Entrepreneurial ability and market selection in an infant industry: evidence from the Japanese cotton spinning industry

In this paper we develop a new insight into the process of learning in an infant industry, in a setting where entrepreneurs are differentiated by talent. The learning rate depends on the quality of ideas, not on the scale of the industry, and a competitive open economy regime may furnish a better environment for innovation-led industrial growth even in the presence of industry-wide increasing returns to scale. Competitive market selection of ablest entrepreneurs forms a crucial condition for successful industrialization. The model is tested against the evidence of the industrial revolution in Japan, which presents a unique historic experiment in which an internationally competitive textile industry was eventually set up without government protection after earlier experiments with subsidized firms had failed. (C) 2003 Elsevier Inc. All rights reserved.