Investigations into Investigations into Schumpeterian Economic Schumpeterian Economic Behaviour using SwarmBehaviour using Swarm

Craig LynchCraig Lynch

Macquarie University (Graduate School of Management)Macquarie University (Graduate School of Management)Sydney, AustraliaSydney, Australia

Structure of PresentationStructure of Presentation

BackgroundBackgroundTheoryTheory

ResearchResearchObjectivesObjectives

DesignDesignApproachApproach

RandomRandomInnovationInnovation

Risk / Risk / EntrepreneurEntrepreneurCompetencyCompetency

PredatorPredatorBehaviourBehaviour

R&DR&DInvestmentInvestment

Imitation &Imitation &MarketingMarketingDefenseDefense

Scenario OutcomesScenario Outcomes

AnalysisAnalysisSummarySummary

FutureFutureDirectionsDirections

Background TheoryBackground Theory

Theory of Economic Development (Schumpeter)

Evolutionary Economics

IndustrialDynamics

Creative Destruction

Strategic Decision-Making by Firms

Role of Entrepreneur & Innovation

Population Focus

Convergence

Schumpeterian FocusSchumpeterian FocusEntrepreneurs

Random Innovation

Risk & Availability

of Credit

Competitive Behaviour (and Inter-firm dynamics)

Predator Behaviour

R&D Investment

Imitation & Mktg Defense

Strategic Choices

Research ObjectivesResearch Objectives Explore economic and competitive behavioural concepts (identifying Explore economic and competitive behavioural concepts (identifying

optimum conditions) for:optimum conditions) for:

1.1. Random innovation within firmsRandom innovation within firms

2.2. Availability of credit and differentiation of supply to entrepreneurial Availability of credit and differentiation of supply to entrepreneurial candidatescandidates

3.3. Predator behaviour amongst firmsPredator behaviour amongst firms

4.4. Innovation investment and firm growthInnovation investment and firm growth

5.5. Imitation and marketing defence investments associated with firm Imitation and marketing defence investments associated with firm growth and survivalgrowth and survival

1.1. NOTENOTE: “Optimum conditions” represents maximum GDP at economy : “Optimum conditions” represents maximum GDP at economy level, numbers of firms, profit levels, and persistence of profit (Roberts level, numbers of firms, profit levels, and persistence of profit (Roberts 2001)2001)

Foundation – Bruun and Luna ModelFoundation – Bruun and Luna Model• Each agent a consumer and individual artisan (producer), at time 0

• Ongoing supply and demand between producers, start-up firms, effective firms with workers, and consumers

•Consumers purchase via shopping cart concept within 2D toroidal landscape, seeking fulfilment within 8 neighbours (Moore neighbourhood)

• Entrepreneur evaluates fulfilment history of neighbours, leads to start-up firm by hiring producers (creating workers), then to establish firm

•Account maintained for all agents, used in bankruptcy business rule

Agent as consumer

Agent as potential entrepreneur

Foundation – Bruun and Luna Model (2000)Foundation – Bruun and Luna Model (2000)Environmental settings:• Bankruptcy level• Probability of consumer switching from effective firm• Probability that firm will dissolve for non-bankruptcy reasons• Degree of profit sharing between entrepreneur and workers• Confidence threshold (for entrepreneurs in evaluating hiring workers)

Sample graphical display of agent types under different bankruptcy levels:

Independent producer

Entrepreneur with start-up firm

Worker employed by entrepreneur

Entrepreneur with effective firm

Extended Agent AttributesExtended Agent Attributes

Artificial internal firm attributes:Artificial internal firm attributes: Product attractiveness levelProduct attractiveness level

• Increments as result of innovation, influences consumer Increments as result of innovation, influences consumer purchasingpurchasing

Financial stability levelFinancial stability level• Increments with sales continuity, decrements with multiple Increments with sales continuity, decrements with multiple

investment types (predator behaviour, R&D investment, investment types (predator behaviour, R&D investment, imitation/marketing defence investments)imitation/marketing defence investments)

Entrepreneur competency levelEntrepreneur competency level• Required for credit availability / risk assessment by banks, Required for credit availability / risk assessment by banks,

increments based on firm start-up & formation successincrements based on firm start-up & formation success

Extended ParametersExtended Parameters(Probability/Likelihood Levers)(Probability/Likelihood Levers)

Innovation randomnessInnovation randomness

Availability of creditAvailability of credit

Dissolution of effective firmsDissolution of effective firms

Predator behaviour (& industry option)Predator behaviour (& industry option)

Strategic R&D investment (& type option)Strategic R&D investment (& type option)

R&D effectivenessR&D effectiveness

Imitation investment (& type option)Imitation investment (& type option)

Marketing defenceMarketing defence

Scenario ModulesScenario Modules

Stage 0Stage 0

Foundation Foundation ModelModel

Stage 1Stage 1

Random Random InnovationInnovation

Stage 2Stage 2

Credit AvailabilityCredit Availability

Stage 3Stage 3

Predator Predator BehaviourBehaviour

Stage 4Stage 4

R&D InvestmentR&D Investment

Stage 5Stage 5

Imitation and Imitation and Marketing Marketing Defence Defence InvestmentInvestment

Product Product attractiveness attractiveness levellevel

Financial stability Financial stability levellevel

Entrepreneur Entrepreneur competency levelcompetency level

Product Product attractiveness attractiveness levellevel

Financial stability Financial stability levellevel

Product Product attractiveness attractiveness levellevel

Financial stability Financial stability levellevel

Product Product attractiveness attractiveness levellevel

Financial stability Financial stability levellevel

MOST MOST SENSITIVE...SENSITIVE...

Bankruptcy levelBankruptcy level

Profit sharingProfit sharing

Consumer shift Consumer shift likelihoodlikelihood

Innovation Innovation randomness randomness likelihoodlikelihood

Availability of Availability of credit likelihoodcredit likelihood

Dissolution of Dissolution of effective firms effective firms likelihoodlikelihood

Predator Predator behaviour behaviour likelihoodlikelihood

R&D investment R&D investment likelihoodlikelihood

R&D R&D effectiveness effectiveness likelihoodlikelihood

Imitation Imitation investment investment likelihoodlikelihood

Marketing Marketing defence defence investment investment likelihoodlikelihood

ATTR

IBU

TES

LEV

ER

S

Generic Execution EnvironmentGeneric Execution Environment

Swarm ABM engineSwarm ABM engine 20 x 20 (400 agent) population20 x 20 (400 agent) population Standard and consistent Bruun & Luna baseline settings Standard and consistent Bruun & Luna baseline settings

to achieve “healthy” GDP profileto achieve “healthy” GDP profile 2 time periods:2 time periods:

0-2000 (with detailed data capture)0-2000 (with detailed data capture) 0-4000 (macro GDP analysis only to determine 0-4000 (macro GDP analysis only to determine

longer-term trends)longer-term trends)

Scenario Outcomes – Stage 1Scenario Outcomes – Stage 1(Random Innovation Impact)(Random Innovation Impact)

Outcome:Outcome: LOW random innovation results in marginally higher GDP than LOW random innovation results in marginally higher GDP than

baseline and other innovation settingsbaseline and other innovation settings

Baseline LOW Random Innovation setting

Parameter settings:Parameter settings: High, Med-High, Med, Low, V. Low random innovation likelihoodHigh, Med-High, Med, Low, V. Low random innovation likelihood

Innovation Randomness Seed:

100 (High)

Innovation Randomness Seed:1,000 (Medium - High)

Innovation Randomness Seed:10,000 (Medium)

Innovation Randomness Seed:100,000 (Low)

Innovation Randomness Seed:100,000,000 (Very Low)

Scenario Outcomes – Stage 1Scenario Outcomes – Stage 1(Random Innovation Impact)(Random Innovation Impact)

No. effective firms highest at low to medium random innovation No. effective firms highest at low to medium random innovation settingssettings

No. Effective Firms over Time

0

20

40

60

80

100

120

1 213 425 637 849 1061 1273 1485 1697

Time Period

Seed 100

Seed 1,000

Seed 10,000

Seed 100,000

Seed 100,000,000

Scenario Outcomes – Stage 1Scenario Outcomes – Stage 1(Random Innovation Impact)(Random Innovation Impact)

Persistence of profit calculations show LOW random innovation Persistence of profit calculations show LOW random innovation firms with lowest levelsfirms with lowest levels

Innovation Randomness Seed

No. Effective Firms

Average Duration of Firm (Time Periods)

Average Net Account Level

per Firm

Persistence of Profit (Average

Net Account Level per Firm

Duration)

100 (High) 81 778 762,522 270

1,000 (Med – High) 99 965 433,385 69

10,000 (Medium) 119 1,465 44,340 12

100,000 (Low) 122 1,420 25,323 2

100,000,000 (V. Low) 123 1,471 91,102 53

Scenario Outcomes – Stage 2Scenario Outcomes – Stage 2(Risk / Entrepreneur Competency)(Risk / Entrepreneur Competency)

Outcome:Outcome: Optimum GDP values when both credit availability and firm Optimum GDP values when both credit availability and firm

dissolution settings are HIGHdissolution settings are HIGH

Baseline HIGH credit availability and HIGH firm

dissolution likelihood

Parameter settings:Parameter settings: High, Med, Low combinations of credit availability & effective firm High, Med, Low combinations of credit availability & effective firm

dissolutiondissolution

Scenario Outcomes – Stage 2Scenario Outcomes – Stage 2(Risk / Entrepreneur Competency)(Risk / Entrepreneur Competency)

Effective firms formed only in Effective firms formed only in high credit availability high credit availability circumstancescircumstances

Maximum no. firms for Maximum no. firms for HIGH/HIGH combination, but HIGH/HIGH combination, but lowerlower persistence of profit persistence of profit

No. Effective Firms over Time

02468

1012141618

1 204 407 610 813 1016 1219 1422 1625 1828

Time Period

High Credit / HighDissol'n

High Credit / LowDissol'n

CreditAvailability

Seed /Effective Firm

DissolutionSeed

Combinations

No.Effective

Firms

AverageDuration ofFirm (Time

Periods)

Average NetAccountLevel per

Firm

Persistenceof Profit(Av. Net

Acct Levelper FirmDuration)

100 (High) /100 (High)

17 1,390 82,905 43

100 (High) /100,000,000

(Low)

11 1,372 268,488 196

Scenario Outcomes – Stage 3Scenario Outcomes – Stage 3(Predator Behaviour)(Predator Behaviour)

Outcomes:Outcomes: Similar GDP results for all Similar GDP results for all

predator settings, for both predator settings, for both industry grouping settingsindustry grouping settings

Maximum no. firms for LOW Maximum no. firms for LOW predator behaviour, with predator behaviour, with persistence of profit calculations persistence of profit calculations steady for all scenariossteady for all scenarios

No. Effective Firms over Time

0

24

6

8

1012

14

1 208 415 622 829 1036 1243 1450 1657

Time Period

Seed 10

Seed 100

Seed 10,000

Seed 100,000

Seed 100,000,000

Parameter settings:Parameter settings: V. High, High, Med, Low, V. Low predator behaviour likelihoodV. High, High, Med, Low, V. Low predator behaviour likelihood

Predator

Behaviour

Likelihood

Settings

No.

Effective

Firms

Average

Duration of

Firm (Time

Periods)

Average Net

Account

Level per

Firm

Persistence

of Profit

(Average

Net Account

Level per

Firm

Duration)

10 (Very High) 12 936 87,763 63

100 (High) 12 967 87,314 64

10,000

(Medium)

13 1,276 59,799 50

100,000 (Low) 13 1,276 59,799 50

100,000,000

(Very Low)

9 1,779 128,637 73

Scenario Outcomes – Stage 4Scenario Outcomes – Stage 4(R&D Investment Impact)(R&D Investment Impact)

Proportional Investment Non-Proportional Investment

VERY HIGH Investment & Effectiveness

HIGH Investment & Effectiveness

R&D

Investment &

Effectiveness

Combinations

No.

Effective

Firms

Average

Duration of

Firm (Time

Periods)

Average Net

Account

Level per

Firm

Persistence

of Profit

(Average

Net Account

Level per

Firm

Duration)

10 (V. High) /

10 (V.High)

6 667 244,827 166

100 (High) /

100 (High)

12 1,206 102,975 74

1000 (Med) /

1000 (Med)

12 1,658 89,241 13

10 (V. High) /

10,000 (Low)

12 1,143 153,207 84

10,000 (Low)

/ 10 (V.High)

12 1,546 134,579 41

R&D

Investment &

Effectiveness

Combinations

No.

Effective

Firms

Average

Duration of

Firm (Time

Periods)

Average Net

Account

Level per

Firm

Persistence

of Profit

(Average

Net Account

Level per

Firm

Duration)

10 (V. High) /

10 (V.High)

9 407 -84,713 -234

100 (High) /

100 (High)

9 1,790 327,467 189

1000 (Med) /

1000 (Med)

12 1,658 89,241 13

10 (V. High) /

10,000 (Low)

8 593 94,228 89

10,000 (Low)

/ 10 (V.High)

12 1,546 134,579 41

Worst GDP profiles

Scenario Outcomes – Stage 4Scenario Outcomes – Stage 4(R&D Investment Impact)(R&D Investment Impact)

GDP profiles similar with GDP profiles similar with exception of very high exception of very high investment and effectiveness, investment and effectiveness, for both types of investmentfor both types of investment

Medium investment and Medium investment and effectiveness produces higher effectiveness produces higher no. firms earlier, BUT least no. firms earlier, BUT least persistence of profitpersistence of profit

Proportional investment more Proportional investment more positive for Very High positive for Very High Investment / Low effectivenessInvestment / Low effectiveness

No. Effective Firms over Time

0

2

4

6

8

10

12

1 225 449 673 897 1121 1345 1569 1793

Time Period

V.High Invest / V.HighEffect

High Invest / HighEffect

Med Invest / MedEffect

V. High Invest / LowEffect

Low Invest / HighEffect

Proportional Investment

No. Effective Firms over Time

0

2

4

6

8

10

12

1 225 449 673 897 1121 1345 1569 1793

Time Period

V.High Invest / V.HighEffect

High Invest / HighEffect

Med Invest / MedEffect

V. High Invest / LowEffect

Low Invest / HighEffect

Non-Proportional Investment

Scenario Outcomes – Stage 5Scenario Outcomes – Stage 5(Imitation / Marketing Defence Impact)(Imitation / Marketing Defence Impact)

2 scenarios of LOW defence 2 scenarios of LOW defence produce best GDP resultsproduce best GDP results

Medium investment & defence Medium investment & defence shows GDP decline late in shows GDP decline late in cycle time periodcycle time period

LOW imitation / LOW defence

HIGH imitation / LOW defence

MED imitation / MED defence

Scenario Outcomes – Stage 5Scenario Outcomes – Stage 5(Imitation / Marketing Defence Impact)(Imitation / Marketing Defence Impact)

Maximum no. firms for LOW imitation / LOW defence scenario, Maximum no. firms for LOW imitation / LOW defence scenario, AND best persistence of profit outcomeAND best persistence of profit outcome

No significant difference between proportional and non-No significant difference between proportional and non-proportional investmentproportional investment

Firms running “in the red”Firms running “in the red”

No. Effective Firms over Time

0

24

6

8

1012

14

1 203 405 607 809 1011 1213 1415 1617 1819

Time Period

High Imit'n / HighDefense

Med Imit'n / MedDefense

Low Imit'n / LowDefense

High Imit'n / LowDefense

Low Imit'n / HighDefense

Imitation and

Defense

Investment

Combinations

No.

Effective

Firms

Average

Duration of

Firm (Time

Periods)

Average

Net

Account

Level per

Firm

Persistence

of Profit

(Average

Net Account

Level per

Firm

Duration)

High (100) / High

(100)

8 523 -104,611 -386

Med (10,000) /

Med (10,000)

10 1,475 -37,049 -26

Low (1,000,000)

/ Low

(1,000,000)

15 1,329 23,174 47

High (100) / Low

(1,000,000)

9 1,521 -43,115 -109

Low (1,000,000)

/ High (100)

10 740 -80,403 -298

Analysis SummaryAnalysis Summary

Essential to analyse at both macro and micro level Essential to analyse at both macro and micro level Small amount of random innovation beneficial for Small amount of random innovation beneficial for

economy (not excessive, however)economy (not excessive, however) But But notnot for firm profit for firm profit

Mixed results (GDP, no. firms, profit persistence) for Mixed results (GDP, no. firms, profit persistence) for credit / dissolution scenarioscredit / dissolution scenarios

Low sensitivity for predator behaviour scenarios, but Low sensitivity for predator behaviour scenarios, but higher profit for LOW setting (marginal)higher profit for LOW setting (marginal)

MediumMedium R&D investment & effectiveness optimum R&D investment & effectiveness optimum combination for economy but not for firmscombination for economy but not for firms

LowLow imitation / imitation / LowLow marketing defence optimum for all marketing defence optimum for all measuresmeasures

Future DirectionsFuture Directions

Establish credit creation through entrepreneur activity, Establish credit creation through entrepreneur activity, with imitation “swarms”with imitation “swarms”

Establish conditions and logic for business cycles Establish conditions and logic for business cycles (Schumpeter theory)(Schumpeter theory)

Establish production dynamics for firms and tiered Establish production dynamics for firms and tiered industry structures (intermediate firms and product industry structures (intermediate firms and product structures)structures)

Multiple, concurrent competitive strategy execution by Multiple, concurrent competitive strategy execution by firmsfirms

Focus on firm balance sheets and P&LFocus on firm balance sheets and P&L