The model studies the sustainability and evolution of local entrepreneurship by modeling the dynamics between the MNE and local entrepreneurs. MNEs have a choice of strategy (stay the same or innovate). The default strategy is to stay the same and benefit from an internalization advantage that MNEs have. However, beyond a certain threshold determined by the slider, the MNE decides to change the strategy and introduce new innovations. Anytime the MNE introduces new innovations, its competence increases forcing local entrepreneurs to adapt. Similar to the MNE, local entrepreneurs can either engage in replicative (red) or innovative (blue) entrepreneurship. Based on the local absorptive capacity, the payoffs and dynamics of the relationship change.
Check to see how high and low absorptive capacity (ACAP) change the dynamics of evolution. Note the Red queen effect when the MNE threshold is low in high ACAP.
In regions with low ACAP, the sustainability of advantages is high, consequently, it is hard for local firms to imitate the MNE quickly. This means that replicative entrepreneurship is hard and when firms innovate they get a high payoff that will last longer. The payoffs to local firms are PL and the payoffs to the MNE are PM. The payoff to the local firms are high and low while the payoff to the MNE are normal or below normal.
When the MNE stays the same it earns an intermediate low payoff as the local firms who replicate can copy the technology only in the next time period. However, introducing a new innovation earns the MNE lower returns as the costs exceed the benefits. When the MNE stays the same, local replicators earn an intermediate low-high payoff as they can copy the innovation in the next time period. However, local firms who innovate earn high returns.
In regions with High ACAP, the sustainability of advantages is low, consequently the MNE advantage lasts only for a short period (in the model it is one time period). Then the local replicators copy the innovation and achieve similar level of competence. Once this happens, the MNE suffers from a lower payoff and consequently, has to introduce another innovation to achieve its normal payoff. However, once the MNE switches to introducing innovations, it cannot go back as the payoff is intermediately negative.
If a patch is blue, then the entrepreneur innovated in the previous iteration as well as the current round.
If a patch is red, then the entrepreneur replicated in the previous iteration as well as the current round.
If a patch is green, then the entrepreneur innovated in the previous round but replicated in the current round.
If a patch is yellow, then the entrepreneur replicated in the previous round but innovated in the current round.
The model is a built from the Iterated Prisoners Dilema model as well as Baumol (2010) and his book on the Microtheory of Innovative Entrepreneurship.
The model is developed for an academic publication. Please do not use or cite without notifying the authors.
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