Commentary

Is America Encouraging the Wrong Kind of Entrepreneurship?

Is America Encouraging the Wrong Kind of Entrepreneurship?

Last month, economist William Baumol passed away at the age of 95. His death was universally mourned by the economics community, many of whom shared the view that he had passed before receiving a much-deserved Nobel Prize. One of us had the great privilege of working with him, befriending him, and being able to regularly witness his economic wisdom, even in his later years.

Among his many contributions to economics, Baumol is most famously known for his “Cost Disease”, which explains why high-productivity industries raise costs and therefore prices in low-productivity industries. This insight is particularly relevant now, as economic activity has shifted into low-productivity services like healthcare and education, where price increases are devouring public and household budgets, and whose continued low productivity has weighed down U.S. productivity growth overall.

However, a lesser-known work of Baumol’s is equally relevant today, and may also help explain America’s productivity slump. Baumol’s writing raises the possibility that U.S. productivity is low because would-be entrepreneurs are focused on the wrong kind of work.

Feeling Isolated? Build a Diaspora

Talent flight is a real problem. Not just for college towns, but for major cities and regions outside of coastal innovation and knowledge hubs like Silicon Valley and New York. The US Midwest, for example, is notorious for producing high rates of engineering and science graduates from top-flight schools, only to see them flee for the coasts (though, this trend may be changing somewhat).

Over the long-term, city leaders need to think hard about how to make sure that would-be local entrepreneurs and other talented individuals have the resources they need to stay at home. But, let me suggest another course of action that can be taken right away: build a diaspora.

Colorado and the Importance of Startup Density

Last week, the Ewing Marion Kauffman Foundation released its annual Kauffman Index of Entrepreneurship, detailing “new venture creation” in the United States through 2016. The index reported that the rate of entrepreneurship in America held steady last year, up sharply from lows reached during the Great Recession.

Also included are measures across all 50 US states, the40 largest  metropolitan areas, and along various dimensions of entrepreneur characteristics (race, gender, nativity, education, and age). Colorado ranked sixth in terms of “startup density” (new firm formations per capita) and Denver was tenth among the largest metropolitan areas for the same measure.

But, these rankings mask important details—they doesn’t distinguish between growth-oriented entrepreneurship and small business formation (this distinction matters for public policy and for economic growth), and the geographic boundaries may be too broad. Fair enough, data limitations abound for this high-level view of activity, and Kauffman provides an informative, timely, service no less.

What remains clear is that density matters a great deal for growth-driven, innovative enterprise, and we can learn something from the places that continually produce these types of businesses.

Chicago's Startup Ecosystem: Some Reading

Chicago's Startup Ecosystem: Some Reading

I'm going to Chicago tomorrow to attend the wedding of an old friend over the weekend. Chicago has always been a special place for me—I lived there for a few years after college and received a first-rate education on the city's south side. Chicago is awesome.

A lot has changed in the city since then, including the development of a booming tech and startup scene. Some of this I've learned about through conversations with active participants in the startup community there, and some has been through a series of research that has been published in the last few months.

As such, I'll use this opportunity to share some of these items with readers who might be interested. The collection of readings—which span academic working papers, analytical blog posts, and business case studies—are all great. They are informative, well-written, and resourceful. And please, if you know of others, add them to this thread in the comments section. Enjoy.

Restart America: Startup-Friendly Policies in the “Third Wave”

If you haven’t done so already, I highly recommend reading The Third Wave: An Entrepreneur’s Vision of the Future, a New York Times Bestseller by Steve Case that published one year ago. Steve is back in the news, with an expanded version (in paperback) out this week that adds a chapter on startup-friendly policies in the post-election environment.

Joining the Startup Revolution

Yesterday, I made my first contribution to the Startup Revolution blog. In it, I discussed my move to Boulder to work on a sequel to Startup Communities with my co-author Brad Feld, and my early impressions of the community here (hint: they are good!). Last night, I got to attend Demo Day for the 2017 Techstars Boulder class—it was fantastic! A lot of great companies to watch out for.

But, as this has mostly been a blog populated by Brad’s writings—and more recently, by Chris Heivly who I’ll also be collaborating with on startup communities—it’s probably a good idea to take a step back and provide a personal introduction.

Startup Communities and Saturday Morning Coffee

A recent article in 5280 Magazine caught my attention. It profiled the economic vitality of the Boulder-Denver region, dubbing it “The Most Exciting and Innovative Tech Hub in the Country.” While I expect every local publication to champion its own hometown, this one happens to be on stronger footing than most others. You see, at least in terms of innovation and startup activity, Boulder is unique among its peers.

The article—which is excellent by the way—couldn’t have come at a better time for me personally. A few days ago, I moved myself and my family to Boulder to work on a book about startup communities. Not only did I come here to work closely with my friend and co-author Brad Feld, I also wanted to experience first-hand what makes this place so special. I came here to learn… and to contribute.

Even piecemeal immigration reform could boost the U.S. economy

This was originally posted on Fortune

(with Robert Litan)

With President Obama expected to make a statement about immigration tonight, Washington is gearing-up for a fight over the President’s seeming willingness to exercise his executive authority to prevent the deportation of primarily low-skilled immigrants. While that’s worth watching, the more important economic picture risks getting lost: the impact that immigrants can bring to the American economy in the long-term. It’s the immigration discussion we ought to be having, and if the rumors are correct as of this writing, it’s the one the President will at least partially extend in the executive action that he will outline. 

High-skilled immigrants are good for America, and we should encourage more of them to come here given recent trends in entrepreneurship, where more firms are dying than being created every year. But high-skilled immigrants could help turn that trend around -- they are twice as likely to start businesses as native-born Americans. This is especially true in high-tech sectors, where immigrants are not only more likely to start firms, but also to patent new technological discoveries. Giving green cards to foreign students completing STEM degrees at U.S. universities, and to many more immigrant entrepreneurs, would increase income and employment opportunities for American workers across the board. 

We have recently published new evidence at the Brookings Institution that supports the link between immigration reform and economic growth. Our research brings a new perspective -- the importance of entrepreneurs -- to an older idea: the link between greater population growth and economic expansion.

This connection was at the heart of concerns expressed by Harvard economist Alvin Hansen in his address, “Economic Progress and Declining Population Growth," before the American Economic Association in 1938. Hansen worried that what he saw as falling rates of population growth and technological advance portended a slump in investment, which would lead to persistently low employment and income growth. Hansen’s forecast never came true, thanks to post-war booms in innovation and fertility rates.

Three-quarters of a century later, another Harvard economist, Larry Summers, has updated Hansen’s concept of “secular stagnation” to describe post-recession slow growth across much of North America and Europe. In the year since Summers first made his remarks, economists have been debating whether and to what extent his thesis will hold in the future. 

Much less publicized is another debate that concerns the current and future state of U.S. economic growth—that of a pervasive decline in the rate of firm formation and economic dynamism. We and others have documented this decline in a broad range of sectors and regions throughout the United States during the last few decades—a decline that even reached the high-tech sector and so-called high-growth firms, the small group of (often young) businesses that are responsible for creating the bulk of U.S. jobs.

And the U.S. wasn’t alone—this decline was observed in other advanced economies of the OECD—suggesting that large global factors are at play.

This evidence runs counter to the narrative that an entrepreneurial renaissance is sweeping the globe, and the seeming endless technological change disrupting the economy. We also see plenty of those signs around us, but their impacts haven’t yet been reflected in the data. Even if they were, their effects would be following more than three decades of persistent decline.

Our most recent Brookings research suggests that slowing population growth hurts entrepreneurship. This was particularly true beginning in the 1980s in America’s West, Southwest, and Southeast regions of the United States—once places with the highest rates of new firm formation as population surged in the 1970s. During the three decades that followed, however, the formation of new businesses fell partly because population growth slowed.

In other words, population growth matters.

George Mason University Economist Tyler Cowen recently warned that the “relatively neglected field” of population economics could hold answers to the period of slow growth facing much of the developed world. For Cowen, one solution is obvious: absorb more immigrants. We couldn’t agree more.

Given the declining rate of growth of native-born Americans in the decades ahead predicted by official federal forecasters, the only other sure way to boost our work force is through more legal immigrants. Welcoming more foreign-born workers makes both economic and political sense, and in an ideal world, Congress and the President would agree on a comprehensive reform package. Since that’s not likely in the cards for now, let’s at least begin with high-skilled immigrants, who can help reverse our nation’s falling startup rate and provide a boost to our innovative capacity.

Life Sciences Startups: Mixed News

This article originally appeared on the MassBio blog

(with Robert Litan)

We have authored two papers recently for the Brookings Institution documenting the 30-year decline in the “startup rate,” or the percentage of firms aged less than one year as a share of all firms. Our data show this decline in the U.S. economy as a whole, in all 50 states, in all major industries, and in all but one of the country’s 366 largest metropolitan areas.  We are as surprised and disappointed as many of our readers have been, as well as puzzled.  How can a country that has prided itself on its entrepreneurial activities, especially over the period we have analyzed, suffered such a steady erosion in the share of its firms that are truly entrepreneurial? We don’t yet have all the answers, though we hope to begin contributing a few in several weeks.

In the meantime, we’ve been digging into the data for one of the sectors of the U.S. economy – the life sciences industry – to see if there are any more encouraging patterns. We focused on this sector, and in particular its startups, because it historically has been a driver of innovation in human health care and has played an outsized role in new job creation economy-wide.

Although we didn’t have data for life sciences going all the way back to 1980, the start date for our earlier studies, we were able to examine the industry for the two decade period, 1990-2011. The evidence, it turns out, is mixed, and can be found in our detailed study published earlier this month at Brookings. Here are some of the highlights.

First, the bad news. Overall, the life sciences industry experienced a relative 23 percent decline in startups and subsequent job creation over this period, significantly higher than the 15 percent decline across the economy as a whole.

Some more bad news. There has been significant variation across three key life sciences industries, although all were hit hard in the Great Recession.  The medical devices and equipment sector saw a steady and persistent decline in entrepreneurship and net job creation, with firm formations down more than 50 percent over the period we studied. Moreover, those firms that were born created fewer jobs over time. The medical devices segment represented about one out of every two new life sciences firms in 1990, but fell to one in three two decades later – a remarkable decline that was both steep and fell from was a large base, dragging down entrepreneurship rates in the life sciences sector overall.

Here’s the good news, however. The drugs and pharmaceuticals sector has been particularly dynamic, with over 50 percent growth in new firm formation levels by 2011. Further, while the other groups (devices and labs) saw new firm formation rates fall during the 21-year period, drugs and pharmaceuticals increased by one-tenth of a percentage point. This increase admittedly is small, but against the huge drop nationwide among all types of firms, and the especially larger drop among medical device firms, we view this increase as welcome.

Finally, while the level of new research, labs, and medical testing firms grew 38 percent between 1990 and 2007, these activities were hit hard by the Great Recession. Growth contracted after 2008, and by 2011 growth was just 4 percent higher than in 1990.

The impact of this decline in number of new firms holds implications for the economy as a whole. The decline in the net job creation rate of life sciences startups overall appears to be about the same as for the rest of the economy, but despite the overall decline, the life sciences sector demonstrated a higher net job creation rate among startups relative to the rest of the private sector.  In fact, life sciences startups were key drivers of job creation in the sector during the period of 1990 to 2011, whereas the effect of job creation and destruction among medium and mature firms mostly canceled each other out. The same is not the case for the private sector as a whole, where medium and mature aged firms are large net job destroyers.

The decline in new firm formations in new medical device and equipment firms in particular appears to stretch beyond the cyclical effects of the Great Recession.  We haven’t figured all the reasons why, but for starters, we believe that new insurance reimbursement models, regulatory restrictions, greater competition, and venture funding scarcity have all contributed to the decline in entrepreneurship in medical devices. Policy makers and citizens pay heed.