Issues in Political Economy, Vol 24, 2015, 28-47 28 Knowledge Spillovers and Entrepreneurial Activity: An Agent-Based Approach to Modeling Schumpeterian Growth for Developing Countries

Though the process of knowledge spillovers was a prominent topic in the early endogenous growth models of Romer (1986) and Lucas (1988), more recent modeling has eschewed explicit knowledge spillover mechanisms in favor of a greater emphasis on innovation and research and development (R&D) expenditure. The Schumpeterian models of Aghion and Howitt (1992), among others, have identified innovative activity as the crucial link between R&D expenditure and total factor productivity (TFP) growth. However, the difficulty of including knowledge spillovers in conventional mathematical models has likely contributed to the topic’s decreased presence in the growth literature. Despite this diminished focus, the topic of knowledge spillovers at a regional level has been preserved in the “new economics of urban and regional growth” recognized by Glaeser (2000). This channel of literature has consisted primarily of empirical studies investigating the link between the geographic density of productive activities and industry growth, though recent years have seen greater efforts to explore how spillovers can be converted into “economically meaningful” knowledge. Through these developments, the knowledge spillover literature has begun to align with the Schumpeterian approach through a shared emphasis on the role of entrepreneurs for engaging in innovative activities. It should be noted that the Schumpeterian growth models of Aghion and Howitt include implicit knowledge spillovers in the growth of a sector-wide “leading-edge” productivity parameter. However, they do not consider how spillover mechanics might lead to the rise of new entrepreneurs. In the “new economics” literature, knowledge spills over not only through R&D activity, but also through the interactions of individuals in densely populated areas such as cities. The “effectiveness” of these spillovers is dependent on those individuals who can capably apply this knowledge to productive activity such as entrepreneurship. Once again, the possibility of developing this process in growth models has likely been hindered by the incompatibility of conventional models to such complex patterns of interaction.