Entrepreneurship Is the Key to Growth

November 24, 2014 • Cato Online Forum
By David B. Audretsch

Americans typically assume that their country leads the world in entrepreneurship. Even in the depths of the Great Recession, The Economist gushed, “For all its current economic woes, America remains a beacon of entrepreneurialism.“1 However, the facts suggest something else.2 America is losing its entrepreneurial edge. What might have seemed unimaginable as recently as fifteen years ago has now, in fact, occurred—a number of other countries, such as Taiwan in Asia and Denmark in Europe, have surpassed the United States in entrepreneurial vigor.3

Reinvigorating American entrepreneurship provides an opportunity to revive American economic growth and prosperity as well as restore the role of the United States as the undisputed economic leader in the world. There are three important ways that American entrepreneurship needs to be reinvigorated. The first is as a conduit for knowledge spillovers. The second involves what we will term here as main street entrepreneurship. The third way is through the identification and commercialization of opportunities across the globe.

A minor army of scholars has provided compelling evidence showing that those cities, states, and entire countries with vibrant entrepreneurship generally exhibit a superior economic performance, typically measured in terms of economic growth, productivity or unemployment.4 The reason why entrepreneurship drives economic growth is because it serves as one of the most important conduits for facilitating knowledge created in one organizational context to spill over and become commercialized through innovative activity in a new startup. Where would the country be had Steven Jobs not taken the ideas and inventions created at Xerox PARC, which the company itself did not think were actually worth pursuing, to launch his new startup? It is not just Apple Computer, but also Microsoft, Google and Facebook, and thousands of other entrepreneurial startups that ensure that ideas and inventions which are costly to create actually end up being commercialized and transformed into the innovations that not only revolutionize their industries, but also fuel economic growth, job creation and competitiveness in global markets.

To spur more knowledge‐​spillover entrepreneurship, America needs to remain vigilant that people with important ideas, independent of what their current occupational status is right now, have access to the key entrepreneurial resources required to launch a new business — money, talent, and know‐​how. We have to make it as easy as possible for talented and creative people to take the leap into entrepreneurship.

The second aspect of entrepreneurship involves the seemingly mundane world of main street entrepreneurship. This type of entrepreneurship consists of small and medium‐​sized enterprises that typically exhibit considerably less volatility and more stability than their high‐​profile, headline‐​grabbing, knowledge‐​spillover counterparts.5 But they matter. And they could matter a lot more. Main street entrepreneurship provides the bulk of jobs in this country. But it remains underutilized and performs way below its potential. The reason is that small business has become the forgotten man of entrepreneurship. The high technology counterparts grab not just the headlines, but also the policy priority, with their IPOs, venture capital backing, and spectacular new product introductions.

The problem confronting America’s underperforming small business sector begins with image. The glamor is in the adrenalin‐​fueled high technology startups, with their boom‐​and‐​bust mentality and performance. By contrast, small business seems boring and staid. But one of the reasons that the German economy has performed better than the American economy over the last decade is not just the bedrock stability it gets from its Mittelstand, or small and medium‐​sized businesses, but also the compelling source of global competitive advantage in key product niches. It is the German Mittelstand that is the key to the unique apprentice system providing young workers with high levels of training, resulting in an unrivaled level of job skills, which in turn fuels productivity. America needs to rediscover its longstanding love affair with small business as both the bedrock of local communities and national economic vitality. As the Frenchman Alexis de Tocqueville reflected in 1835, “What astonishes me in the United States is not so much the marvelous grandeur of some undertakings as the innumerable multitude of small ones.“6

The third role involves the fundamental feature of entrepreneurial thinking — discovering opportunities and then acting upon those opportunities. Given the American predominance and preeminence following World War II, along with its historical isolationist tendencies, it is perhaps not surprising that Americans have developed the habit of looking for those opportunities predominately at home, in the United States. After all, estimates placed half of the world’s wealth and two‐​thirds of the physical capital in the United States as World War II came to an end.

Thus, it is perhaps understandable that when confronted by the recent economic crisis, the drop in aggregate demand triggered calls for stimulating the economy from political parties of all persuasion, albeit one side advocated increases in government spending while the other side argued for tax cuts.7 The perception was a lack of opportunities for American businesses to sell their products, so that spending had to be increased, one way or another, to restore those opportunities.

The entrepreneurial view, however, suggests scanning not just the domestic economy for opportunities. In a globalized economy, it makes sense to search for and discover opportunities not only at home but throughout the world. This is exactly what Germany has done in its astonishing economic resilience even while its European neighbors and other leading developed countries have struggled. The unemployment rate fell below six percent and in several Bundeslaender, such as Bavaria and Baden‐​Wuerttemberg, was at negligible levels. By equipping its citizens and businesses with an orientation and the skills to understand, comprehend, interact, and ultimately thrive in other cultural and national contexts, Germany looks for, and finds, opportunities not just at home, but throughout the world. Through a careful development of a global orientation, Germany has equipped its citizens and companies with the skills required to go out into the world to discover and reap global opportunities. This global entrepreneurial orientation has paid dividends in terms of growth, jobs and competitiveness. Through a global entrepreneurial orientation, Germany has been able to fend off the Great Recession with its strong export performance.

America needs to develop a similar entrepreneurial spirit and attitude. It is not enough just to be comfortable and proficient in the context at home in the United States. Americans need to be equipped with the attitudes, orientation, skills, and competencies to go out into the world to discover, create, and act upon those opportunities. This involves acquiring the so‐​called soft skills of cultural and language competencies and feeling at home not just at home but also in other countries and cultures as well.

1“The United States of Entrepreneurs,” The Economist, May 12, 2009.
2 See for example, the recent study by Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda, “The Role of Entrepreneurship in US Job Creation and Economic Dynamism,” Journal of Economic Perspectives, Summer, 2014. In particular, the authors conclude that, “Evidence along a number of dimensions and a variety of sources points to a US economy that is becoming less dynamic. Of particular interest are declining business startup rates and the resulting diminished role for dynamic young businesses in the economy.“
Jose Ernesto Amoros and Niels Bosma, “Global Entrepreneurship Monitor 2013 Global Report” http://​www​.gem​con​sor​tium​.org/​d​o​c​s​/​d​o​w​n​l​o​a​d​/3106.
4 David B. Audretsch, Everything in its Place: Entrepreneurship and the Strategic Management of Cities, States and Regions (New York: Oxford University Press, 2015).
5 David B. Audretsch, Innovation and Industry Evolution (Cambridge: MIT Press, 1995).
6 Cited from Audretsch, Innovation and Industry Evolution, p. 185.
7 Paul Krugman, The Return of Depression Economics and the Crisis of 2008 (New York: W.W. Norton, 2008).

The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on reviving economic growth.

About the Author
David B. Audretsch