CEIBS Podcast/Video Centre

Professor of Entrepreneurship Ramakrishna Velamuri on “The Baumol Framework Revisited -- Changing Rules of the Game”

“I am going to start off by presenting innovations that were introduced in China before the year 1400 -- breakthrough innovations such as the clock powered by water, iron-making, yarn- production, cotton-production, gun powder, printing on paper, etc.

Historian Joel Mokyr refers to the period before 1400 in China as the “Chinese enigma” because, while these breakthrough innovations were introduced in China, they did not actually spread in China. Therefore, Chinese society did not benefit from these innovations. He outlines a number of different reasons for this complex phenomenon, one of which is that there were no entrepreneurs to take these innovations to market. In China at that time, entrepreneurs were look down upon -- the brightest minds in China wrote the imperial exam and became officials for the emperors. So entrepreneurship did not thrive at that time.

Economist William Baumol has developed a very interesting theory stating that the supply of entrepreneurial talent at any given time in any given society is fixed. Policymakers can influence how this entrepreneurial talent is allocated between productive, unproductive and destructive uses. He argues that the “rules of the game” are what determines where entrepreneurial talent will be drawn to. Let me give you examples of each: first is Steve Jobs and Steve Wozniak -- clearly an example of productive entrepreneurship. They used their creativity to bring joy and added value to millions of people around the world.

Second example, of unproductive entrepreneurship, is the “Ambassador car”, which dominated the Indian roads for 25 years during which time virtually no innovations were introduced. This model was the market leader until the mid-1980s, but beyond minor changes to the grill and fender, no innovation took place. The market was strictly regulated and competition was very limited, and the company did not have the incentive to innovate.

Finally, my example of destructive entrepreneurship is Bernie Madoff, who used his creativity to destroy the wealth for thousands and thousands of investors.

If you look at China over past 30 years, a lot has changed. Market institutions have become more and more sophisticated. Protection of property has become more robust, and we have seen remarkable economic growth as a result. We refer to this as the Chinese Miracle, and other emerging countries in the world are now trying to follow the Chinese Miracle. One of the questions I would like to pose is: What still needs to change in China?

Today, entrepreneurs are contributing to China’s economic growth and at the same time also benefiting from it -- so entrepreneurship is thriving, unlike before 1400. As disposable incomes have grown, new opportunities have been created in a whole host of sectors such as branded goods, restaurants, travel and leisure, etc, and entrepreneurs have been drawn into new ventures and the overall entrepreneurial community in China has expanded. Private enterprise currently accounts for 65% of China’s output even though there are still large sections of the economy that are reserved for SOEs (such as banking and infrastructure). While the Chinese entrepreneurs of 1400 did not enjoy recognition in society, the role models of top Chinese university graduates today are the likes of Jack Ma, and Robin Li.

The message is that: An individual is a product of his or her times. This means that an individual is a product of the political and economic context, the family context, and the society in which he or she lives. In China, the environment for entrepreneurs has changed dramatically for the better. We hope that this trend will continue and that entrepreneurs will continue to blossom in China."