This document discusses entrepreneurship and its importance for economic growth. It makes several key points: 1) Entrepreneurship, especially from new and young businesses, is a major driver of job creation. A small number of high-growth startups create most new jobs. 2) Startups spur innovation through commercializing new technologies and ideas. They also improve productivity by increasing competition and reallocating resources to more efficient firms. 3) Cities with higher rates of entrepreneurship experience greater GDP and job growth over time. Supporting entrepreneurs is important for long-term economic prosperity at the local level. 4) To improve a startup community, leaders should take a bottom-up approach focused on

1. Entrepreneurship and Economic Growth
RAIN Eugene Accelerator, Annual Showcase
October 3, 2017

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CENTER FOR AMERICAN ENTREPRENEURSHIP
Preliminaries

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CENTER FOR AMERICAN ENTREPRENEURSHIP
Remember me?
Everyone here
knows that small
businesses are
where most new
jobs begin.
Joint Session of
Congress, Sept. 8, 2011
“

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CENTER FOR AMERICAN ENTREPRENEURSHIP
What is entrepreneurship? Why is it important?

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CENTER FOR AMERICAN ENTREPRENEURSHIP
§ Entrepreneurship is the process by which individuals or a group of individuals (entrepreneurs)
exploit a commercial opportunity, either by bringing a new product or process to the market, or
by substantially improving an existing good, service, or method of production.
§ An entrepreneur is a person who organizes the means of production (capital, labor) to engage
in entrepreneurship, often under considerable uncertainty and financial risk. Entrepreneurs
may partner with other entrepreneurs (co-founders) to jointly found companies (startups), or
partner with an existing organization (corporate or university spin-outs).
§ A startup is a business organization, formed by an entrepreneur or a group of entrepreneurs,
to coordinate the entrepreneurship process under a common ownership structure.
§ A defining characteristic of startups is growth – either as a stated business objective or as the
result of its success. What differentiates entrepreneurial ventures from small businesses, and
entrepreneurs from small business owners, is a desire or ability to grow.
§ A second inherent feature of startups is that they are temporary – the stage of “starting up” is
one of potentially many in a company’s lifecycle (e.g., sustained existence, an acquisition or
public offering, decline, or closure), and thus must end. Entrepreneurship, then, is concerned
with the process of establishing and scaling growth-oriented companies in their early years.
What is entrepreneurship?

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CENTER FOR AMERICAN ENTREPRENEURSHIP
§ Entrepreneurship creates jobs – new and young businesses, not small businesses per se, are
the engine of net job creation in the economy. Similarly, a small number of high-growth firms
accounts for the substantial majority of new job creation.
§ Entrepreneurship improves productivity – entrepreneurship injects the economy with a fresh
batch of (often) higher productivity firms, increasing competition among existing businesses,
and pushing out less-productive incumbents.
§ Entrepreneurship spurs innovation – new and young firms are disproportionately responsible
for commercializing new innovations, particularly radical innovations that spawn entirely new
markets or substantially disrupt existing ones.
§ Entrepreneurship stimulates economic growth – each of the factors are both a cause and an
effect of broader economic growth (GDP); productivity and innovation are the primary driver of
sustained economic vitality, and jobs are created to meet consumer and business demand.
Cities with higher rates of entrepreneurship see higher income and job growth.
§ An entrepreneurship-driven local economy is attainable – most of the critical conditions and
resources driving (or constraining) high-growth entrepreneurship are local; much of this is
driven by education and culture, which also means that the pathway to a vibrant startup sector
is in the hands of the community (though it takes a long term commitment)
Why is entrepreneurship important?

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CENTER FOR AMERICAN ENTREPRENEURSHIP
Job Creation

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When accounting for firm age, small businesses overall don’t create
jobs—it is new and young firms that do (they tend to be small)
§ While it is true that small
businesses contribute more
to net job creation (# jobs
created by firms that grow
minus # jobs destroyed by
those that contract), this is
because young firms tend
to be small
§ Outside of young firms,
small businesses as a whole
are net job destroyers!
§ Young/small and old/large
businesses, as a group,
contribute positively to new
job creation
§ After controlling for firm age
the impact of firm size on
new job growth dissipates
Annual Rate of Net Job Creation by Firm Age and
Size (1992-2014)
Source: CAE analysis of U.S. Census Bureau, Business Dynamics Statistics data
17%
-6%
-5%
15%
0%
0%
14%
3%
1%
-10%
-5%
0%
5%
10%
15%
20%
Young (< 6yrs.) Middle (6-15yrs.) Mature (16+ yrs.)
Small (< 50 emp.) Medium (50-499 emp.) Large (500+ emp.)

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The typical (median) firm doesn’t grow much at all; but, young firms
grow more so than older ones do on average
§ The typical (median) firm
(that survives between two
years) grows annually at a
rate of less than one
percent
§ The average surviving firm
grows about two percent in
a given year
§ As the numbers show, both
the average and median net
employment growth rates
generally decrease
monotonically with firm age
§ Though working from a
smaller base, young firms
disproportionately add to
new job creation
Mean and Median Net Job Creation Rates by Firm
Age (surviving firms) (1992-2011)
Source: Decker, Haltiwanger, Jarmin, and Miranda (2014)
0
3
6
9
12
15
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16+
Percent
Firm age
Median Mean

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The rate of job creation (and destruction) is highly skewed among
business age groups; this is especially true among younger firms
§ The distribution of growth
rates is highly skewed
among the age groups
§ Younger firms create and
destroy jobs at a higher
rate; have wider spread
In work not shown here1:
§ From 1997-2012, “high-
growth firms”—those w/
20%+ growth for three
consecutive years—
accounted for 2% of all firms
but 45% of new jobs
§ Firms aged less than 3
years are most likely to be
HGFs than firms aged 4+
-60
-40
-20
0
20
40
60
80
100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16+
Percent
Firm age
90th percentile 10th percentile Median
Net Job Creation Rates by Firm Age (surviving firms)
(1992-2011)
Source: Decker, Haltiwanger, Jarmin, and Miranda (2014)
1 Clayton, et. al. (2013)

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Innovation, Productivity, and Economic Growth

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Entrepreneurship spurs innovation
§ Entrepreneurs respond to opportunities that
incumbents are unwilling or unable to, and,
generally, startups exist to deliver something
new or improved to the market
§ Entrepreneurship is the vehicle by which the
most transformational ideas come to
market—airplane, railroad, automobile,
electric service, telegraph and telephone,
computer, air conditioning, and so on
§ Research establishes a strong link between
firm age (young) and innovation (new
product announcements) disproportionately
so compared to larger firms
§ One study estimates that every $1 of
venture capital produces the same amount
of innovation as $3 of R&D
Entrepreneurship improves efficiency
§ The economy is in a constant state of
churn– with many firms opening, closing,
growing, and shrinking; workers switch jobs.
§ This process of business and labor market
“reallocation” allows resources (capital and
labor) to be put to their most productive
use; entrepreneurship (new firm entry) is a
particularly important component of this
§ New firms challenge established
incumbents, products, and methods of
production and distribution: their emergence
promotes a more competitive environment
§ Research establishes that young firms are
more productive than older ones; entering
firms more productive than exiting ones
Why are startups better suited for innovation, and how do they
improve productivity?

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§ Neoclassical growth theory – population growth and capital accumulation increase economic
growth in the short-run, but experience diminishing returns. The way to increase our standard
of living (income per capita) over the long-run is to raise output per hour worked (productivity)
through “technological change” (innovation = efficiency + technology).
§ New growth theory – standard theory doesn’t identify where “technological change” comes
from. New growth theory shows the source of advance is knowledge; more specifically, the
economic application of ideas (i.e. economically useful ideas). The nature of knowledge means
that divergences will occur about the expected value of new ideas (opportunities emerge).
§ Schumpeterian growth theory – the economy is constantly in a constant state of change; by
serving as agents of change, entrepreneurial firms provide an essential source of new ideas
and experimentation that otherwise would remain untapped in the economy
§ New entrepreneurship theory – entrepreneurship is how new opportunities are discovered,
evaluated, and exploited for commercial purposes. Entrepreneurial ventures, then, serve as an
important mechanism for delivering economically valuable useful ideas. These endeavors are
fundamental to our sustained economic prosperity. Put differently, investments in human and
entrepreneurial capital are necessary for growth.
The “new entrepreneurship” theory of economic growth

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Consistent with the theory and evidence, cities with higher startup
rates experience higher subsequent GDP growth
-2%
0%
2%
4%
6%
8%
10%
12%
0% 5% 10% 15% 20% 25%
Growth(CAGR)1983/85to2003/05)
Firm Birth Rate (1983/1985)
Firm Birth Rate (1983-85) versus GDP Growth
Rate (1983-85 to (2003-05) by Metro Area
-2%
0%
2%
4%
6%
8%
10%
12%
0% 5% 10% 15% 20% 25%
Growth(CAGR)1983/85to2003/05)
Firm Birth Rate (1983/1985)
Firm Birth Rate (1983-85) versus Job Growth
Rate (1983-85 to (2003-05) by Metro Area
Source: CAE analysis of U.S. Census Bureau and Moody’s data

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Practical Guidance

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CENTER FOR AMERICAN ENTREPRENEURSHIP
§ New economic geography – economic activity concentrates in some regions and not others;
geographic proximity is an important mechanism for the diffusion of ideas (hubs); this is
especially true for innovation and entrepreneurship—both cluster geographically more so than
does economic activity as a whole
§ (Social) networks of trust – networks (as opposed to traditional hierarchies) are an emergent
form of organization, which help startups locate and acquire vital resources (ideas, talent,
capital); the flow of resources in a network is determined by the characteristics of those
(human) relationships, which are defined by informal norms and values that promote openness,
diversity, collaboration, and kinship.
§ Economic culture is cumulative – variation in startup rates and other innovation measures
(such as venture capital) exhibits significant momentum / path dependency; startup culture (a
primary driver) is slowly evolving, and noticeable changes in activity can take a generation
§ Support homegrown entrepreneurs – research shows that homegrown entrepreneurs are the
most successful entrepreneurs, and those that choose a new city do so because of quality of
life—a “love of place”; critically, stay engaged with those who have left (build a diaspora)
§ Startup communities of support – experienced entrepreneurs, mentors, community builders,
and other leaders must play a key role in building communities of business and emotional
support and guidance for local entrepreneurs (this is hard stuff; entrepreneurs need help!)
Everyone knows that all politics is local—but so is entrepreneurship

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CENTER FOR AMERICAN ENTREPRENEURSHIP
DO: bottom-up, connector approach
§ Put entrepreneurs at the center: elevate
and celebrate them, find ways to increase
density and “random collisions” between
founders, mentors, and support orgs.
§ Take a long-term view: of entrepreneurs as
individuals who learn by doing and benefit
most by interacting with each other
§ Convene and connect: local contacts are the
most important, but not easily made—local
gov’t can facilitate networking, mentoring,
and other “catalytic” events; costs little too
(Startup Week/Weekend, 1 Million Cups,
competitions/prizes, events like this!)
§ Other stuff: be inclusive; non-control; more
than cocktail parties; high frequency events;
encourage seasoned founders to take lead
DO NOT: incubators, investments, tax breaks
§ Incubators: research demonstrates that
accelerators, competitions, and “catalytic”
events that create intense “sink or swim”
learning-by-doing environments are more
effective; impact of incubators is ambiguous
(capital intensive activities an exception)
§ Direct investments: venture funds are risky
(80% of private funds in US fail to return
more than 3%); public sector is less suited to
pick winners and losers; better to fund other
initiatives (e.g. very early stage grants)
§ Tax incentives: “smokestack chasing” is the
old way of economic development; instead,
invest in education and support programs for
entrepreneurial “communities” (imagine if
state of Wisconsin gave the $3B Foxconn tax
break to local entrepreneurs instead)
How can I improve the startup community in Eugene?
Source: Motoyama and Weins (2015); Feld (2012)

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CENTER FOR AMERICAN ENTREPRENEURSHIP
Additional resources
Firms in the innovation sector
increasingly drive local economic
growth; even for other sectors
Entrepreneurship in America is
undergoing a 30-year decline;
some policy changes can help
To increase your local startup
“batting average”, there are some
social-cultural best practices