Conference on Entrepreneurship and Economic Growth
Supported by the Ewing Marion Kauffman Foundation
Manuel Adelino and David T. Robinson, Organizers
October 14-15, 2016
The Quality of Entrepreneurship
and the Outlook for the American Economy
The state of American entrepreneurship shapes the outlook for the American economy. High-growth startups contribute disproportionately to net job creation and to impactful innovation, laying a crucial foundation for economic dynamism and prosperity. Fostering these firms is a strategic priority.
Among all new businesses, however, only a very small fraction experience the explosive growth in jobs, revenue, or valuation that propels the economy. The state of American entrepreneurship and its potential to fuel economic dynamism and prosperity therefore depends more on whether there are enough startups being founded with the potential to realize this outsized performance than on the quantity of new business starts.
From the perspective of a policymaker, a central difficulty in assessing the state of American entrepreneurship is being able to systematically account for "the skew" — the fact that the overall ability of entrepreneurship to facilitate American economic prosperity depends disproportionately on the realized performance of a very small number of new firms. How do we identify whether the economy at a given point in time is nurturing the types of startups that have the potential for exponential growth?
Traditional approaches to measuring entrepreneurship have by and large abstracted away from firms' initial differences in growth potential-tracking the rate of entrepreneurship by either counting new firms (considering all firms within a given sector to be equal) or selecting on achieving a performance outcome (such as the receipt of venture funding).
Catherine Fazio, Jorge Guzman, Fiona Murray, and Scott Stern aim to break through this impasse.
Their work calculates consistent estimates of the underlying growth potential of startups, using a combination of comprehensive business registries and predictive analytics and drawing on startup characteristics observable at or near the time of founding. These new metrics allow for the evaluation of the state of entrepreneurship across time (and place) and yield several new findings.
Contrary to the secular decline in the rate of net firm births observed with quantity-based measures, the rate at which high-potential growth startups are founded follows a cyclical pattern that is sensitive to the capital market and overall market conditions. Among key new findings are a sharp, upward swing in the number of expected growth outcomes starting in 2010; and strong differences across place and time in the likelihood of startups for a given quality level to realize their potential and scale. These findings demonstrate the importance of accounting for quality when measuring the quantity of entrepreneurship and evaluating its potential impact on future economic growth.
By offering a novel approach to account for quality, at both a theoretical and methodological level, the researchers offer a new way to conceptualize firm growth dynamics, and offer evidence of the importance of at-birth characteristics in creating firm outcomes, rather than simply processes of "random growth" that have often been advocated in economics.
The state of American entrepreneurship looks quite different when one has a clear view of the skew, the researchers conclude. Startups with the ambition and potential for exponential growth have strikingly different patterns of creation than small and medium enterprises. Furthermore, traditional measures of the overall rate of entrepreneurship do not effectively capture the likely potential of these firms to scale. Finally, to the extent that American entrepreneurship is currently in crisis, the problem is not in the rate of creation of high growth-potential startups or even in the initial funding of those firms, but instead in the potential of those firms to scale in a meaningful way over time.