Executive Summary
Among the factors contributing to the success of the U.S. economy over the past decade—as reflected in the doubling of productivity growth compared to the preceding two decades—is the continued transformation of the U.S. economy toward a more entrepreneurial form of capitalism. In such a system, innovative new firms play an unusually central role in developing and commercializing the radical technologies that provide the underpinnings to whole new ways of doing things and enjoying life. In the last century, innovations which have changed the social and economic landscape in the United States and in much of the rest of the world, such as the automobile, airplane, air conditioner, the personal computer and its operating system, and, most recently, many of the leading Internet-based business models, all were commercialized by entrepreneurs.
The United States and other countries face daunting challenges in this century. Aging populations and the retirement and medical needs they require, global warming, and new security concerns—to name just a few—all demand the resources that can come only from continued rapid economic growth. Economic growth, in turn, will require continued entrepreneurial innovation. Ideally, much of that innovation and entrepreneurship will take place here in the United States, where it historically has occurred.
How best can this outcome be assured? For over a decade, the Ewing Marion Kauffman Foundation has been supporting basic research into this and related questions surrounding entrepreneurship. The officers and staff of the Kauffman Foundation are in constant touch with all elements of the entrepreneurial community.
In the essay that follows, we distill what we’ve been learning through the research we sponsor and the feedback we receive from entrepreneurs, both about the specific challenges to continued innovative entrepreneurship that confront the United States in the coming years, and how those challenges might be addressed. In particular, we outline some of our views on policies that we believe the best research suggests are likely to be most conducive to innovative entrepreneurship, as well as those subject areas that could benefit from future research.
We concentrate primarily on the following four policy subjects that innovative entrepreneurs have been telling us are of uppermost importance to them.
- Ensuring a Skilled Workforce: Entrepreneurs tell us that perhaps the most significant constraint on their future growth, and on the growth of future entrepreneurs, is the difficulty finding and attracting “talent”—highly skilled, entrepreneurial workers. This also looms as one of the more important challenges facing the U.S. economy. Meeting this challenge will require major, entrepreneurially driven improvements throughout our educational system (K-12 through graduate school) that allow more choices for students and their families; improved schools from which to choose; accelerated learning opportunities; increased funding for college and graduate-level training; and research and development in engineering and the physical sciences. In addition, the nation could benefit from more enlightened immigration policies, designed to attract and retain highly skilled foreign workers and potential entrepreneurs to start and work for new businesses here.
- Reforming Health Care: The continued escalation of health care costs, coupled with the uncertainties about future trends in these costs, rank high on entrepreneurs’ lists of concerns, as well as on those of American business generally. In addition, the fear of losing health care insurance compounds workers’ anxieties about job loss itself, and most likely deters some employees from leaving their current jobs to launch new enterprises. The most entrepreneurial approach the federal government could take to address these problems would be to untether health insurance from employment, a system that stems from an accident of history (explained in the text). The current administration has proposed one way of doing that: extending tax deductibility of health care insurance to those who purchase health insurance on their own, funded by an effective cap on the tax deduction for employer-provided health care coverage. Other approaches are surely possible. However accomplished, a new health care system should be one in which individuals buy insurance for health care as they currently do for other types of events (such as damage to their personal property, homes, or businesses), although they might do so through any number of non-employer groups or associations. Meanwhile, for their part, insurers should not be permitted to deny coverage or discriminate in setting their premiums on the basis of individuals’ preexisting health conditions.
- Promoting Innovation: Innovative entrepreneurship cannot occur unless the innovation pipeline is full and incentives for commercializing innovation are in place. Historically, the United States has done well on both these counts. But continued and ideally enhanced success requires even more: shifts in the patent system that reduce the likelihood that overly broad legal protection of “intellectual property” will inhibit the entry of innovative, new firms; improvement in the ways that university-developed ideas are commercialized; and monitoring of ideas and inventions developed abroad, just as foreign companies have been doing with U.S.-based inventions for decades.
- Limiting Overly Burdensome Regulation and Liability Litigation: Because of their size, entrepreneurial firms often bear a disproportionate cost of regulation and liability litigation. Accordingly, entrepreneurs have the most to gain from generally sensible reforms that would require all major federal (and state) regulations to be implemented only if their estimated benefits exceed costs, and further that any regulations that pass this test also be designed to minimize costs in achieving their objectives. In addition, although progress has been made in reducing uncertainties associated with liability costs, further reforms would be useful (without reducing incentives for companies to make safe products). Three ideas in particular are worth serious consideration: enacting a federal product liability law to establish more uniformity and thus less uncertainty in liability rules for products sold in interstate commerce; adopting the “English rule” on attorneys’ fees (loser pays) for litigations involving commercial interests on sides; and limiting the award of punitive damages where defendants have complied with prevailing regulatory standards.
At the conclusion of this essay, we briefly discuss two other policy subjects—taxes and regulation of the capital markets and corporate governance—that are likely to be important to promoting innovative entrepreneurship, but where we believe further research is required before offering policy recommendations.
This document is the second iteration of one released initially on February 26, 2007. It reflects comments on that first version received during several expert panels convened in Washington, D.C. during EntrepreneurshipWeek USA, as well as other comments transmitted to the Foundation via our Web site.
We continue to invite readers’ views on the subjects advanced here. Are there other topics you believe are as or more important than those we concentrate on here for promoting the formation and growth of innovative entrepreneurial enterprises? Within any of these subject areas, are there particular questions you believe require further research? We’d like to hear from you. Comments can be emailed to research@kauffman.org or posted online at www.kauffman.org/policy. Periodic updates to this document will be posted online at this location.
Make a Comment: