended effect is that the payoffs to entrepreneurial
innovation are partially or wholly eliminated (Anderson and Huggins, 2008; Popp,
2010).
Traditionally, policy actions have assumed two forms: subsidies for environmentally
desirable products, or taxes upon environmentally undesirable products. A stylized rep-
resentation of policy impacts upon entrepreneurial innovation is captured in Figure 1.
The depiction involves policy action that creates a ‘zero-profit’ condition for break-
through innovations, meaning that an entrepreneur cannot earn a risk-adjusted return
for resolving a negative externality. This occurs because the subsidy or tax already
addresses the externality, so that entrepreneurial innovations are economically indistin-
guishable from existing technologies.
As Figure 1 illustrates, the generation of entrepreneurial innovations involves the con-
fluence of an entrepreneur’s propensity to act and his or her ability to produce a
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marketable innovation (Gnyawali and Fogel, 1994). Any entrepreneur with some propensity
to act embodies an idiosyncratic mix of: (a) motivation, ranging from purely financial to
purely intrinsic (Wry and York, 2015) (X-axis), and, (b) the ability or inability to develop and
market an innovation (Y-axis). For individuals motivated by financial remuneration (the blue
area: ‘crowded out entrepreneurs’), the impetus to innovate recedes when the ability to profit
from one’s innovations is impeded by policies favouring existing technologies. For example,
an individual who develops software that improves load balancing for solar power genera-
tion will not earn risk-adjusted profits if subsidies for solar power make inefficient load bal-
ancing economically meaningless. He or she cannot capture the value of solving the
inefficiency if the costs are absorbed through subsidies or taxes that make breakthrough
innovations economically indistinguishable from inefficient solutions.
Conversely, individuals who are at least partially motivated by non-financial factors
may attempt to persist in their efforts to innovate even in the face of no profits. How-
ever, the presence of some intrinsic motivation is insufficient to motivate all founders to
continue operating at a sustained loss. The purple area, ‘defeated believers’, represents
entrepreneurs who have at least some intrinsic motivation but cannot self-fund indefi-
nitely and must, therefore, suspend entrepreneurial action prior to producing a market-
able innovation. The green area represents the ‘stalwarts’, committed entrepreneurs
who possess the means to persist indefinitely despite their unsuccessful pursuit for mar-
ketable innovations. Finally, the red area consists of intrinsically motivated individuals
who do not require risk-adjusted profits, who have the necessary resources to absorb
Figure 1. Crowding out effect. When subsidies or taxes create a ‘zero-profit’ condition, novel break-
throughs are economically indistinguishable from existing technologies, resulting in significant unrealized
innovation
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financial losses, and who have the ability to produce a marketable innovation that
improves upon existing technologies. All the other areas are crowded out by one or
more of the following: absence of financial returns to innovation (blue), the absence of
adequate resources despite intrinsic motivation (purple), or the absence of commercializ-
able breakthroughs despite intrinsic motivation and adequate resources (green). This
stylized depiction predicts that the realized innovation that ultimately does occur under
policy-based conditions (red) is a fraction of the quantity, quality and diversity that
would have emerged under market-based conditions (white) due to abandonment under
policy-based conditions (Anderson and Huggins, 2008).
Innovative breakthroughs are not the only drivers of a sustainable existence. Institu-
tional and socio-cultural forces, including individual behavioural modifications, also fig-
ure prominently (Meek et al., 2010; Sine and Lee, 2009; York and Lenox, 2014).
Nonetheless, technological breakthroughs and novel organizational forms both consti-
tute indispensable tools to simultaneously maintain commercial markets, create employ-
ment opportunities, and arrest the adverse effects of environmental degradation (Popp,
2010; Rennings, 2000). For this reason, policies that restrict the profitability of innova-
tive breakthroughs are likely to impact environmental entrepreneurship (Anderson and
Leal, 2001; Baumol and Oates, 1988). Since sustainable development involves a steady
flow of innovations that are predicated on the ability of individuals to transform market
failures into profits (Coase, 1974; Dean and McMullen, 2007), this crowding out is con-
sequential. Fundamental changes in how entrepreneurs are able to profit from their
ingenuity will in time affect the quantity and diversity of entrepreneurial activity and its
outcomes (Baumol, 1993; Baumol et al., 2009). Accordingly, we propose the following:
Proposition 1: Environmental policies that subsidize environmentally desirable goods and services or
tax environmentally undesirable goods and services will, in the long run, at least partially crowd
out beneficial environmental entrepreneurship that otherwise would have occurred.
Path Dependence
It might be argued that crowding out effects, in and of themselves, are not necessarily a
bad thing. For example, if the government can, through policy-driven fiat, accomplish
desired aims better, faster or cheaper than the private sector, then it stands to reason
that government should perhaps play a pronounced role in addressing market failures
that lead to environmental degradation. In fact, this is a widely held belief, despite
evidence of crowding out effects and other complications that may arise when market-
based pricing mechanisms are abandoned (Anderson and Leal, 2001). The most signifi-
cant of these additional complications pertains to path dependence, which simply means
that future events are inevitably the consequence of events that have occurred in the
past (David, 2007). Path dependence makes technologies susceptible to what Arthur calls
‘lock-in’, a set of circumstances in which commitments made to a specific incumbent
technology dominates to such a degree that migration to alternative solution sets is seri-
ously impeded (Arthur, 1989, 2007). For example, the QWERTY typewriter keyboard
was developed in order to prevent key-jamming on archaic typewriters by actually
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slowing down the typist. And yet, even today, long after computers have eliminated the
jamming problem, QWERTY persists, despite significant evidence that it is ergonomi-
cally inferior to a host of alternatives (David, 1985).
By abandoning market-pricing mechanisms, government policy interventions may
unwittingly select the wrong technologies. Even when new solution sets emerge that
improve upon the performance and cost of existing technologies, path dependence and
the associated effects of lock-in often forestall adoption (Arthur, 2007; Rogers, 2010).
Existing research has demonstrated that this is particularly true when policy-based
incentive systems generate high returns for inexpensive, imitative innovations and low
returns for high-risk, novel innovations (Newell et al., 1999; Popp, 2010). Subsidies and
taxes that are intended to accelerate the scaling of extant technologies tend to generate
immediate responses from individuals and organizations aiming to capitalize on the
favourable economic treatment or cost-avoidance that accompanies scaling-friendly pol-
icies and because they leverage the roll out of extant technologies (Popp et al., 2010).
For example, taxes on coal-fired plant emissions motivate firms to quickly develop and
implement incremental innovations that alleviate the cost impacts of emission taxes.
Meanwhile, subsidies allow entrepreneurs to take advantage of existing technologies
that have been accorded preferential status in the marketplace through financial sup-
port. For instance, when subsidies were implemented for the installation of residential
solar energy systems, hundreds of companies formed in a matter of weeks to provide
solar panel installation services (Cusick, 2015; Victor and Yanosek, 2011). This near-
term dynamic is captured in our second proposition:
Proposition 2: In the near-term, environmental policies that intentionally or unintentionally support
path dependent technologies, organizational forms or business models will increase the quantity and
beneficial impact of environmental entrepreneurship.
The near-term surge in environmentally beneficial outcomes contrasts markedly with
longer term effects in which path dependent forces lock in engrained assumptions per-
taining to extant technologies (Arthur, 2007; Newell et al., 1999; Popp, 2006) and
organizational designs that leverage existing business models and value propositions
(Zott et al., 2011). As noted above, lock-in operates on a self-sustaining logic that favours
continuity and replication (David, 1985), even when it materially constrains the quantity
and diversity of entrepreneurial activity (Anderson and Huggins, 2008). This radical
turn in long-term effects is expressed in the following manner:
Proposition 3: In the long-term, environmental policies that intentionally or unintentionally support
path dependent technologies, organizational forms or business models will decrease the quantity and
beneficial impact of environmental entrepreneurship.
Intergenerational Fairness
The model for Propositions 2 and 3 (Figure 2) posits a theoretical threshold for sustain-
able existence. Although the threshold is fixed in this illustration, it would be expected
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to vary markedly over time as a function of numerous foreseeable (e.g., population den-
sity) and unforeseeable (e.g., natural cataclysms) factors. For the sake of simplicity, two
path-dependent conditions are considered. Both have the aim of arresting environmen-
tal degradation. The first, a policy-based condition, relies on policy actions to determine
the development and diffusion of environmental technologies. The second, a market-
based condition, relies on market-pricing mechanisms. Although both conditions are
curvilinear, the policy-based condition is significantly steeper than the market-based
condition, indicating our prediction that in the short-term sustainability aims are
addressed more expeditiously when policies are used as the primary mechanism to arrest
environmental degradation. However, in the long run we predict that the two conditions
will intersect, indicating that over time the policy-based condition will generate less
cumulative progress than the market-based condition.
The base case presented in Figure 2 predicts that a policy-based approach ultimately
will be less effective in attaining sustainability. If correct, this has significant ethical
implications with respect to intergenerational fairness (Barrett, 1996; Weiss, 1990).
Enigmatically, concerted attempts to implement fairness-based policies may result in less
intergenerational fairness. Our fourth proposition integrates sustainability, ethics and
entrepreneurship on this important point:
Proposition 4: In the long-term, policies that subsidize environmentally sound goods and services or
tax environmentally unsound goods and services will underperform free-market entrepreneurial activ-
ity in making progress towards intergenerational fairness.
Figure 2. Path dependent effects. In the near-term, subsidies and taxes will be more effective in arresting
environmental degradation than a market-based approach. Longer term, however, the policy-based
approach under-performs markets due to less flexibility and fewer technological and organizational
innovations
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RESEARCH DESIGN
Crowding out effects are notoriously difficult to investigate because doing so involves the
quantification of non-occurrence (Gordon and Hayward, 1968). Since it is impossible to
directly measure non-occurrence – innovations that are materially delayed or permanently
undeveloped – one way to constructively engage the topic is through a stochastic computa-
tional model, which simulates the dynamic interplay between societal needs, institutional
policies, prospective entrepreneurs and the ethical imperatives of intergenerational fairness.
Methodologically, simulations have been shown to provide valuable complementary insights
when purely conceptual or empirical work is insufficient (Markman et al., 2015). They are
ideal when focal relationships are weakly understood, yet the underlying theory regarding a
phenomenon is sufficiently developed to design a simulation model that displays internal
validity and lends itself to experimental rigor (Davis et al., 2007; Zott, 2003). Prior uses of
simulations have demonstrated their applicability to circumstances involving non-linearities
(Carroll and Burton, 2000; Rudolph and Repenning, 2002), elusive empirical data (Davis
et al., 2007), and the intricacies of environmental modelling (Popp, 2006).
Simulation Framing
By their very nature, simulation models are only approximations of reality since they
are built upon an array of probabilities that must be justified with respect to the past,
present and future. Our model consists of a series of probability distributions that are
applied to the cross product of two matrices (Gordon and Hayward, 1968); one repre-
senting individual environmental entrepreneurs and the other representing the environ-
mental entrepreneurship context. Through this, an indexed score was assigned to each
entrepreneur (Appendix) that was then used to determine the occurrence or non-
occurrence of five successive environmental entrepreneurship activities: firm formation,
market entry, marketable innovation, ongoing operations and exit.
In order to identify and assess the underlying mechanisms relating entrepreneurial
action to policy action, our model employed a comprehensive accounting of contextual
factors that are likely to be influenced by policies. The burgeoning study of entrepre-
neurial environments offers an array of perspectives and frameworks (e.g.,
Acs, 2008;
Bruton et al., 2010), assessing the impact of policy actions on entrepreneurship (e.g.,
Levie and Autio, 2011; McMullen, 2011; North, 2005) and the social welfare gains
accrued from entrepreneurial action (e.g., Zahra and Wright, 2015). For our purposes,
a useful framework needed to facilitate three research aims: (i) simultaneous considera-
tion of policy-based and market-based conditions; (ii) conceptual integration of sustain-
ability, entrepreneurship and ethics; and, (iii) identification and assessment of the
underlying mechanisms that may be related to crowding out, path dependence, non-
occurrence and material delay. Given these constraints, the frameworks derived from
most prior scholarship lacked sufficient breadth in order to provide omnibus coverage of
entrepreneurial environments while still being sufficiently detailed to facilitate an explo-
ration of specific mechanisms. Of the extant frameworks that were considered, only
Baumol, et al. (2009) serviced all three research aims.
At the centre of Baumol et al. are the ‘entrepreneurship pillars’, key facets that are
required for a vibrant entrepreneurial environment: (i) ease of starting and expanding a
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business; (ii) rewards for productive entrepreneurship; (iii) disincentives for unproductive
entrepreneurship; and, (iv) incentives to keep the winners on their toes. In adapting this
framework, we made one important modification, consisting of a splitting of the two ele-
ments contained in Pillar 1. The environmental factors influencing starting and expand-
ing a venture can be one and the same, but that is not the norm. For example,
differences in bankruptcy laws impact business foundings differently from ongoing busi-
ness operations (Armour and Cumming, 2008). Bifurcating the elements in Pillar 1
leaves us with five distinct categories that we operationalize in our analysis.
Simulation Structure
Given the data and design constraints associated with non-occurrence, we built the
model and conducted the analysis using Monte Carlo simulation experiments with sto-
chastic process modelling. Our model included three dimensions: environmental policy,
entrepreneurial support pillars and the propensity by entrepreneurs to develop and mar-
ket breakthrough innovations. In the Monte Carlo approach, each experiment is a simu-
lation with fixed and variable parameter settings that is run multiple times (Law and
Kelton, 1991). The results are then averaged and confidence intervals calculated (Kalos
and Whitlock, 1986). Thus, for any given experiment, the result is the mean perform-
ance over multiple runs. Stochastic process modelling allowed us to test multiple struc-
tures (Davis et al., 2007, 2009). Each experiment consisted of 50 runs, which
represented the upper limit for improvements in precision. Each period in the simula-
tion represented 1 year. Durations ranged from 10 to 250 years. Each experiment began
with 1,000 entrepreneurs, who continued or exited based on matrix cross-products
described below. For each additional year of the simulation, 1,000 new entrepreneurs
were added at the beginning of the year. Additional detail on the entrepreneur and con-
text coding is provided in Appendix.
Operationalizing Baumol, Litan and Schramm’s Entrepreneurship Pillars
As noted above, we did make one major modification to the Baumol et al. framework
by splitting Pillar 1 – ‘Ease of Starting and Expanding a Business’ – into two separate
categories. To distinguish Baumol et al.’s original 4 Pillars from our modified categories,
we refer to our categories as ‘Elements’. Sensitivity analyses comparing models based on
the original four ‘Pillars’ with our modified five ‘Elements’ revealed that use of the Bau-
mol et al.’s original formulation would dramatically reduce entrepreneurial activity in
the policy-based condition. For accuracy and conservatism, we conducted our investiga-
tion using the bifurcation.
In order to operationalize each of the 5 Elements, we called upon empirical data
from extant literature to develop five ‘factors’, each of which is an arithmetic expression
of a key mechanism underlying each of the 5 Elements. As detailed in Appendix, the first
four factors for each Element consists of a probability distribution related to a key driver
of that factor. For the fifth factor, the state (i.e., 00, 01/10 or 11) is randomly assigned
with equal probability.
Since the Pillars were not specifically focused on environmental issues, we sought to
cast each of the 5 Elements in terms of how the factors would impact entrance, survival
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and innovation in the Cleantech sector, which consists of firms that sell products, serv-
ices and processes intended to provide superior performance at lower cost, while greatly
reducing or eliminating negative ecological impact and at the same time improving the
productive and responsible use of natural resources (Cleantech Group, 2014). The base
case probabilities for each factor reflect the extent to which the factor is a weak, moder-
ate or strong determinant in favourably influencing entrepreneurial activity. The base
case probability and associated coding is displayed in Table I.
RESULTS
The purpose of this inquiry is to address the question of how the aims of intergenera-
tional fairness are best achieved. Although extant scholarship suggests that both public
policy and entrepreneurial innovation are indispensable facets of sustainable existence,
no prior research has investigated the long-term interaction between the two forces.
Our inquiry drew us to two questions: First, do even well intended environmental poli-
cies, involving subsidies or taxes, crowd out entrepreneurial activity that might otherwise
occur? Second, if crowding out does occur, would the path dependent nature of innova-
tive technologies hinder or help societal efforts to achieve intergenerational fairness
through sustainability? To address these questions, we advanced four propositions,
tested over very long periods of time using a computer simulation.
In total, we ran more than 500 simulations, for periods ranging from 10 to 250 years.
Since the focus of our research involved an attempt to quantify material delay or non-
occurrence of potentially beneficial entrepreneurial activities, the analytical cornerstone
of our research design consisted of head-to-head comparisons of scenarios involving
market-based and policy-based conditions. Accordingly, our reporting of the results in
this paper is comprised of a series of graphs that are intended to display the critical areas
in which our theory successfully or unsuccessfully found support. For the sake of com-
prehensibility and consistent reporting, all the data was standardized and indexed, rang-
ing from 0 to 1, so that the year-to-year fluctuations of each dimension can be studied
over time in a comparable fashion.
Overall, the results show strong support for our core premises: environmental policies
elicit an immediate escalation of favourable environmental outcomes, benefits that
decline over time due to the combined effects of crowding out and path dependence.
This suggests a sharp disjunction between short-term optima and long-term optima.
Along virtually every dimension we analysed, policy-based subsidies for environmentally
desirable products or taxes on environmentally undesirable products are both associated
with heightened near-term entrepreneurial activity (e.g., Figures (3 and 4) and 8). Since,
however, this activity arises as a consequence of massive investments in existing technol-
ogies (Figures 8 and 11), there are longer term effects that gradually erode the policy
benefits, before erasing the benefits of subsidies and taxes altogether (Figures 9 and 12).
Consistent with prior literature comparing the relative impacts of subsidies and taxes
(Jaffe et al., 2003) our simulation results reveal that taxes on undesirable products result
in more long-term innovation than subsidies for environmentally desirable products
(Figures 10). This finding led us to modify the analysis and report subsidy effects sepa-
rately from tax effects. Differences between taxes and subsidies are likely related to the
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Table I. Operationalization of the entrepreneurship pillars (Baumol et al., 2009)
Element 1: The Ease of Starting a Business
Base Case Distribution
Factor Sources 0-0 0-1/1-0 1-1
1. Returns to
Imitation
Baumol, 1993, 2006; Enkle and
Gassmann, 2010; Meisenzahl and
Mokyr, 2009; Schmitz, 1989
P: 15% P: 30% P: 55%
M: 35% M: 50% M: 15%
2. Returns to
Innovation
Akcigit et al., 2013; Bessen and
Maskin, 2009; Green and
Scotchmer, 1995; Rumelt, 1984
P: 60% P: 35% P: 5%
M: 40% M: 40% M: 20%
3. Property Rights Alston and Mueller, 2005; Anderson
and McChesney, 2003; Grossman
and Hart, 1986; Johnson et al.,
2002
P: 40% P: 40% P: 20%
M: 10% M: 50% M: 40%
4. Regulatory
Climate for SMEs
(e.g., bankruptcy
and healthcare
laws)
Anderson and Leal, 2001; Baumol
et al., 2009; Kerr and Nanda, 2009;
PERC, 2014; Storey, 2003;Van Stel
et al., 2007
P: 20% P: 30% P: 50%
M: 40% M: 40% M: 20%
5. Random Effects N/A P&M: 33.3% P&M: 33.3% P&M: 33.3%
Element 2: The Ease of Expanding a Business
Base Case Distribution
Factor Sources 0-0 0-1/1-0 1-1
1. Market
Concentration
Carroll, 1985; Cleantech, 2014;
Rumelt, 1984; Shaked and Sut-
ton, 1983
P: 40% P: 40% P: 20%
M: 50% M: 40% M: 10%
2. Interest Rate and
Financial
Environment
Black and Strahan, 2002; NFIB,
2015; Shane, 1996
P: 20% P: 35% P: 45%
M: 50% M: 30% M: 20%
3. Addressable Mar-
ket for Novel
Innovations
Akcigit et al., 2013; Bessen and
Maskin, 2009; Green and
Scotchmer, 2008
P: 60% P: 30% P: 10%
M: 30% M: 40% M: 30%
4. Addressable Mar-
ket for Incremen-
tal Innovations
Baumol, 2006; Brynjolfsson et al.,
2006; Meisenzahl and Mokyr,
2010
P: 10% P: 30% P: 60%
M: 50% M: 30% M: 20%
5. Random Effects N/A P&M: 33.3% P&M: 33.3% P&M: 33.3%
Element 3: Rewards for Productive Environmental Entrepreneurship
Base Case Distribution
Factor Sources 0-0 0-1/1-0 1-1
1. Appropriability of
rents for incremental
innovations
Baumol, 2006; Hunt,
2013; Meisenzahl and
Mokyr, 2010
P: 15% P: 30% P: 55%
M: 60% M: 30% M: 10%
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Table I. Continued
Element 3: Rewards for Productive Environmental Entrepreneurship
Base Case Distribution
Factor Sources 0-0 0-1/1-0 1-1
2. Appropriability of
rents for novel
breakthroughs
Akcigit et al., 2013; Bessen
and Maskin, 2009; Green
and Scotchmer, 1995
P: 70% P: 25% P: 5%
M: 40% M: 40% M: 20%
3. VC Cleantech
Funding
NVCA, 2015 P: 30% P: 50% P: 20%
M: 20% M: 50% M: 30%
4. IPOs for Cleantech
Firms
NVCA, 2015;
Cleantech, 2014
P: 60% P: 30% P: 10%
M: 10% M: 40% M: 50%
5. Random Effects N/A P&M: 33.3% P&M: 33.3% P&M: 33.3%
Element 4: Disincentives for Unproductive Environmental Entrepreneurship
Base Case Distribution
Factor Sources 0-0 0-1/1-0 1-1
1. Oligopolistic Mar-
ket Control
Kirzner, 1978; Rumelt,
1984; Shaked and
Sutton, 1983
P: 15% P: 40% P: 45%
M: 30% M: 50% M: 20%
2. Restrictive Patent-
ing Laws
Moser, 2003, 2013; Park,
2008; Penrose, 1973;
Sakakibara and Bran-
stetter, 2001
P: 40% P: 35% P: 25%
M:30% M: 30% M: 40%
3. Anti-Fraud and
Corruption
Regime
Acemoglu and Verdier,
1998; Aidt, 2003;
Anokhin and Schulze,
2009; Baumol, 1996
P: 20% P: 40% P: 40%
M: 10% M: 40% M: 50%
4. Legal
Environment
Alston and Mueller, 2005;
Baumol, 1990, 1996;
Compustat Data
P: 60% P: 30% P: 10%
M: 30% M: 40% M: 30%
5. Random Effects N/A P&M: 33.3% P&M: 33.3% P&M: 33.3%
Element 5: Keeping Incumbents on Their Toes
Base case distribution
Factor Sources 0-0 0-1/1-0 1-1
1. Cross-Border Pat-
ent Recognition
Macedo, 1990; Moser,
2003, 2013; Park, 2008;
Penrose, 1973
P: 55% P: 35% P: 10%
M: 20% M: 30% M: 50%
2. Incentives to
incumbents
Kent and Meyers, 2001;
Popp, 2005, 2006; Por-
ter and Van der Linde,
1995
P: 40% P: 35% P: 25%
M: 70% M: 25% M: 5%
P: 60% P: 30% P: 10%
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fact that taxes increase the cost structure of product manufacturers and service pro-
viders, creating an incentive to reduce that cost through targeted innovations. This is
tantamount to leaving the entrepreneurial rents at least partially intact. The finding also
provides support for work by Dean and McMullen (2007) and Popp (2010), predicting
that policies specifying favoured technologies are likely to underperform policies that
create new incentives, while keeping market forces intact. While taxes are preferable to
subsidies, they too underperform market mechanisms long term (Figure 10).
Firm Formation and Market Entry
Our theory predicted that, in the long run, environmental policies crowd out or materi-
ally delay beneficial entrepreneurial activity that would otherwise have occurred in the
absence of government-mandated subsidies or taxes. However, we noted that the oppo-
site is likely to occur in the short-term. As indicated in Figures 3 and 4, the market-
based scenario exhibits far fewer firm formations and market entries in the first decade.
This is supportive of Proposition 2.
Table I. Continued
Element 5: Keeping Incumbents on Their Toes
Base case distribution
Factor Sources 0-0 0-1/1-0 1-1
3. R&D as % of
GDP
NSF Data; Compustat
Data; PhRMA Data
M: 10% M: 40% M: 50%
4. New Tech Speed
to Market
Bayus, 1997; Benner and
Tushman, 2003; Fang,
2008; Tripsas and Gav-
etti, 2000; Schoonhoven
et al., 1990
P: 60% P: 30% P: 10%
M: 10% M: 40% M: 50%
5. Random Effects N/A P&M: 33.3% P&M: 33.3% P&M: 33.3%
Figure 3. Firm formation comparison: Policy vs. market-based conditions
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While year-over-year simulation results in Figures 3 and 4 display a rapid reaction to
the implementation of new policies, Figure 5 demonstrates that this surge in firm forma-
tions and market entries is almost exclusively due to subsidies. It appears that taxes
designed to discourage environmentally undesirable behaviours and products are far
slower to elicit firm formations and market entries. Meanwhile, subsidies – especially
those intended to accelerate the scaling of extant technologies – generate immediate
responses from individuals and organizations intent on aiming to capitalize on the
favourable economic treatment that accompanies subsidy-focused policies (Figure 6).
The reason for this is likely related to the ways in which an entrepreneur would profit
from creating ways to exploit a subsidy versus avoiding a tax. Subsidies are more imme-
diately responsive to addressable market mechanisms because they tend to leverage the
roll out of extant technologies. Meanwhile, the returns to incremental innovation
derived through taxes are slower to form than the rollout of existing, subsidized prod-
ucts. However, taxes generate a larger number of innovations since tax avoidance
requires the development of new resources, processes or technical solutions. This
dynamic is investigated further in Figure 10.
Figure 4. Market entry comparison – policy vs. market-based conditions
Figure 5. Firm formations: subsidies versus taxes
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Although new firm formations and market entries are heightened short-term through pol-
icy action, the relative benefits of entrepreneurial action via a market-based approach to
environmental degradation begin to reverse after 10 years, post-implementation. This rever-
sal is consistent with prior research demonstrating that, at least initially, more proximal and
accessible opportunities will be preferred over those deemed to be riskier and more distant
(Benner and Tushman, 2003; Dosi, 1982; Jaffe et al., 2003; Popp, 2010). Longer term, how-
ever, the advantages are less clear. While the policy-based scenario eventually trends towards
oligopolistic industry structures, characterized by a small cluster of cost-conscious firms
(Baumol and Oates, 1988; Dosi, 1982; Popp, 2010), the market-based solution exhibits a
growing population of new firms (Figures 3 and 4).
Operational Longevity
From the outset, market-based conditions result in greater longevity of entrepreneurial
ventures than that observed under policy-based conditions (Figure 7).
Part of this finding is due to the stampede of short-lived, unfit firms in the policy
condition, reflecting over-optimism to munificent environmental conditions (Barnett,
Figure 6. Market entry: Subsidies versus taxes
Figure 7. Comparison of firm longevity: Policy vs. market-based conditions
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et al., 2003; Swaminathan, 1996), particularly those arising from more favourable
institutional policies (Hunt, 2015). The lower survival rates under policy-based con-
ditions arise due to cutthroat competition to cheaply replicate existing technologies.
The key mechanism associated with the divergence in firm fate across the policy-
based and market-based conditions appears to be the paucity of technical differen-
tiation associated with the policy-based condition. This mechanism embodies the
tendency of under-differentiated sectors to drift towards oligopolies, as Dosi (1982)
predicted. Conversely, market-based conditions provide incentives to develop alter-
native paradigms, since entrepreneurial rents will accrue to the innovators of break-
through, differentiable technologies.
Innovation
Our theory predicts that environmental policies tend to crowd out innovations that
would otherwise occur under market-based conditions because a policy-based approach
creates near-term incentives to implement existing technologies and this has an adverse
long-term impact on the incentives to develop and market innovative breakthroughs.
Since the processes of technical and organizational innovation are path dependent, poli-
cies that place non-competitive technologies and organizational forms financially on par
with radical breakthroughs may foreclose upon future innovations. If true, then the sim-
ulation results should exhibit more numerous and impactful innovations emanating
from market-based conditions than policy-based conditions, and the innovation gap
should increase over time.
As the results in Figure 8 reveal, the central premise of our theory finds support on
these points. Initially, there are more innovations under the policy-based condition,
post-policy implementation. But this relationship reverses between years 15 and 20 of
the simulation.
It appears that the decisive mechanisms governing firm formation and market entry
shift from conditions favouring returns to imitation to conditions favouring returns to
innovation. As the Baumol et al. taxonomy suggests (Table I), mechanisms that draw
out rapid firm formation and market entry may differ from the mechanisms that
Figure 8. Innovations 250-year horizon: Policy vs. market-based conditions
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generate rewards for ongoing productivity, most notably the ability of a market partici-
pant to appropriate rents from novel breakthroughs. Since subsidies favours imitation,
technical differentiation fails to fully develop and returns to innovation are not rewarded
in the marketplace, causing a reversal that becomes more and more pronounced over
time, as indicated in Figure 9.
This initial surge is due almost entirely to the effect of policies in which taxes are insti-
tuted. As Figure 10 reveals, subsidy-focused policies have little impact on innovation,
which is consistent with the earlier finding that entrepreneurs will primarily enter the
market to sell existing products that receive favourable treatment under subsidy pro-
grammes. Conversely, taxes appear to foster an early wave of innovations in a cost-
driven attempt to engineer around the tax assessment.
Intergenerational Fairness
As the foregoing results demonstrate, significant differences in new firm formations,
market entries and innovations arise over very long periods of time. The question is: Are
these differences consequential to the aims of intergenerational fairness? Since there is
no fixed unit of measurement for the attainment or non-attainment of sustainable
Figure 9. Innovations 2100-year horizon: Policy vs. market-based conditions
Figure 10. Innovations: Subsidies versus taxes with a 100-year horizon
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development, it is impossible to conduct a long-term empirical comparison between
policy-based and market-based approaches to the reversal of environmental degrada-
tion. However, it may be possible to use a proxy for progress towards intergenerational
fairness, such as carbon neutrality. Environmental economists maintain that the scope
of global carbon neutrality is likely to require many generations of innovation, including
new technical paradigms that are yet to be conceived (Popp, 2005; Popp et al., 2010;
Porter and Van der Linde, 1995). The combination of long timeframes, path depend-
ence and the essentiality of technical innovations, makes carbon neutrality an interesting
test for our simulation model. Combining carbon calculation mechanisms synthesized
from seven different sources by Wiedmann and Minx (2008) - including, the Carbon
Trust, ETAP, Global Footprint Network and Parliamentary Office of Science and
Technology – we have recast the theoretical model presented in Figure 2 to focus on
carbon neutrality.
The results of a 50-year (Figure 11) and a 250-year (Figure 12) simulation are shown
below. Three scenarios are modelled: a policy-based response using subsidies, a policy-
based response using taxes, and a market-based response that excludes any form of
Figure 12. Comparative progressions toward carbon neutrality: 250-year horizon
Figure 11. Comparative progressions toward carbon neutrality: 50-year horizon
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government policy. Both figures display the results under the assumption that neither of
the other two scenarios operates concurrently. Each of the three lines represents an
exclusive condition, whereby the other two conditions are excluded for a given simula-
tion. In reality, various combinations of the three can and do exist, and we conducted
some testing of hybrid conditions to see if new minimums or maximums could be
achieved that would move the outer boundaries of the simulation outcomes. None of
the hybrid conditions that we tested resulted in a higher maximum or lower minimum
than the thresholds captured through use of the three conditions.
The initial conclusion one would draw from Figure 11 is that subsidies reliably
deliver a predictable and immediate impact. However, the immediate results do not
reflect longer-term effects because eventually tax-based environmental protections
provide a stronger, more sustained payback, thereby eclipsing the advantage that
subsidies display in the first five years. Environmental policy decisions that focus
only on the initial years post-implementation are likely to err in expecting subsidies
to continue to generate improvements. In fact, our model actually shows a reduc-
tion in the effectiveness of subsidies after the 15-year mark. While limits are appa-
rent in the tax-based condition, as well, a far more severe technological ‘lock in’
(Arthur, 1989) occurs with subsidies; so much so that they cannot keep pace with
population growth.
Also conspicuous in the 50-year carbon neutrality comparison is the slow pace of
environmental impact that occurs in the case of a market-based response to environ-
mental degradation. The longer ramp-up stems from its reliance upon the diffusion of
competing innovations. The comparative attractiveness of policy-based responses is
manifested in the generation of early results – and this is exactly the challenge, as well.
As Figure 12 shows, when the simulation is run for 250 years, a market-based approach
eclipses tax-based policies shortly after the 50-year mark, with the difference steadily
increasing until neutrality is achieved in approximately 225 years. The longer time-
frames reveal an unpromising fate for policy actions.
Considered from the perspective of material delay or non-occurrence, policy-based
approaches to environmental degradation reduce innovations that would have otherwise
emerged in a market-based approach. The impact 50 years post-implementation is a 26
per cent reduction in innovation, and 100 years post-implementation is a 41 per cent
reduction. By unwittingly crowding out environmental entrepreneurs, well-intended
policies that employ subsidies forestall innovation to such an extent that 225 years post-
implementation – the point at which a market-based approach would have established
sustainability – subsidies lag the market-based approach by 95 per cent (Figure 12). In
this sense, and in support of Proposition 4, market-based entrepreneurial innovation dis-
plays a marked advantage over policy actions in the achievement of intergenerational
fairness.
Robustness: Sensitivity Analysis of the Simulation Structure, Content and
Results
The core requirement of any simulation model is that it is not susceptible to small
changes in the underlying assumptions. This risk necessitates rigorous sensitivity analysis.
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To ensure the conservatism of the base case probability distributions we tested more
than 1,200 permutations of the environmental context matrix (i.e., 10 tests each for 24
stochastic values, for each of the five model elements). The results of this analysis con-
firmed that any other set of probabilities would result in stronger support for the four
propositions. Additionally, we conducted sensitivity analysis for each model dimension
that is based on uniform distribution assumptions, for which there are three: the annual
entry rate of entrepreneurs, the milestone critical thresholds (see Appendix), and the
proportion of financially versus intrinsically motivated entrepreneurs (see ‘Implications
for Environmental Entrepreneurs’ below). In each case, any deviation from the base
case distributions strengthens our findings. Conservatism thus dictated reporting on
results drawn from the base case distributions.
Since there are randomly assigned components to each of the bit strings that form the
entrepreneur and contextual matrices in our model, there is an inherent variability to
the outcomes for each experiment. Applying standard protocols for Monte Carlo analy-
sis (Law and Kelton, 1991), we conducted multiple runs (n 550) of each experiment
and took the mean value for each series. Given that the mean values derived from any
observations of simulated or empirical stochastic processes display variability in error
variances, this facet was assessed with respect to the associated confidence intervals (Law
and Kelton, 1991). Following the procedures of Davis et al. (2009), we subjected these
error variances to robustness tests in which the square root of the variance of each
experiment is compared to the array of simulation runs. The results of this analysis pro-
vided ample statistical support that the results we obtained can be summarized as fol-
lows: they are not a consequence of chance; they are statistically different from the null
hypothesis; additional simulation runs would not result in statistically distinguishable
outcomes; and, there is no evidence that the underlying error variances either com-
pound or cancel out in a fashion that would invalidate our conclusions.
DISCUSSION
The complex nexus of sustainability, ethics and entrepreneurship is wracked with puz-
zles and contradictions. That which is beneficial short-term, may be costly long-term.
Our proposed framework does not resolve all of these issues, but it does offer the analyti-
cal means to assess the tradeoffs that impact intergenerational fairness. These findings
have significant implications for scholars, policymakers and entrepreneurs.
Shakespeare (1602) wrote, ‘It is better to be 3 hours early than 1 minute late’. Escalat-
ing concerns about the steep costs and diminished quality of life that may befall future
generations under a regime of market-based mechanisms (e.g., Klein, 2015) has led
some scholars to call for immediate, enforceable international measures to curtail green-
house gas emissions and other environmentally undesirable outputs (e.g., Van den
Bergh, 2004; Weiss, 1990). Given these heightened concerns, the urgent appeal for deci-
sive policy actions is a rational response to the possibility that time is running out for the
implementation of steps that ensure intergenerational fairness. The fear is that we may
be too late. However, the results of the foregoing analysis suggest that attempts to
address environmental degradation primarily through policy measures amount to show-
ing up on time, but with an ineffective set of tools for the attainment of intergenerational
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fairness because, in the long run, subsidies and taxes reduce intellectual diversity, limit
competition and stunt the development of innovative solution sets.
We find that even well-intended efforts to forestall environmental degradation
through subsidies and taxes ultimately crowd out entrepreneurial innovations that are
critical to the achievement of sustainable human existence by unintentionally throttling
technological progress and organizational innovations that are decisive to the achieve-
ment of sustainable existence.
Implications for Research
Our study presents challenges and opportunities for scholars ranging across diverse
fields. First and foremost, the findings demonstrate that time-variant effects are indispen-
sable determinants of whether or not sustainability is attained. The centrality of time to
the relationships formed through the nexus of sustainability, ethics and entrepreneurship
requires that useful frameworks must be able to define, assess and predict both intended
and unintended outcomes. Taking into account the complex interactions between envi-
ronmental policies and entrepreneurial environments, examined over long expanses of
time, our framework offers the first unified treatment of crowding out and path depend-
ence as they pertain to environmental entrepreneurship. By combining these related
effects, our study clarifies the long-term issues that characterize the reciprocating influ-
ences between public policy initiatives and environmental entrepreneurship.
Prior studies on crowding out effects have examined a wide range of contexts,
(Abrams and Schitz, 1978; Czarnitzki and Fier, 2002; Wallsten, 2001), but none to date
has investigated the inter-play between environmental policy and environmental entre-
preneurship, and none prior to this study has explicitly undertaken a conjoint analysis of
crowding out and path dependence. The results of our simulation suggest that it is
important to do so. We found that government sustainability policies are inherently
non-neutral, meaning that subsidies and taxes crowd out market participants who pos-
sess the capacity to add value. In this sense, well-intended environmental policies imper-
fectly substitute for the activities of environmental entrepreneurs, causing new
technologies and organizations to be lost or materially delayed.
In light of our findings, future studies should examine the conditions under which
entrepreneurs are more or less dramatically impacted by specific policy measures. Lev-
eraging the framework we have developed, it would be productive to ask: Is it possible
for public policies to serve as a sort of ‘placeholder’ while technological and organiza-
tional innovations are developed? If not, how might societies recover from the adverse
effects of technological and organizational lock-in? Are there ways to minimize path
dependent impacts by simultaneously supporting scaling efforts and nourishing a diver-
sity of emergent solution sets? If so, what are the micro-mechanisms that would enable
the coexistence of policy aims and entrepreneurial action? Are there public-private
hybrid solutions that leave value-enhancing environmental entrepreneurship intact?
A number of boundary conditions apply to the scope of our inquiry, each of which
offers compelling opportunities for future research. First, our focus is on new and small
market entrants since our goal is to examine the complete lifecycle of entrepreneurial
action, from ideation to exit. However, corporate entrepreneurship is instrumental to
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sustainability and it would be useful to explore the extent to which findings from that
context parallel those from our study. Second, our design focuses on policy-dominant
and market-dominant conditions, for which we assume that there are significant costs
associated with attempts to migrate across technology paradigms. This approach may
not fully account for the potential spillover effects in hybrid conditions. Future research
may wish to examine whether crowding out and path dependence are neutralized by
spillover benefits that might materialize in hybrid conditions. Third, our model is con-
structed to identify the non-occurrence and material delay of entrepreneurial innova-
tions; however, we are not able to quantitatively assess a ‘better late than never’
condition. While material delay is intuitively preferable to non-occurrence, we are
unable to measure the exact difference computationally. Finally, our study is bounded
by the ‘zero-profit’ assumption of policy interventions that arise when policies situate
average, existing technologies on equal economic footing with novel breakthroughs
(Figure 1). Our approach does not invalidate the possible presence of partial conditions,
involving both policies and market forces; indeed, that is usually the case in reality.
However, the quantification of partial non-occurrence remains a future research oppor-
tunity, to which our study’s findings can be compared and contrasted.
Implications for Policymakers
From a policymaker’s perspective, our investigation poses challenges and opportunities.
Given the highly charged nature of sustainability concerns, a ‘wait and see’ approach is
unlikely to be a viable option. To this, we offer two observations. First, policies that
have a low impact on the entrepreneurial environment are preferable to those with a
high impact. Not all five Elements exert equal influence on the quantity and quality of
entrepreneurial activity. Table II provides a capsule of the variance attributable to each
Element. As Table II reveals, 40 per cent of the performance variance between markets
and policies is attributable to Element 3, ‘rewards for productive entrepreneurship’.
This means that reductions in an entrepreneur’s ability to profit from innovation is the
primary driver of crowding out effects. Policymakers can best minimize the adverse
impact of policy on innovation by avoiding measures that significantly reduce the
returns to innovation.
A second facet for policymakers to consider is that direct support for diversified inno-
vation is better long-term than support for the scaling of existing technologies. As
Spulber noted (2014), under conditions of dynamic technological change, it is unlikely
that a single, specified invention is capable of servicing the evolving requirements of an
entire market on an ongoing basis. Given this, policy incentives to discover new technol-
ogies, such as R&D subsidies, may be a better way to broaden the array of competing
solution sets in response to environmental degradation. However, subsidies that are
designed to expedite mass scaling of incumbent technologies, dissociate inventions from
the seller’s true costs and the buyer’s true willingness to pay. This, in turn, influences the
economic decisions of innovators, producers, investors, and consumers (Hayek, 1945;
Spulber, 2014) by rewarding scale over innovation. Given this, intergenerational fairness
may best be served when policies spur innovation, rather than subsidize of scaling
efforts.
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Implications for Environmental Entrepreneurs
Individuals self-selecting to the challenges of developing private-sector solutions to
environmental degradation do so for some combination of financial and non-
financial reasons (Wry and York, 2015). Regardless of an entrepreneur’s personal
motives, the same questions are relevant: What is the fate of each entrepreneur’s
organization? What becomes of their innovations? Is sustainability best left to social
entrepreneurs who are driven by intrinsic aims?
One of the key assumptions of our baseline model is that the role of financial
and non-financial motivators in eliciting and sustaining environmental entrepreneur-
ship is evenly distributed across the spectrum from purely financial to purely intrin-
sic (Figure 1). That is, there is an equal chance that an environmental entrepreneur
will be motivated by financial considerations or intrinsic factors, such as social con-
cerns, ethical imperatives, intellectual enjoyment or simple curiosity. It is reasonable
to question whether the uniform distribution assumption is an accurate representa-
tion of reality. In all likelihood it is not. Numerous scholars and social
Table II. Relative predictive role of entrepreneurship pillars (from Baumol et al., 2009)
Element Observed impact in the simulated model
Attributable long-term variance
between market and policy-
based conditions
1. Ease of starting a
business
Subsidies initially offered socio-political and
cognitive legitimacy to new ventures
(Aldrich and Fiol, 1994), but this created a
contagion-like effect that invited entry.
Simulated firm formations and market
entries steadily grew in the market-based
condition, but repeatedly ebbed and flowed
in the policy-based condition.
17%
2. Ease of expanding a
business
Lifespans in the policy-based conditions of
the simulation were far shorter, reflecting
the difficulties seen in contagion-style entry
of unfit firms (Hunt, 2015). The advanta-
geous status becomes a liability.
7%
3. Rewards for productive
entrepreneurship
Policy-based approaches in the simulation
eroded the value of breakthrough technolo-
gies and impinged upon entrepreneurial
rents.
40%
4. Disincentives for
unproductive
entrepreneurship
Policy-based approaches, especially those
using subsidies, created incentives rather
than disincentives for short-term actions,
and were characterized by protections for
below-average solutions.
12%
5. Incentives to keep the
winners on their toes
Subsidy and tax-based approaches reduced
the array of scalable competing technolo-
gies, causing a more rapid move towards
oligopolistic conditions.
24%
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commentators have noted the importance of personal, moral, ethical and socio-
cultural drivers of social, cultural, institutional and environmental entrepreneurship
(e.g., Conger, York and Wry, 2012; Gao and Bansal, 2013; Wry and York, 2015).
Therefore, in order to ensure that our findings are robust to these concerns, we
conducted experiments with scenarios that tilted the motivational spectrum heavily
towards intrinsic forces, meaning that environmental entrepreneurs would be far less
likely to abandon entrepreneurial activity due to financial considerations.
Unlike the baseline model, which assumes uniform, 50:50 distribution, a 75:25
tilt towards intrinsic motivators, means that only 250 of the 1,000 new market
entrants each year would make decisions with any consideration to profits. Overall,
we ran the model 50 times, for periods of up to 250 years, using an intrinsic bias
of various thresholds, ranging between 60 per cent and 100 per cent. Increasing
the weighted percentage of intrinsic motivation did in fact increase firm formations,
market entry decisions and the total innovations produced. However, the increase
in innovations among intrinsically motivated entrepreneurs was greater in the
market-based condition than it was in the policy-based condition. For example, the
75 per cent threshold drove a 30 per cent increase in innovations in the market-
based condition and only a 4 per cent increase in innovation in the policy-based
condition.
This means that even entrepreneurs who are intrinsically motivated are substantially
better off without taxes and subsidies. Consistent with the perspectives of Spulber (2014)
discussed above, government-sponsored support for an existing technology leads to lock-
in, which creates steep switching costs for breakthrough alternatives, regardless of
whether the innovation is generated by a financially motivated or intrinsically motivated
entrepreneur.
Policies, Innovation and the Search for Intergenerational Fairness
The ethical imperatives of intergenerational fairness are not confined to environ-
mental issues. Other issues – sovereign debt, the acts and outcomes of warfare,
access to and quality of educational opportunities, and the adequacy of ongoing
infrastructural investments – are also germane to attaining and maintaining a qual-
ity existence. It is, however, in the consumption of finite resources that the commit-
ment of contemporary peoples to the fate of future peoples is most rigorously put
to the test (Gore, 2006). Gao and Bansal (2013) asserted that key to sustainability is
the migration by firms from the use of instrumental logics, which involve sequential
decision-making that aim to minimize the impact of sustainability costs, to integra-
tive logics, which embraces the mutual aims of economic, social and environmental
well-being. Through an integrated perspective, Gao and Bansal envisioned the
enactment of sustainability programmes. This is an interesting notion that should be
tested in the context of entrepreneurship.
If this Special Issue only sought to examine sustainability and business ethics, then
it is likely that the Gao-Bansal formulation would suffice. That is, large, globally
operating firms can and should be held accountable for environmental degradation
and the instrumental logic that perpetuates it. However, with the inclusion of
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entrepreneurship, the adequacy of an instrumental versus integrative rubric is called
into question. While subsidies and taxes aim to achieve intergenerational fairness by
supporting extant technological and organizational paradigms, environmental entre-
preneurs aim to achieve the same ends through a comparatively chaotic amalgama-
tion of competing solution sets. It is far easier to see the ethical intentions
embedded in policy actions than in firms seeking to monetize technological and
organizational breakthroughs, but even entrepreneurs who employ instrumental log-
ics may produce intergenerational fairness gains. As Stepp and Atkinson noted, ‘If
the goal is to create a global energy system that is largely carbon free, dependence
on subsidies... is not the way. Driving innovation is’ (2012, p. 3).
Conclusion
Our study responds to multiple calls for careful scrutiny of the differences between
policy-based and market-based approaches to one of the most vexing ethical dilemmas
of our day: intergenerational fairness (e.g., Lenox and York, 2011). Existing literature
seeking to integrate sustainability, ethics and entrepreneurship have amply demon-
strated the essentiality of considering all three elements, but important gaps remain in
addressing how environmental entrepreneurship can be left to do what it does best: to
advance the aims of intergenerational fairness by producing a multiplicity of competing
solution sets based on innovative technological and organizational breakthroughs.
Nowhere is this more apparent than in the effort to understand how well intended pub-
lic policies interact with entrepreneurial action.
ACKNOWLEDGEMENTS
The authors wish to acknowledge the critical insights and feedback from the JMS Special Issue Editors and
three anonymous reviewers. The paper also benefited immeasurably from suggestions offered by attendees of
the Sustainability, Ethics and Entrepreneurship Conference, the JMS Paper Development Symposium, and
the Babson College Entrepreneurship Research Conference.
APPENDIX: SIMULATION CODING AND DESIGN
Entrepreneur Coding
Each of the 1,000 initial entrepreneurs and each subsequent entrant was assigned a
100-digit series of 0’s and 1’s representing the entrepreneur’s relative level of financial
or intrinsic motivation to engage in environmental entrepreneurship activities. At the
extremes, an entrepreneur who is solely motivated by financial considerations would
be coded with 100 0’s, while an entrepreneur who is solely motivated by intrinsic
considerations would be coded with 100 1’s. For the baseline model, the 1,000 initial
entrepreneurs are evenly distributed across the propensity spectrum from 1 to 100, so
that each integer-level has ten entrepreneurs. The annual addition of 1,000 new
entrants is structured to reflect the same distribution as the initial population. Below
is a sample code for one of the ten entrants who is characterized by a 75 per cent –
25 per cent split between financial and intrinsic motivators, indicated by the 25 1’s
and 75 0’s.
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Sample Array for Entrepreneur Coding:
11111111111111111111111110000000000000000000000000....00000000000000000
In order to build a matrix that will be multiplicative with the 5 x 5 contextual matrix
(see below), it is necessary to replicate the unique 100-digit sequence for five rows, in
exactly this fashion for each simulated entrepreneur, thereby creating a 5 x 100
matrix.
Contextual Coding
For each year of each experiment, a matrix was constructed representing the market-
based and policy-based drivers of entrepreneurial activity expressed as a series of 0’s
and 1’s. These drivers were structured within the framework drawn from Baumol
et al. (2009). For each of the five elements, we assigned ten-digit codes, comprised of
five separate pairs of 0’s and 1’s. Four components consist of a policy-based or
market-based determinant that is coded one of three ways: 0-0, 0-1/1-0, or 1-1,
reflecting the extent to which the determinant is a weak, moderate or strong factor in
favourably influencing entrepreneurial activity. The final pair of each code is ran-
domly assigned to account for unforeseeable favourable and unfavourable develop-
ments. For example, Element 3 – Rewards for Productive Entrepreneurship – might
be coded as:
This sequence results in a complete code for Element 3 of: ‘00110101??’ The final
two slots are each randomly assigned a 0 or 1. Elements 1 – 5 are assigned values in
accordance with probability distributions that are idiosyncratic to each specific cell,
and the final two digits left for random assignment. The five ten-digit sequences are
stacked in a 5 x 10 matrix to form a 50-digit code that is unique to each year of
each experiment.
Sample factoring array for contextual coding – element 3:
Factor 1 Factor 2 Factor 3 Factor 4 Factor 5
00 11 01 01 ??
Sample factoring array for contextual coding – complete matrix
Factor 1 Factor 2 Factor 3 Factor 4 Factor 5
Element 1 00 11 01 01 11
Element 2 11 01 01 11 01
Element 3 01 01 00 01 00
Element 4 01 11 11 00 01
Element 5 00 00 01 11 01
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The assignment of 00, 01/10 or 11 for each cell of Factors 1 – 4 was randomly
determined for each simulation run by applying cell-specific probability distributions
(detailed below). Using Monte Carlo simulation tools, one of the three states was
selected for each run based on the unique distribution developed for that cell, based
on the specific ecosystem element that was being represented in that cell. For exam-
ple, Factor 1 for Elements 3 (Rewards for Productive Entrepreneurship) was Appropri-
ability of Rents from Technical Innovation. The base case probability distribution for this
factor, based on a review of empirical data that was drawn from innovation econom-
ics was: 77 per cent for 00, 19 per cent for 01, and 4 per cent for 11. The exception
to this contextual coding process is Factor 5, for which each cell is randomly assigned
one of the three states in equal proportion, thereby providing a component for unob-
served random effects
Entrepreneur Index, Entrepreneurial Activity and Critical Thresholds
Once the cell codes were randomly assigned in accordance with the cell-specific prob-
ability distributions and a complete contextual matrix was assembled, the 5 x 5 con-
textual matrix was then multiplied by each of the 5 x 100 entrepreneur matrices
one-by-one for each simulation run in each year of a given experiment. The cross
products of the matrices were then averaged to produce an Entrepreneur Index,
ranging from 0 to 1. In the base case, entrepreneurs with an Index score of 0.1 or
less did not continue to the subsequent period, thereby creating attrition. For those
that did continue, an Index score of 0.9 or above allowed the entrepreneur to
advance from firm formation to market entry and eventually to marketable innova-
tion. Once entrepreneurs enter, they remain in the simulation until the Index falls to
0.1 or less.
Experiments were staged for durations extending from 10 to 250 years. Each year
was subjected to 50 simulation runs, producing a mean index for each entrepreneur
that would determine whether the entrepreneur would remain in the simulated mar-
ket for the subsequent year or would be dropped. Extensive sensitivity analyses were
conducted to validate the 0.1 and 0.9 Index score thresholds. These analyses substan-
tiated the conservatism of these thresholds. Any combination of higher expulsion
thresholds (i.e., greater than 0.1) or lower advancement thresholds (i.e., less than 0.9)
only strengthened the support for our theorized effects, meaning that less stringent
thresholds resulted in statistically significant increases in the observed effects, so that
our predictions actually found greater support when we migrated from these compa-
ratively conservative thresholds. On this basis, we opted to maintain the most con-
servative rendering of these critical thresholds.
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... Aside from socioeconomic factors, governmental intervention, which holds a significant role through institutional and regulatory aspects, has also attracted considerable attention in the environmental fields. On the one hand, the government has attempted to facilitate corporate green innovation through carrot-and-stick policies including assistances that are in the shape of green R&D subsidies (Bai et al. 2019), tax preferences for low-emission and high-tech enterprises (Zheng and Shi 2017), and punitive taxes imposed upon technologies or actions that are environmentally undesirable (Hunt and Fund 2016). These stimulus policies have contributed to pushing enterprises to achieve "innovation compensation" by reducing compliance costs and promoting production efficiency. ...
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... All the countries worldwide have considered protecting our planet from environmental crises as a first priority and have been involved in many international agreements concerning this issue, including the Kyoto Protocol (COP3), Kyoto Protocol (MOP 1), United Nations Framework Convention on Climate Change (UNFCCC), Paris Agreement (COP21), Doha Amendment to the Kyoto Protocol, and Bali Road Map (COP13) (Charfeddine, 2017). Intergenerational equity theory suggests that preserving the environment is a moral and ethical commitment for future generations (Clayton et al., 2016), (Hunt and Fund, 2016), and many researchers have emphasized the significance of formulating and imposing national, regional, and international laws that guarantee planetary rights and obligations for all generations (Charfeddine, 2017), (Demirel et al., 2017), (Foley et al., 2005). Nevertheless, these agreements have not achieved the goal of significantly reducing different types of pollutants, including CO 2 emissions. ...
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... Therefore, the increase in energy demand is equivalent to an increase in carbon dioxide (CO2) emissions, which leads to environmental degradation [5,6]. Thus, protecting the planet and preserving the environment for future generations becomes a necessity and a moral and ethical obligation [97,98]. Indeed, several studies have called for international, national, and local laws to guarantee the rights and responsibilities of the planet for all generations [99][100][101]. ...
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... Deemed crucial to achieving competitive advantage in family business (Boyd et al., 2015), transgenerational relationships can occur between current and future generations (e.g., Wade-Benzoni et al., 2010), or current and past generations (e.g., grandparents and children; Nguyen et al., 2018). Although the transfer of intangible resources has mostly been studied with reference to behavioral (Honey-Rosés et al., 2014), entrepreneurial (Jaskiewicz et al., 2015), and environmental (Hunt & Fund, 2016) issues, the last 10 years indicate growing interest in how such transfer affects next generation engagement in family firms (e.g., Garcia et al., 2019;Reay, 2019). This is surprising, since transferring intangible resources from predecessors to successors is typically an unstructured process, and thus difficult to observe (e.g., as Schell et al., 2018 argue). ...
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The concept of generations has become increasingly important in the social science fields to explain diverse phenomena affecting organizations. This is especially true in the family business field where generations are considered a constitutive element. Nevertheless, there is still a limited understanding of generations and the implications of their involvement in family business. We review prior studies on generations by considering different social science fields, which we analyze according to a novel theoretical framework. Building on this framework, and placing particular emphasis on family firms, we identify important knowledge gaps that serve as a springboard for future research.
... There is considerably more emphasis on how entrepreneurs seek to create market demand or reduce market failures (Dean & McMullen, 2007). The success of these efforts is often dependent upon the intervention of third parties like policymakers (Hunt & Fund, 2016) and social movement activists (Pacheco, York, & Hargrave, 2014), who assist in building or incentivizing market demand (York et al., 2018). This dependence upon external stakeholders is a consequence of environmental entrepreneurs looking to collectively develop profitable market opportunities. ...
... There is considerably more emphasis on how entrepreneurs seek to create market demand or reduce market failures (Dean & McMullen, 2007). The success of these efforts is often dependent upon the intervention of third parties like policymakers (Hunt & Fund, 2016) and social movement activists (Pacheco, York, & Hargrave, 2014), who assist in building or incentivizing market demand (York et al., 2018). This dependence upon external stakeholders is a consequence of environmental entrepreneurs looking to collectively develop profitable market opportunities. ...
... For instance, environmental deterioration and associated climate change can lead to extraordinary hazards, such as the melting of glaciers, extreme weather, unpredictable rainfall, extinction of species, low agricultural productivity, food shortages, and water scarcity (Dong et al., 2019;Shahbaz et al., 2018). Besides, humans are also morally obliged to preserve and endure the natural environment for future generations (Hunt and Fund, 2016). ...
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Recent studies have emerged that highlight the critical role of green entrepreneurial orientation (GEO) in achieving sustainability in a business context. However, knowledge of drivers of GEO and how and when GEO influences corporate environmental performance (CEP) is limited and lacks clarity. Therefore, this review aims to enrich the present literature on environmental research and practice by synthesizing the literature regarding drivers of GEO in organizations. Moreover, it highlights underdeveloped and overlooked areas regarding mediating and moderating factors that influence GEO and CEP links. Thus, this review advances the research by proposing the conceptual framework using the identified gaps in the literature, suggesting that the micro, meso, and macro-level factors enhance the adoption of GEO in organizations. This also shows that organizational factors mediate the relationship between GEO and CEP while socio-demographic characteristics and favorable contextual factors moderates the GEO–CEP link. In addition, it calls for researchers to turn attention from the importance of the process to finding how GEO can be improved to enhance environmental performance.
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Policy makers around the world are anxious to find tools that will help their regions emulate the success of Silicon Valley and create new centers of innovation and high technology. Unfortunately, although we have learned a great deal about firm clustering, the composition of Silicon Valley, and the various components of successful high-tech regions, we know little empirically about the effectiveness of activist policy interventions. The list of potential policies is long and cannot all be examined in one essay. This chapter examines two common policy approaches intended to generate regional technology growth. Some regions create public venture capital (VC) funds - direct government subsidies for small high-tech firms - to stimulate entrepreneurship. Other regions (or, sometimes, the same regions) build science parks to lure high-tech firms. These approaches remain popular around the world. The International Association of Science Parks currently has members in 49 countries outside the United States. And while some parks are quite small, others represent significant investments. Hong Kong, for example, is spending more than $2 billion to develop a research and technology park (Cheng 1999). Malaysia recently opened a planned, 7,100-acre, high-tech region, Cyberjaya. Public venture capital funds, meanwhile, have been established in several Asian countries, while European Union (EU) nations are increasingly turning toward direct subsidies of small, high-tech firms. The United States witnessed large growth in both science parks and public venture capital in the 1980s, making it possible by now to investigate their effects empirically.
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"Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street," observed legendary speculator Jesse Livermore. History tells us that periods of major technological innovation are typically accompanied by speculative bubbles as economic agents overreact to genuine advancements in productivity. Excessive run-ups in asset prices can have important consequences for the economy as firms and investors respond to the price signals, resulting in capital misallocation. On the one hand, speculation can magnify the volatility of economic and financial variables, thus harming the welfare of those who are averse to uncertainty and fluctuations. But on the other hand, speculation can increase investment in risky ventures, thus yielding benefits to a society that suffers from an underinvestment problem.
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To address the trade-off between new product innovativeness and speed to market caused by customer participation activities, the author differentiates two dimensions of customer participation—customer participation as an information resource (CPI) and customer participation as a codeveloper (CPC)—and explores the moderating effects of downstream customer network connectivity and new product development process interdependence and complexity. Matched data collected from 143 customer–component manufacturer dyads indicate that CPI has a negative influence on innovativeness when downstream customer network connectivity is high but a positive effect when it is low. In contrast, CPI has a positive effect on speed to market when downstream customer network connectivity is high and no significant effect when it is low. In addition, CPC undermines new product speed to market when process interdependence is high. In contrast, CPC can improve new product speed to market but hurt new product innovativeness when process interdependence is low. The results of this article provide specific managerial guidelines as to how to manage customer participation to improve new product innovativeness and speed to market.
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International environmental agreements have increased exponentially within the last five decades. However, decisions on policies to address key issues such as biodiversity loss, climate change, ozone depletion, hazardous waste transport and numerous other planetary challenges require individual countries to adhere to international norms. What have been the successes and failures in the environmental treaty-making arena? How has the role of civil society and scientific consensus contributed to this maturing process? Why have some treaties been more enforceable than others and which theories of international relations can further inform efforts in this regard? Addressing these questions with renewed emphasis on close case analysis makes this volume a timely and thorough postscript to the Rio-Plus 20 summit's celebrated invocation document, The Future We Want, towards sustainable development. Environmental Diplomacy: Negotiating More Effective Global Agreements provides an accessible narrative on understanding the geopolitics of negotiating international environmental agreements and clear guidance on improving the current system. In this book, authors Lawrence Susskind and Saleem Ali expertly observe international environmental negotiations to effectively inform the reader on the geopolitics of protecting our planet. This second edition offers an additional perspective from the Global South as well as providing a broader analysis of the role of science in environmental treaty-making. It provides a unique contribution as a panoramic analysis of the process of environmental treaty-making.