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Centre for Employment Studies
The
role of small business based structures in promoting innovation, and Megan Khoshyaran * Abstract In this paper my aim is to compare an open market system that allows free entry and operation of small businesses, system (A), with a closed oligopolistic market system, system (B), in terms of each system's structural tendency towards innovation and its effects on employment. At the microeconomics level, innovation is related to the inherent nature of the tasks performed by the labour force in both systems. If I define a task as a force applied to a point, in system (A), each worker applies force in a multi-dimensional space. Thus, it is easy to form a complex functional. In other words, the labour force hired has to perform a spectrum of tasks in either the production process or the running of a business. This element offers a comprehensive knowledge of the nature of the product to the employees. The learning process eventually encourages one or more of the employees to come up with ideas for a new product or a complementary product. In system (B) each worker applies a linear force. In this case only linear projections are possible. Any function of this simple space has a simple form. In system (B), the labour force is highly specialised. Workers and specialists perform minuscule tasks when compared to the scope of the activities. The work force is short-sighted. This makes for innovations that are predictable, continuous and incremental. Proposition1: The scale of innovation is directly related to the degree of the complexity of the tasks performed. The complex functional of the tasks performed in system (A) eventually results in two types of spin-offs: either 1) creation of complementary products or 2) creation of new products. Proposition 2: Given equal market conditions, innovations in system (A) always lead to either new products or complementary products; innovations in system (B) always translate to an incremental evolution of the same product. An important issue is pricing. Proposition 3: In system (A), price is a function of the tasks performed by labour, and machine. In system (B), price is a function of the interaction among the market forces. On the macroeconomics level, I prove Proposition 4: System (A) leads to a better distribution of the labour force, which leads to a balanced growth between innovation, productivity, and employment. To prove proposition 4, I take the two systems as two intelligent machines. Machine (A) starts from a nucleus of small sub-systems, and it propagates through diffusion and separation. Eventually, it develops into a large number of small intelligent sub-systems. There is always a slot for a new sub-system in machine (A). Each sub-system is made up of a number of self–organising particles or labour. When the equilibrium state in each sub-system is disturbed by exogenous factors, it experiences a phase transition. Some of its particles go through a diffusion process that eventually ends in a total separation and formation of a new sub-system. Machine (B) consists of a few large intelligent sub-systems. In system (B), any disturbance in the equilibrium state of each sub-system can only cause deformation. There is either expansion or contraction. Extension of proposition 4 results in proposition 5: System (A) leads to multiple equilibrium points; while, system (B) leads to a single equilibrium point in the market. The advantage of a multiple equilibrium system is that it can function even if some of its sub-systems are not at equilibrium. In a single equilibrium case, once the equilibrium is disturbed, then it is unlikely that the system can continue. Finally, I will prove Proposition 6: Business cycles are directly related to the scale of a business, the larger the business the higher the occurrence of a business cycle. In system (A), business cycles are easily avoided. Any drop in demand can be considered as the factor causing the diffusion process. It can trigger innovation, and since any new diffusion can be supported by the system, it then allows companies to adjust their output. System (B) is more susceptible to business cycles. Since, system (B) can only accept contraction; it becomes much harder for companies to make adjustments reflecting any decrease in demand. *
Department of Economics Catholic University of Leuven
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