Much Progress, More to Be Done
Robert E. Litan, Ph.D.
Vice President, Research and Policy, Ewing Marion Kauffman Foundation
As New York University's distinguished economist and Kauffman advisor William Baumol has observed, entrepreneurs seem to be everywhere except in economics textbooks. We know that entrepreneurs are disproportionately responsible for breakthrough or "disruptive" innovations—the automobile, the airplane, computers and software, Internet search, and air conditioning being just a few of the more prominent examples. We also know from research carried out by researchers in academia and at Kauffman that startups have accounted for virtually all net new jobs created since the late 1970s. But, until the past few years, mainstream economic theory had yet to fully incorporate entrepreneurs generally—and specifically the formation and growth of "scale" firms—into formal or even informal economic models.
This is beginning to change, with research support and intellectual input from the Foundation. In 2007, I was fortunate to team with our president, Carl Schramm, and William Baumol, to co-author Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, which, among other things, identified the central role of new firm formation in driving growth in all economies around the world. In 2009, Professor Daniel Spulber of Northwestern University published a path-breaking book, The Theory of the Firm, which formally identifies firms, as distinct from the individuals who found them, as key agents in driving economic growth, and then models firm formation and growth. William Baumol recently followed his earlier seminal book in the area, The Free Market Innovation Machine, with his new Microtheory of Innovative Entrepreneurship, which highlights the central role of "innovative entrepreneurs" in particular—those who develop new products, services, or modes of production or service delivery—as primary drivers of economic development. Baumol's essay in the pages that follow documents how far economists have come in both understanding the importance of entrepreneurs and in beginning to identify policies that can effectively advance entrepreneurship.
Ultimately, a main purpose of research is to inform policymakers and improve policy outcomes—in our case, to better facilitate innovation and growth...
Economic understanding advances not only through new theory, but through careful empirical analysis. Empirical studies cannot be carried out without data, and it is on this front that the Foundation's research support has been especially important, as outlined in more detail in the essay by E.J. Reedy on page 86.
Ultimately, a main purpose of research is to inform policymakers and improve policy outcomes—in our case, to better facilitate innovation and growth, for it is only through sustained, faster growth that Americans will realize more improvements in their standard of living. Toward this end, the Foundation's research program supports numerous policy-relevant studies by scholars in academia or research organizations, as well as by Foundation associates.
One particularly noteworthy policy-relevant initiative is the Foundation's multi-year effort to stimulate a new wave of legal scholarship. Our Law, Innovation, and Growth initiative, in particular, is designed to identify improvements in "the law"—statutes, regulations, and judicial doctrines—that can provide a better legal and institutional environment to foster growth. In 2009–'10, we assembled a distinguished task force of the nation's leading legal scholars and social scientists to identify specific legal reforms. Their findings are spelled out in a comprehensive volume titled Rules for Growth (see page 92 for an overview).
Research organizations and the foundations supporting them constantly wrestle with the question of "impact." How is it best measured and achieved? There are no perfect answers, especially because of the inherent lags between the research itself, its publication, and, most importantly, translation or adaptation of proposed ideas into actual policies. In addition, even the best policy ideas require the right timing. Persuading policymakers to adopt policy changes to better facilitate entrepreneurship is especially difficult because entrepreneurs are not well organized, and often don't want or have time to be. (This is even more true of aspiring entrepreneurs.)
Nonetheless, Kauffman-sponsored research is having impacts through a variety of channels. Hundreds of studies on entrepreneurship or entrepreneurship policy have appeared in academic journals and books in just the past four years. Entrepreneurship issues now are addressed routinely in annual conferences of the major economics professional organizations. The authors of many of the papers on entrepreneurship subjects can be traced to the seminal work they did when writing their dissertations, supported by the Kauffman Dissertation Fellowship program. Some of the leading studies have been authored by recipients of the Kauffman Prize Medal for Distinguished Research in Entrepreneurship (see the essay from the most recent Prize recipient, Alexander Ljungqvist, on page 76).
Furthermore, references to Kauffman studies in the media and in the blogosphere are large and continue to grow. Kauffman grantees or scholars of entrepreneurship have served in important policymaking posts in the federal government, in both the current and previous administrations.
Hundreds of studies on entrepreneurship or entrepreneurship policy have appeared in academic journals and books in just the past four years.
But perhaps the most visible manifestation of the heightened recognition of the importance of entrepreneurship has come about through the unfortunate circumstances of the Great Recession. As the major macroeconomic stimulus measures have begun to wane, more elected officials have pointed to the need to promote new firm formation and growth as the only sustainable way for the U.S. economy to recover. Similar sentiments can be found in the statements and policy positions advocated by government officials abroad. Time and again these statements refer to Kauffman studies documenting the critical role of new firms in creating jobs and expanding output.
None of us can rest on our laurels, however. There is still much that we do not fully understand about how scale firms, in particular, are best formed and grow. At Kauffman, we hope to learn at least some of the answers through Kauffman Labs for Enterprise Creation (see page 98 for more on this important initiative) and efforts like it. Likewise, in the policy arena, there remains much to be learned and then applied to the real world of policymaking. Nothing less than the future growth rate of the U.S. economy, and indeed the global economy, depends on the translation of sound research into effective laws, institutions, and policies that best foster the most successful future entrepreneurial enterprises.
