The Ripon Forum

Volume 50, No. 2

April 2016

Helping Entrepreneurs Succeed

By on April 17, 2016

by WENDY GUILLIES

Wendy_Guillies_062015-3 %283%29From Shark Tank to Silicon Valley, Elon Musk to Mark Zuckerberg, and Uber to Airbnb, entrepreneurship has never been as highly regarded in pop culture as it is now. Entrepreneurship and firm dynamism are critical for innovation, meaningful employment and a higher quality of life for all Americans. But entrepreneurship is not thriving — at least not yet.

Research indicates that the number of new firms each year has been declining for decades, and the decline only accelerated during the Great Recession. Even with a modest recent uptick, our economy is now following a trend where the rate of business creation in the United States is about half of what it was in the 1980s. The decline in startups – coupled with the concentration of power in a small number of large firms – creates a less dynamic economy.

Despite this gloomy picture, there is reason to believe that we are about to enter a future with robust economic growth led by entrepreneurs. If we remove the artificial barriers that impede entrepreneurship, we may see a real world experience that matches the glamourous pop culture narrative.

To understand the entrepreneurial decline and general stagnant economic recovery since the Great Recession, take a look at the barriers entrepreneurs face. Burdensome regulations for new and young businesses create a strong bias toward incumbent firms. Established firms sometimes seek out governmental protections under the guise of public good, but those protections ultimately just crowd out new firm activity. Curbing startups means fewer young, high-growth firms – the businesses that drive job creation and productivity gains.

Research indicates that the number of new firms each year has been declining for decades, and the decline only accelerated during the Great Recession.

Firm financing is always a point of concern for most new businesses, and the research shows traditional funding sources may be diminishing for entrepreneurs. While the total value of commercial loans has doubled in the past couple of decades, the share of those loans going to small businesses has decreased from about half of all bank loans to under one-third.

Demographics also are changing, creating further impediments to entrepreneurship. Millennials are having a stunted impact on economic growth. Reaching working age during the recession and subsequent modest recovery for the U.S. economy certainly did not help. While it is true that millennials are not starting businesses at the same rate that older generations did at the same age, millennials also are not at the peak age for starting a business: late thirties and early forties.

The general aging of the population, including the retirement of “boomers,” can explain part of the decline in economic mobility and productivity. However, we have been fortunate that older Americans increased their participation in the labor force at the same time that the participation rates of other age groups decreased. And, boomers have shown higher propensities to start companies even into retirement.

As technology continues to lower the costs for some aspects of entrepreneurship – software, computing power, robotics, artificial intelligence and cloud storage – we can imagine a not-so-distant future filled with entrepreneurial activity. The Kauffman Foundation outlined how we can get to this future in our “New Entrepreneurial Growth Agenda.” Forty researchers, academics, policy experts and other thought leaders contributed essays that lay the framework for reaching robust entrepreneurial growth. A few of the key policy recommendations are:

Despite this gloomy picture, there is reason to believe that we are about to enter a future with robust economic growth led by entrepreneurs.

1) Adapt existing regulations for the new economy — Federal policy should provide clarification of how the changing nature of work (gig economy, irregular work) affects worker rights. Current employer and contractor worker classifications are no longer sufficient to capture the nature of employment today. Without clarification, this raises uncertainty for startups.

2) Reduce the opportunity cost of entrepreneurial experimentation — Policymakers should consider allowing individuals to maintain unemployment insurance when they are starting a business. This policy change has already worked in France by increasing not only the number of startups, but the quality of those firms as well.

3) Increase the labor market supply and velocity — As the United States confronts lackluster labor force participation rates, we would benefit from expanding immigration quotas. One component of immigration reform that is particularly urgent is the nation’s lack of a startup visa. Fifteen other countries have some form of a startup visa that allows immigrant entrepreneurs to stay and create jobs. The United States is missing out on a great way to enhance the global exchange of ideas.

4) Decrease incumbent bias to support entrepreneurial entry and competition — We should ensure current beneficial policies – regulatory exemptions, loan guarantees, subsidies – take in to account company age instead of just size. We also should remove unneeded occupational licensing, which artificially limits employment and startups. We need to safeguard against incentives that inhibit growth, especially fast-growing startups.

5) More data and research on entrepreneurship — Collecting and publishing more data and research on entrepreneurship is imperative to making wise policy decisions. We can make evidence-based policies rather than emotional or political responses to topics ranging from student loans, regulations, immigration, unemployment insurance, education and health care reform.

Our founder, Ewing Marion Kauffman, who would have turned 100 this September, believed in the power of “making a job.” That’s exactly what entrepreneurs do when they bring new ideas to the market.

We don’t need to predict the future that entrepreneurs will create. We just need to get the unnecessary obstacles out of their way so they can go full steam ahead.

Wendy Guillies is President and CEO of the Ewing Marion Kauffman Foundation, a private, nonprofit organization that works to advance entrepreneurship and improve youth education to help individuals attain economic independence.

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