The Age of Entrepreneurs

Stephen DeAngelis

April 16, 2007

According to Robert E. Litan, vice president of the Ewing Marion Kauffman Foundation in Kansas City, Mo., the United States has never been more adventurous when it comes to starting businesses [“Innovators Matter Most,” Wall Street Journal, 24 Feb 2007].

“The U.S. in the midst of the most entrepreneurial era in its history, with more than 500,000 Americans involved in launching their own companies each year and an estimated 10% to 15% of all working adults engaged in some kind of entrepreneurial activity.”

The entreprenuers who really matter, Litan insists, are not those who open franchises but those who can be classified as true innovators. He writes:

“Among these entrepreneurs, it is the innovators who matter most. Their enterprises are the ones which create the jobs and industries of the future — as they have lifted the economy’s productivity in the past. The automobile, the airplane, the telephone, air conditioning, the personal computer and its software, and Internet search engines — all were launched by innovative entrepreneurs rather than large companies. So how do we foster more of these innovators?”

Litan doesn’t write about how to make people more innovative. I’m not sure that is even possible. You can teach people how to think more creatively by giving them tools that allow them to examine challenges from different perspectives, but teaching them to think conceptually, in the way that true innovators do, is another matter. You can teach people to assess benefits and risks, but I’m not sure that you can turn risk avoiders into risk takers. Litan, therefore, does not pursue that topic but rather asks different questions. How can you help natural innovators follow their instincts? How can you create an environment that fosters rather than impedes innovators? Litan asserts that past examples of successful policies should guide us in the future.

“Experience has shown us some of the public policies over the past several decades that have reduced obstacles to innovation and increased the potential rewards of entrepreneurial risk taking. The removal of legal barriers to entry — and the lifting of price controls — in the transportation and telecommunications industries has lowered costs and barriers to entry for new firms throughout the economy. Reforms that permitted pension funds to invest in venture-capital partnerships helped unleash the growth of a new form of entrepreneurial finance. The 1980 Bayh-Dole Act, which allowed universities to commercialize technologies developed with federal funds, has promoted university-based innovation.”

If good policies foster entrepreneurship — and if entrepreneurship is key to America’s economic future — Litan asks, “What next?”

“Recently, the Kauffman Foundation, with the assistance of Inc. magazine, asked some of the nation’s most successful entrepreneurs what they needed to grow. They cited four challenges, and academic research has helped to pinpoint the policies that best respond to each of them.

“Ensuring a skilled work force. Entrepreneurs say that the biggest constraint on growth is finding ‘talent’ — highly skilled, entrepreneurial workers. Thus we will need major improvements in K-12 education, which are unlikely to come about without more charter schools: parents and students being able to choose their schools, and principals and teachers with more freedom, and accountability. We also can use as many skilled immigrants as are willing to come here. Recent surveys indicate that immigrants have been essential in forming a quarter of our rapidly growing high-tech companies. We ought to be encouraging, not limiting, the entry of such people. [See my recent post The Visa Game — Hottest Ticket in Town] How about giving permanent residency to any foreign student who obtains a math or science degree at one of our universities — since these skills are key to the formation and growth of high-growth companies of the future?

“Reforming health care. Escalating health-care costs rank high on entrepreneurs’ lists of concerns. They’re not alone. Workers are anxious about losing their own health insurance, especially if they take the risk to leave their stable jobs to form their own businesses. The obvious answer to both challenges: Phase out current tax linking employment with health care, using the revenue to subsidize the purchase of health insurance by those of limited means. President Bush has offered one approach, surely there are others. Whatever is done, prohibit insurers from discriminating or refusing to insure based on an individual’s pre-existing health conditions (as we do for genetic conditions).

“Promoting innovation. We already do a great job innovating and commercializing. But we can do better, by enhancing government funding of research in basic science and engineering; reforming patent law so that protections are not so overly broad that they inhibit the creation of innovative, new firms; improving ways for university-developed ideas to be commercialized; and funding efforts to identify and take advantage of innovations developed abroad, just as foreign companies have been doing with U.S.-based innovations for decades.

“Limiting costly regulation and liability litigation. Because of their small size, entrepreneurial firms are especially vulnerable to excessive regulation and liability litigation. Accordingly, entrepreneurs have the most to gain from sensible reforms requiring all major federal (and state) regulations to be implemented only if estimated benefits exceed costs, and by adopting further liability law reforms (without reducing incentives for all companies to make safe products). Two reforms would help curb frivolous litigation: adopting the “English rule” — loser pays — on attorneys’ fees for litigation with commercial parties on both sides; and limiting the award of punitive damages where defendants have complied with prevailing regulatory standards.”

These are not simple topics that can adequately be dealt with in short paragraphs. As an entrepreneur, I’m all for incentives that let me invest more of my backers funds into activities that create products and grow the business. As an inventor, however, I want to ensure that I have sufficient legal protection for the intellectual capital that my colleagues and I generate. As a boss, I want to make sure that my employees receive the benefits they deserve. This is necessary to attract the very best people to help a business grow. At the same time, I have to be concerned about benefit costs because such overhead impacts a business’ competitive edge. A productive discussion among all stakeholders (entrepreneurs, policymakers, & consumers) needs to take place. There is not a state in the union that does not benefit from entrepreneurial activity. As a result, lawmakers (at all levels) should be in favor of fostering the innovators — some are. At the moment, Michigan is sponsoring a campaign to attract entrepreneurial companies using actor Jeff Daniels as its spokesman. I know other states are also actively seeking such companies. This kind of competition between states is a good thing. It benefits both states and startups, creating an obvious win-win situation. States that have lost manufacturing jobs should seriously consider putting together a package focused on attracting innovative companies. Such a program should include education (at all levels) as part of the mix. Entrepreneurial companies require a motivated and educated work force. If Litan is accurate about America being in the midst of an entrepreneurial era, we should embrace the trend, stop lamenting about lost manufacturing jobs we are unlikely to recover, and figure out how to involve displaced workers in entrepreneurial businesses.