Abstract

This chapter shows how the Schumpeterian growth paradigm can be used both to shed light on various aspects of the growth process which cannot be easily understood using alternative paradigms, and also to think about policies to foster innovation-led growth in a developed economy. In particular it will: (i) look at the relationship between growth and competition; (ii) shed light on how growth relates to firm dynamics and the size distribution of firms; (iii) revisit the debate on how growth relates to income inequality and social mobility; and (iv) discuss the role of the state in fostering innovation-led growth, and question the design and limits of R&D subsidies, or the desirable scope for patent protection, or whether the government should provide sectoral state aids or instead limit itself to pure horizontal targeting.

Introduction

There is a broad consensus among most European leaders and in Brussels on the importance of structural reforms to foster innovation-based growth in Europe. However, this consensus has not reached the European public at large. One recent example is France, where the timid reforms proposed by the Economy Minister have met opposition from all political parties. So often do we hear that structural reforms amount to austerity, and therefore are detrimental to growth and employment. Similarly, a commonly held view is that going for supply side policies (structural reforms or fiscal devaluations aimed at fostering such reforms) necessarily means that we have decided to ignore the demand side. We also hear that a fiscal system conducive to innovation and entrepreneurship would necessarily aggravate inequality and reduce social mobility. The purpose of this chapter is twofold: first, to bring the reader up to speed with recent research in the Economics of Innovation and Growth; second, to provide the reader with the theoretical and empirical background to think about growth policy design in EU countries.

We should emphasize right away that this chapter is opinionated in the sense that it reflects our own biases and uses the lenses of our own work. However, the reader should feel free (and is welcome) to disagree and take issue with the models, analyses and statements outlaid in the next sections.