October 2006

The Entrepreneurial Imperative

What is the secret behind America’s economic success? Could it be our technology, or is it our citizens’ level of education? Carl Schramm, president of the Kauffman Foundation, believes the secret lies in our spirit of entrepreneurship. In The Entrepreneurial Imperative (Harper Collins, 2006), Mr. Schramm examines the history of innovation in the United States, as well as the current state of American corporations, government, universities, and start-up firms. He concludes that in order to maintain its economic “superstar” status, the United States must increase its support of entrepreneurial activities in all aspects of society.

Is entrepreneurship really the key to America’s economic success? What does the future hold for our businesses? What does the everyday citizen need to know about our changing economy? On October 23 at AEI, Carl Schramm and Kevin A. Hassett discussed the future of innovation in America and around the globe.

Carl Schramm
Author of The Entrepreneurial Imperative

In the 1970s there was a trend that stifled the entrepreneurial spirit of American businessmen and women. It was believed that the economy was the best way to provide predictability and stability. This was done through the triangular relationship between big business, big labor, and big government. The recessions of the 1980s led to a slight altering of that relationship. Big labor was no longer a major player in policy formation because the size of labor unions trailed off during this period. The large industrial firms took on a large amount of debt during the 1980s. In order to avoid bankruptcy, these firms no longer put as much money into research and development or innovation. The government continued to expand intellectual property and fund basic research. Universities have become more influential in policymaking because they contribute research, technological innovation, and human capital to the market. Since the 1980s, entrepreneurs have become a separate driving force in the national economy.

The renewal of entrepreneurship is evident in two ways. First, there has been an extraordinary change in the view of job tenure. In the 1960s, experts estimated that a person would hold four jobs between the ages of twenty and sixty-five. Now it is estimated that an average person will work four jobs before the age of thirty. There is a 20 percent chance that one of those four jobs will be a self-started business. Second, well over 60 percent of the jobs currently created in the United States are in firms less than five years old. The creation of new firms effectively creates new jobs and helps combat recession. This may account for the increase of the culture of entrepreneurship throughout the 1980s and 1990s.

Kevin A. Hassett
AEI

The Entrepreneurial Imperative describes what is right with the U.S. economy, but it also explores a major threat to that economy--namely, the bureaucracy in Washington, D.C. It also describes the relationships and interplay between start-up businesses, established large-scale firms, universities, and the government.

The large-scale firms tend to reach a point of bureaucracy so stifling that innovation no longer occurs. In fact, very few large-scale firms continue to innovate new technology or contribute to the intellectual community. General Electric, as a large firm that continues to contribute to innovation, is an exception to this rule. Universities, at present, have two problems. There is a lack of business education in the actual how-to of operations. Furthermore, undergraduate programs tend to prevent entrepreneurs from actually trying to make money. Rather, students are taught vague theories that may or may not work once they actually try to run a business. The Entrepreneurial Imperative does a less complete job explaining why start-up firms emerge and needs to better expand its discussion of the government’s role in the market.

There are entrepreneurs in every industry. Each of these entrepreneurs is expanding his industry, while the large-scale firms are stagnant in their contributions. The small start-up businesses can make a difference when they are bought by the large-scale firms. Large firms are experienced at turning ideas into revenue, and by using this experience, they can efficiently supply the public with technologies or ideas that were previously limited by scale. Unfortunately, tax laws often prohibit large-scale firms from efficiently acquiring small firms. As a result, expenditures of the small firms cannot be deducted from future profits of the large firms once the merger occurs. This causes the small start-up firms to be the highest taxed area in the economy.

The United States is unique in the way it accepts failure. If an entrepreneur fails in establishing a business, the failure does not have to ruin the entrepreneur’s life. Bankruptcy can be declared, and the entrepreneur can go on with life. For example, in the state of Florida, one’s residence does not count as an asset that can be taken to pay debt. A study by Aparna Mathur shows that states with more forgiving bankruptcy laws tend to have a higher rate of entrepreneurship. Bankruptcy laws have an impact on entrepreneurs because they can either stifle or encourage business formation.

AEI intern Andrew Roozeboom prepared this summary.