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.