If you judge the state of entrepreneurship solely by how much attention it gets in the popular media, you’d think things were booming. Rock star entrepreneurs like Jeff Bezos, Elon Musk and Jack Dorsey are everywhere and each week brings news of a new company valued at a mindboggling amount. VC is up and crowdfunding is hot.
But the truth is, good press or not, entrepreneurship is on the decline in this country. In this article, Dane Stangler, vice president of research and policy at the Kauffman Foundation, explains what needs to be done to reverse that.
How the U.S. Can Revive Its Entrepreneurial Vigor
By Dane Stangler
This may sound odd, but the United States needs a revival in entrepreneurship.
Venture capital funding is at levels not seen since the dot-com bubble, and angel investment has grown strongly as well. Startup valuations are astronomically high, with dozens of companies above the $1 billion mark, including Airbnb, Dropbox, and Jawbone. The data firm CB Insights counts 588 companies in its 2015 “Tech IPO Pipeline.” On college campuses, entrepreneurship has been the fastest growing curricular, co-curricular, and extra-curricular activity on campus in recent years. And, business accelerators and incubators have proliferated wildly. There is even, to the chagrin of many, an Entrepreneur Barbie.
American entrepreneurship has never been stronger, right? Unfortunately, it doesn’t appear that way.
Researchers, led by economist John Haltiwanger at the University of Maryland, have found that new firm entry rates are falling and young firms are closing at higher rates than before. My former colleague Bob Litan and coauthor Ian Hathaway have confirmed these findings (although the economy is not “aging” quite as much as they claim). These trends predate the financial crisis, were exacerbated by the recession, and have rebounded only minimally during the recovery. A revival, it seems, is in order.
Actually, “revival” is not exactly the right word. What is needed, more accurately, is economic renewal driven by an increase in entrepreneurial dynamism. Haltiwanger and others have uncovered not just a drop in business creation but also a broad decline in “business dynamism” across the economy. “Labor market fluidity”-the pace at which workers change jobs in search of a better match-has also diminished. Other researchers have found a general decline in firm dynamics-the U.S. economy is getting a smaller productivity bang from fast-growing companies.
Many markets have become either entrepreneurially stagnant, or are experiencing massive efforts by incumbent businesses to use their political and economic power to protect themselves from new competition. Certain sectors of the economy have become dominated not necessarily by older firms, but by larger companies-think about Amazon and Google, for example. In sectors not necessarily associated with technology-such as the beer industry-an uptick in entrepreneurial activity, driven by craft brewers, has prompted efforts by incumbents to use laws and regulations to keep them out.
At the micro level, the increasing prevalence of “rent-seeking” behavior by established firms has thrown up more and more barriers to new entry and potential innovation. In states and cities, this is best represented by an increase in professional and occupational licensing-its spread has in some areas moved far away from any justification for protecting consumer welfare. It’s also getting harder for individuals to move around not just from job to job, but from place to place as well. There is plenty of evidence that local land use law is being used to hamper startups and growth.
Everywhere you look, it seems, despite the verbal homage paid to entrepreneurs by policymakers and Fortune 500 CEOs and a rise in the general consciousness about entrepreneurship, the economy is getting less entrepreneurial, less dynamic, and thus less productive.
What can be done about this? Policymakers, by looking for ways to release entrepreneurial energy, can help spark economic renewal. Here are a few areas they can start.
First, expand the pipeline of new entrepreneurs by opening up more pathways for immigrant entrepreneurs. There is some evidence that foreign entrepreneurs, who in previous years would have come to the United States to start and grow their companies, are now migrating elsewhere. The political climate in the United States today is not entirely welcoming to immigrants, even entrepreneurs, and they are also drawn elsewhere by more and more incentives established by other countries. Whether it’s a startup visa, stapling a green card to a STEM degree, or some other mechanism, this should be the first place policymakers look because it’s low-hanging fruit.
Second, policymakers should approach regulation not merely as something to be increased or decreased in the aggregate, but as a tool for promoting competitive markets and new entry. Too often, regulation is used as a tool for protecting incumbents-whether it’s the proposed Regulatory Improvement Commission, a general sunset provision, or a periodic regulatory review, policymakers need to reform regulations from a competitive, not protective, perspective.
Third, policymakers at all levels need to fix the human capital pipeline. This is not just about raising test scores or encouraging more students to study science and engineering-although those would obviously be positive developments. The human capital debate today is locked in a narrow discussion about what employers need. That’s necessary, of course, but policymakers need to lead a broad discussion about how to create a 21st century workforce, not one that’s designed only for the needs of today.
Finally, policymakers need to use their financial leverage to collect better data on what is or isn’t working in supporting entrepreneurs. Entrepreneurship education and training programs have exploded, but nobody knows whether that’s a good or bad (or neutral) thing. When an accelerator or incubator or competition or some other program receives public funding, it should come with a stipulation for collecting data and testing the effectiveness of the intervention.
These are just starting points. Falling economic dynamism and stagnant entrepreneurship demand action-the United States needs entrepreneurial renewal, and policymakers can help lead the way.
Dane Stangler is Vice President of Research & Policy at the Ewing Marion Kauffman Foundation.