Economic Development, Innovation and Entrepreneurship

What is the common ground between the economic prosperity of the Netherlands in the XVII-XVIII centuries, nineteenth century England, twentieth century U.S. and, more recently, countries such as South Korea, Singapore and Israel?
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What is the common ground between the economic prosperity of the Netherlands in the XVII-XVIII centuries, nineteenth century England, twentieth century U.S. and, more recently, countries such as South Korea, Singapore and Israel? Although the question could be answered from different angles, fundamentally it can be inferred: in their own time, these countries promoted economic systems where resources were efficiently channeled to the most competent entrepreneurs and endeavors, generating value and bringing business solutions to problems.

Canadian economist Reuven Brenner summed it up perfectly: "Prosperity is the result of matching talent with capital and holding both sides accountable". According to Brenner, "capital" can come from one or more sources: capital markets, government, savings or inheritance. "Talent" may be fostered internally - through education, incentives for innovation and entrepreneurship, development of a risk-taking culture - and/or imported, with the opening of borders to skilled and entrepreneurial immigrants. Finally, "accountability" is constructed through solid institutions (political, economic, regulatory, legal, social) that promote a stable business environment, where contracts are honored and a long-term perspective is established.

In the XVII-XVIII centuries, the Netherlands had the most developed capital market in the world. It operated the forefront of financial instruments, which enabled people and companies with good business ideas to grow their ventures. Therefore, at a time when most societies were divided essentially into castes - with royalty, nobility and aristocracy keeping their wealth generation after generation - the Dutch popularized access to capital and implemented a socioeconomic system that was, by the time's standards, more democratic and meritocratic. Moreover, in addition to having effective institutions, it opened its doors to immigrants from diverse backgrounds, welcoming for example Spanish Jews and French Huguenots, who brought innovations from their countries and who, by definition, were mostly entrepreneurs (what is more enterprising than venturing oneself into a new country?)

A century later, England became the engine of the Industrial Revolution within the same logic: capital-talent-institutions. Innovations, both technological (e.g., steam engines) and of process (e.g., revolutionary management techniques) were only possible due to an economic system where risk was properly rewarded and trial and error was stimulated. In the second half of the twentieth century, the United States, in turn, established itself as the major economic superpower based on: capital (Wall Street, angel investors, VC/PE funds, R&D subsidies); talent (Americans and immigrants educated in universities such as Stanford, Harvard and MIT and creating hubs such as Silicon Valley); and institutional climate (pro-business laws, efficient legal system, solid social fabric).

Immigration was especially important in the U.S. As proof, 40% of Fortune 500 companies were founded by immigrants or their children, including giants such as Intel, Google, eBay, Apple and GE. Furthermore, ¾ of patents developed in American universities had the participation of immigrants. It is no wonder that immigration reform is constantly brought up in the debate for promoting American competitiveness and sustained economic growth.

More recently, one of the most successful cases of economic development was the Asian Tigers. The political, economic and institutional reforms that occurred in these countries, combined with investment in education and the development of capital markets, enabled a flurry of investments and skilled immigration, driving the growth and development of these countries. Another interesting case is Israel, a nation created just over half a century ago, in the middle of the desert, and that thrives due to skilled immigration and education, dynamic access to capital (private and public), a culture conducive to risk taking, and solid institutions.

In economics, traditionally the quest for prosperity has been driven by top-down policies, often based on unrealistic theoretical models. Looking at economies through the lenses of "capital-talent-accountability", as proposed by Brenner, gives us a clearer view of the issues at hand, from the bottom up. It provides better grounds for understanding the underlying factors that build an economy and allows for more factual and effective policy making.

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