The Return of the American Entrepreneur
Over the last generation, American entrepreneurship — measured by business openings over closing — has steadily declined. The net growth in small businesses in 2016 was 1.9%, compared to 4.2% in 2006, a 20-year high leading up to the Great Recession. As a result, markets across industries have concentrated, and confined themselves largely to cities — leaving workers outside of major metropolitan areas in the cold. America’s populists have cried out against the vanishing community, identifying globalism and free trade as culprits. It’s true that wages have stagnated and the nation’s competitiveness has declined, as the Dynamism in Retreat report from the Economic Innovation Group shows. The solution lies in reigniting the engines of creative destruction.
Entrepreneurship is increasingly rare because it’s increasingly hard. Only a fraction of entrepreneurs create game-changing products that command large revenues. In their new book, “Innovation + Equality,” economists Joshua Gans and Andrew Leigh argue that, given the amount of uncertainty at each step of the entrepreneurial process, the key motivating factor for innovators is the perceived likelihood of success. It’s necessary to have the right idea with the right resources at the right time while targeting the right market. That’s very unlikely to happen.
It becomes even more unlikely whenever American innovation policy provides the wrong incentives. For the past 40 years, the government has used financial incentives, such as tax cuts, to reward innovators — once they’re already successful. Policymakers were convinced they’d boost growth by encouraging entrepreneurs to bear the risk of innovation with promise of handsome reward should they succeed. That didn’t work, as 50% of startup ventures fail within the first five years. Instead, inequality rose as increasing entry barriers hindered would-be entrepreneurs’ desire to risk financial insecurity.
The alternative? Creating an environment wherein the risks associated with entrepreneurship are reduced — thus increasing the perceived likelihood of success. Gans and Leigh have an idea on how to do just that. In their book, they present a set of proposals for increasing innovation and decreasing inequality — changes that would work hand-in-hand to create the kind of entrepreneurial-friendly environment America desperately needs.
These suggestions include policies like increasing teacher quality, encouraging vocational education, banning noncompete agreements that prevent employees from moving to jobs in the same industry, and limiting occupational licensing.
Gans and Leigh offer more radical proposals as well. They suggest that the public sector take a proactive role as a partner in the innovation process, bearing some of the early stage risks that come in developing groundbreaking innovations. Public agencies, concerned with the long-term social good rather than short-term profits, have the capacity to finance the moonshot innovations and basic scientific research that fail to attract venture capitalists.
The public sector is the gatekeeper of the information entrepreneurs need, too. It maintains national statistics and the research that occurs within agencies and universities. By investing in improving national statistics and data access, and increasing the accessibility of publicly-funded research, the public sector could create a level playing field for large firms and fledgling startups to compete on the quality of their products.
Too much is at stake for us to not pay attention to helping entrepreneurs innovate. In domains like biotechnology or artificial intelligence, and in areas like healthcare and transportation, entrepreneurs lack proper infrastructure to support scaling their projects. In medical technology, administrative systems that lack standardization prevent new technologies tested locally from expanding. In transportation, poor road infrastructure remains one of the biggest hurdles for self-driving cars.
We must also realize that innovation is a social process. It requires the right mix of skills and resources to support new ideas. The Creative Destruction Lab, based out of the University of Toronto, has used its platform as a deep science startup accelerator to bring together researchers, business leaders, policymakers, and investors, connecting them with each other, and tying their interests together. As a result, the support that exists for innovators has increased, while the risks associated with bold ideas decreased. These programs should be widely encouraged, leveraging the talent and community influence of public universities, especially in areas trying to revitalize their economies for a digital age.
The strategy of using financial incentives like tax cuts to increase entrepreneurship has failed with the decline of American dynamism. An excessive focus on rewarding success, rather than increasing the opportunity for success, has discouraged innovation. A new strategy is needed that prioritizes creating the optimal entrepreneurial environment for innovators. Without this, the political frustration expressed by working men and women across the country will only grow, and innovations that have long made America flourish will become ever more diminished.