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Entrepreneurs and the economy – a lot to be optimistic about

Will entrepreneurs have as big a role as before in the outlook of the U.S. economy and what do we need to know to assess how America is stacking up against its competition?

It is a popular time of year to take stock of the U.S. economy and its future outlook. Beyond the annual State of the Union address in Washington, there are several private-sector assessments of entrepreneurship and the U.S. economy, such as the Kauffman Foundation’s annual State of Entrepreneurship address. The question is will entrepreneurs have as big a role as before in the outlook and what do we need to know to assess how America is stacking up against its competition?

It will not come as no surprise to this audience that the United States has been experiencing declining rates of new firm formation. Analysis of government data for recent years shows new business creation has not kept pace with working-age population growth. Furthermore, businesses that do start have been growing more slowly and hiring fewer employees than in the past. There has been much discussion about the reasons for this, including factors such as the growth of the big box retailers. But there is little disagreement about the numbers.

Gallup’s analysis also reached the same conclusion: We are behind in starting new firms per capita. A recent SBA report said it appears among the group that makes up a quarter of the U.S. population, and is heralded as a big promise for the future – millennials – fewer are becoming entrepreneurs relative to other generations.

With so much effort being expended to create a better, more enabling environment – and more rigorous performance standards from entrepreneurial support organizations – such facts are troubling.

But it’s not so gloomy, said Wendy Guillies, president and CEO of the Kauffman Foundation during the seventh State of Entrepreneurship Address at the National Press Club in D.C. last week. Ms. Guillies offered some encouraging insights as to a new wave ahead of entrepreneurial growth.

Barriers to entrepreneurship are expected to continue falling, driven by the spread of software, higher computing power and cheaper server storage. Not only are these obstacles falling, but we can also expect to see new waves of technological change in robotics and artificial intelligence that promise to open major entrepreneurial opportunities. In addition, Ms. Guillies noted, the increasing number of existing companies supporting entrepreneurial employees to be “intrapreneurs,” bodes well for the propagation of the entrepreneurial mindset and innovation.

Another reason for optimism also embraced by both Ms. Guillies concerns the coming surge of millennials entering the labor market that will likely boost business creation as they approach the peak age for business formation.

The SBA also reports that millennials could eventually match prior generations of new startups over the next few decades. College courses focusing on entrepreneurship increased from 250 in 1985 to 5,000 in 2008. With entrepreneurs generally peaking in their 40s, increased exposure to entrepreneurship in college is likely to result in this demographic cohort surpassing previous generations in terms of their entrepreneurial weight. The oldest millennials will already turn 35 this year, but the full force of this generation’s entrepreneurial impetus will still take a few years to be felt.

The baby boomers in the near term also offer a silver lining. A 2015 Gallup survey report suggested baby boomers are twice as likely to be planning to start a business within a year than millennials. In fact, the percentage of entrepreneurs ages 55 to 64 has risen steadily from 14 percent in 1996 to 23 percent in 2013. Over that same time period, median net worth for households over age 65 increased by 38 percent, suggesting access to capital might be less of a hurdle for a greater number of entrepreneurial baby boomers.

One constant among those optimistic about the contributions of entrepreneurs to U.S. economic growth remains our comparative position in the world. Investment brokers are quick to remind their clients that their bonuses are based not on how well they do with your investments, but how well they do compared to other brokers in a given market. If the U.S. economy was growing at only 2 percent, but our major competitors at 1 percent, can we stand proud?

For entrepreneur-led growth, the question is whether the rise of other competitive entrepreneurship powerhouses, like London, Berlin, Tel Aviv, and Beijing, serve as an ominous sign for America. Not yet.

The U.S. is still ranked top or close to the top of nations by most indexes or comparative studies that measure elements of entrepreneurial performance. And the rise of economic stability around the world opens new investment and market opportunities for Americans.

The challenge for policymakers now, is that we are still not clear by what measure we want to assess the outlook for entrepreneur-led growth. Our research is getting better. Is it future demographic trends? Is it our performance with producing new types of jobs behind those industries entrepreneurs are racing to disrupt? Is it the number of new firms created and how fast they grow? Is it productivity or GDP? Is it the performance of our accelerators and entrepreneurial support capacity? Is it the number of entrepreneurs trying and feeding the organic process of new firm formation?

And with international comparative studies, should we be looking at an index that is output-based (i.e., new firm counts) or rather framework-based (i.e., comparisons of countries’ policies and regulations). Some, such as the Global Entrepreneurship Index have been designed to overcome the limitations of both approaches but the field still remains an inexact science.

As the Index recognizes, “entrepreneurship can mean very different things in different economic and institutional contexts. A local horticultural venture, for example, would have different economic consequences for the Kenyan economy than a social media startup in Silicon Valley.”

Here lies the key. To be entrepreneurial, it is not about how many entrepreneurs a country has, it is about enabling those entrepreneurs that create most wealth, jobs and contribute to innovation. We already know in the U.S. that it is a very small percentage of new firms that succeed that generate 90 percent of the jobs and economic value. This is what researchers and economists have to figure out how to monitor – whether in enabling our promising generations, capitalizing on technological trends or fueling other efforts to help our most promising citizens.

So, how is the State of Entrepreneurship in America? We are getting better at defining and measuring the outputs that matter. Policymakers are asking more of the right questions and we have more Americans being smarter about the methodologies and science at their fingertips to help them contribute in real ways to their nation’s economic prospects. Despite recent anxiety about over-valued startups in Silicon Valley and the recent pull back of venture capital firms, I expect to report strong numbers ahead and argue our prospects are very promising for an even more entrepreneurial future in America.

Photo Credit: Flickr