Sunday, March 01, 2015

Sharpening Our Understanding of How to Shape Our Economic Future

Sharpening Our Understanding of How to Shape Our Economic Future

State of Entrepreneurship
According to just about every objective measure, the United States remains the most entrepreneurial country in the world. But, as I noted in a recent testimony on Capitol Hill concerning declining rates of new firm formation, there is growing concern that the Great Recession has sapped America’s entrepreneurial vitality. The data are, in fact, quite sobering.

At the Kauffman Foundation’s recent State of Entrepreneurship Address, we learned from Wendy Guillies, acting president and CEO of the Kauffman Foundation, that:

  • New business formation dropped by more than 30 percent after peaking in 2006 and has only slowly recovered.
  • Entrepreneurial dynamism has declined: survival rates for early-stage firms have been falling since the early 1990s and the United States economy is getting smaller contributions from high-growth firms.
  • Access to capital remains restricted – over half of young companies that applied for credit were rejected.
  • Many would-be entrepreneurs are struggling financially from little to non-existent wage growth, lost wealth from the collapsed housing bubble, and high levels of consumer and student loan debt.

We also learned that, due to demographics, the United States is at something of a crossroads: while the large baby boom generation ages out of the workforce, the large millennial generation’s entrepreneurial prospects are hampered by debt. There is an optimistic scenario, but also a pessimistic one. In her address, Guillies discussed the need for a renewed sense of possibility, and a renewed notion of shared prosperity. She also explained why entrepreneurship is the best-known way to bring about this renewal.

While the trends regarding entrepreneurship in the United States are indeed troubling, I see reasons to believe in the optimistic scenario. For starters, the government is responding. This is as it should be: in 2008, at the depth of the financial crisis, Kauffman Foundation surveys found that 70 percent of respondents believed that entrepreneurship was the answer to getting America out of the economic collapse. And, 80 percent were in favor of the government allocating resources that would strongly support entrepreneurship.

Popular opinion has led to public sector action. High-level government officials participated in last week’s event, including three members of Congress. United States Secretary of Commerce Penny Pritzker gave remarks, as did the Small Business Administrator Maria Contreras-Sweet, herself a successful and inspiring entrepreneur.

Pritzker not only addressed the importance and impact of America’s entrepreneurs, she described the wide variety of ways her agency, which leads the government’s focus on entrepreneurship, is addressing the slow recovery in entrepreneurial activity. From a new National Advisory Council on Innovation and Entrepreneurship, to new programs that help local manufacturers implement and scale their latest innovations, the agency is focusing its attention on supporting a strong infrastructure. It is also seeking to strengthen America’s national entrepreneurship ecosystem. With a particular focus on education, intellectual property protection and access to capital, the agency seeks to foster a culture and legal system with a high tolerance for risk taking, because, as she said, “failure is often a stepping stone to success.”

Contreras-Sweet described how small and growing firms are the engine that drives job creation. She pointed out that last year, small businesses generated 7 of the 11 million jobs created. She cited polls that show Americans remain interested in starting their own new businesses. Although the firm formation rate among Millennials (those born between 1980 and 2000) is lower than for previous generational cohorts, more than half say they want to start a new business. The SBA is going online to help, and “moving into the 21st century” in the process. For example, a new web-based service connects loan applicants and lenders from across the nation.

These are just a few of the ways the federal government is reacting. Of course, on this blog we write about many more steps the public sector is taking that together give us a reason to be optimistic. 

A second reason, as discussed in the Kauffman Foundation’s State of Entrepreneurship report, is that demographics could create an entrepreneurial boom. Many members of the baby boom generation, who are now in their 50s and 60s, became first-time entrepreneurs in their 30s and 40s and are now serial entrepreneurs. When they first entered the labor force, in the 1970s, the United States economy was in a period of stagnation. When America needed renewal then, it was the boomers who started the new businesses that created the millions of jobs needed to absorb their unprecedented numbers. They are well-suited to do again.

At the other end is the millennial generation whose first wave will soon be reaching the peak entrepreneurial age, which most studies suggest is about 40. They also have the potential to unleash another entrepreneurial boom. They are exceptionally tech savvy, having come of age during the IT revolution. Entrepreneurs hold high-status in their sub-culture. They are the most well-educated generation in American history and many have taken some of the entrepreneurship courses that have exploded across college campuses during the past 15 years. And, as I mentioned above, they have entrepreneurial aspirations – half of their numbers say they want to start their own business.

A third reason to be optimistic is that as the federal government is responding, many local governments are as well. There is a new awareness among local policy makers that cities are entrepreneurship ecosystems. The country has 50 plus large cities. A focus on developing these, with the knowledge gained from national and international efforts, is helping local leaders to understand how they can fill gaps and create incentives for entrepreneurial activity.

Because cities are generally where firms are launched and developed, the upcoming annual Global Entrepreneurship Congress this year in Milan is focused on this very subject. From March 16 – 19, entrepreneurship experts from the United States and around the world will discuss, debate, and learn from one-another how cities can propel entrepreneurship – or stifle entrepreneurial dreams.

So we have plenty of reasons to believe we will see improved rates of new firm formation in 2015. Whatever happens we need to follow the Kauffman Foundation’s lead in carefully examining where and how our interventions and support are likely to yield the highest impact. This month’s discussion of boomers and Millennials is the kind of analysis that can help guide and direct policymakers to act where it will most make a difference. That fewer firms are forming and fewer are succeeding means we must seek to understand why this is the case, and take steps to address the causes.

Americans are talented people who will continue to want what their forbearers wanted: to shape their own lives and build a better future for their families and their communities. But in the face of sobering trends, the role of research in guiding smarter policy interventions has never been more important. Our economy would be well served by more efforts like those of the Kauffman Foundation to look at the data and think more deeply about what really matters in shaping our economy in the future.

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