Barbara Pruitt, 816-932-1288, email@example.com, Kauffman Foundation
Ben Branham, 212-704-4577, firstname.lastname@example.org
Finding, recruiting and nurturing innovative entrepreneurs can help generate the “home run” companies essential to economic recovery
(KANSAS CITY, Mo.), Dec. 7, 2010 – How many new billion dollar firms would it take to permanently increase the U.S. GDP by one percentage point? According to the Kauffman Foundation, the answer is most likely between 30 and 60. Collectively, the impact from high-growth firms that are able to realize $1 billion in revenue could significantly accelerate the U.S. economic recovery, and over time greatly increase income and wealth of the average American household.
Since World War II, the American economy has averaged 3.3 percent growth per year, but fell to a negative growth rate during the height of the recession in 2009. Even as the economy recovers, it is widely believed that the long-run sustainable growth rate has fallen to less than 3 percent.
Is there any way that long-run growth rate can be boosted by a full percentage point? In a new study, Inventive Billion Dollar Firms: A Faster Way to Grow?, the Kauffman Foundation’s vice president for research and policy and author of the study, Robert Litan, suggests one possible way.
“If innovative, high-growth firms historically have been the drivers of economic growth in both output and jobs, then cultivating the creation of more such firms will increase growth of the economy in the long run,” Litan said. “Our challenge is to create environments that foster the growth of these new successful companies that generate large social benefits.”
The Kauffman paper uses $1 billion in sales as a proxy for highly innovative firms. Using some plausible assumptions about key parameters, Litan estimates that 30-60 more such companies launched every year would achieve the permanent percentage point increase in economy-wide GDP. This estimate rests on the findings of Yale economist William Nordhaus that highly inventive companies, like individual inventors, generate gains to society that vastly exceed the profits earned by the companies or inventors themselves.
The potential economic impacts demonstrate that if the economy grew at 4 percent annually rather than the average of 3 percent, GDP would double six years faster (18 versus 24 years). With compounding, this extra 1 percent would cumulate over a century to produce roughly three timesthe level of GDP than would otherwise exist.
“Whatever the ‘magic number’ of highly successful firms may be,” adds Carl Schramm, president and CEO of the Kauffman Foundation, “the bigger question is: How do we ensure the creation of those firms here in America?”
One answer, the Foundation believes, is in the creation of “entrepreneurial ecosystems.” Currently, research universities across the country are creating mentoring programs for faculty, alumni and student entrepreneurs. These commercial, private-sector “accelerators” use a competitive selection process to nurture new potential breakthrough companies in markets including medical devices and Web-based businesses.
Kauffman Laboratories for Enterprise Creation, launched last year, aims to recruit highly motivated individuals with commercial ideas that have the potential to produce billion-dollar-plus companies. Kauffman Labs surrounds the successful candidates, chosen in a highly competitive process, with entrepreneurial instruction and mentoring from some of the nation’s leading experts in the same industry or “vertical.” The first Labs program consisted of outstanding postdoctoral scientists who have developed promising technologies. The next program, which starts in early 2011, consists of potential entrepreneurs with innovative commercial ideas in the educational field. Future Labs programs will be centered on other verticals ripe for high-growth, innovative startups.