INTERVIEW: Author Examines State of Entrepreneurship
In their new book Better Capitalism: Renewing the Entrepreneurial Strength of the American Economy, Robert E. Litan and Carl J. Schramm address the question of why entrepreneurship in American is struggling and what needs to be done to renew it. Litan, director of research for Bloomberg Government and former vice president for research and policy at the Ewing Marion Kauffman Foundation, answered questions from FreeEnterprise.com.
FreeEnterprise.com: How would you characterize the state of American entrepreneurship today?
Litan: It's struggling. After averaging about 500,000 to 600,000 starts a year between the mid-1990s and 2008, the annual number of starts has fallen to around 400,000, an unacceptable low. Compounding the problem is a dip in the five-year survival rate from roughly 50% to 45%, and a secular decline in the number of jobs created per startup. This all adds up to less job creation from startups—historically responsible for virtually all net new jobs—than we need to have a strong recovery.
Is American capitalism becoming more like its European cousin? Why or why not?
There are really two Europes -- Western Europe, which has had a long capitalist tradition but with economies heavily dependent on large firms, and Eastern Europe, which converted to capitalism after the fall of the Berlin Wall fell and is driven by relatively more entrepreneurial ventures. With its entrepreneurial vigor flagging, the United States unfortunately has been moving in the direction of Western Europe. Nonetheless, the U.S. remains among the most entrepreneurial countries in the world, one that attracts the best and brightest from other countries to study here. A central challenge for policy makers looking ahead is to revise our immigration laws so these students are allowed to work and start their own businesses here. We must also allow skilled immigrants who are here on temporary visas to launch businesses to remain here if they desire.
Your book focuses on high-growth firms rather than simply all small businesses and sole proprietors. What are the unique characteristics of high-growth firms and why are they so important to our economy recovery?
Economies depend on firms of all sizes to make their contribution, but high-growth firms in particular are more likely to introduce breakthrough innovations with positive 'spillovers' for the rest of the economy. Otherwise, they wouldn't enjoy such rapid growth. Think of Microsoft or Apple, which have provided platforms for a vast number of "app developers" to become successful. The more high-growth firms the U.S. economy can birth and nurture, the faster our overall economy will grow.
What are the biggest obstacles to entrepreneurship?
While the U.S. remains one of the most hospitable places to start a business, various federal, state and local rules can slow the process down. At the local level, zoning rules can often delay the launch of a business at a critical time. Occupational licenses, mostly administered at the state level, have proliferated to the point where 30% of the workforce today must have a license of some form, up from just 5% in 1970. These restrictions impede the launch of many smaller businesses. But perhaps the largest obstacle to the formation and growth of new companies today in the wake of the financial crisis is risk aversion on the part of would-be entrepreneurs and their potential funders. The federal government could help address this problem by getting its long-term finances in order—removing the threat of a future fiscal crisis—while reforming the tax code to increase the after-tax returns from business activity.
Since the financial crisis in 2008, what government policies, if any, have encouraged entrepreneurship?
The Obama Administration has launched a private sector initiative—Startup America—to help link new firms with larger firms that could be their customers. And Congress and the president agreed on a package of securities reforms in April 2012—embodied in the Jobs Act—that should help growing firms become even more successful. But there is still much more that needs to be done, which is a major reason that Carl and I wrote Better Capitalism.
Regulatory reform is one of the four policy solutions you propose in your book. Can you be more specific about what types of regulations pose the biggest problems for entrepreneurs?
Until the Jobs Act was enacted, I would have put financial regulations that impede the raising of capital at the top of the list. Assuming that the SEC implements regulations that are consistent with the spirit of that law, those impediments should be eased. Nonetheless, many firms starting out in the past have relied on some form of bank financing to get started or to grow. Since the financial crisis, bank regulators have tightened their scrutiny of banks, which, however necessary this tightening was, has nonetheless made banks far more risk averse in extending any kind of loans, including commercial loans.
More broadly, there are too many federal statutes that do not permit regulatory agencies to balance benefits against costs when designing and implementing regulations. This problem should be remedied by an omnibus act that simply requires all regulations to pass a benefit-cost rest.
How do we get capital into the hands of entrepreneurs to bring good products and services to market?
We need bank regulators to be more flexible in examining banks so that they can return to their main role of channeling deposits to support commercial activity. As for equity capital, I have faith in new crowd funding platforms and techniques that will be legal under the Jobs Act, assuming the SEC allows this new phenomenon to reach its full potential.
How does immigration policy impact entrepreneurship?
Studies show that immigrants account for roughly one-quarter of successful high-tech businesses in particular, or about double their share of the U.S. population. We need a national immigration policy that reflects and takes advantage of this important fact.
Immigration reform, access to capital, and regulatory reform are all familiar solutions to our economic malaise. Are there any "outside the box" policy innovations that you propose to spark entrepreneurship?
Yes, one in particular: conditioning the awards of federal research grants to universities on the grounds that they allow their innovative faculty members to license their inventions on their own, without the need for the universities' 'technology licensing offices.' In other words, innovative faculty members should have the same freedom in their commercial activities as they do in their publishing. This one change in federal policy would unleash some of our most innovative entrepreneurs—'rock star' scientists in our universities—to commercialize their inventions more rapidly, benefting consumers, their universities (which typically have a contractual share in the profits), and the faculty innovators themselves.
You've talked about what's wrong with the system and what needs fixing. Is there something inherent about American entrepreneurship that makes it exceptional and that ensures that America will always be an entrepreneurial powerhouse? In other words, what are we doing right?
As I have said, America still remains the 'go to' place for launching a business, especially in high-tech fields. We have great universities, we have an effective legal system by and large, and we have an entrepreneurial culture. But other countries have learned from us, and while everyone in the world (including Americans) benefits from new ventures wherever they are launched, Americans benefit most from home-grown new firms. We need to step our game to make sure that the U.S. continues to be the Mecca of entrepreneurship it has been for at least the last century.