Sunday, January 05, 2020

Entrepreneurship in rich countries declining; Innovation also sliding

In January 2004 Mark Burnett, a British-born producer of reality TV programmes in the United States and Britain, launched a new series that tapped into America's celebration of an era that many saw as an Age of Entrepreneurship and Innovation. Burnett teamed up with a New York serial bankrupt who was notorious for defrauding suppliers and who was on the blacklists of Wall Street banks.

'The Apprentice' on the NBC channel "portrayed Trump not as a skeezy hustler who huddles with local mobsters but as a plutocrat with impeccable business instincts and unparalleled wealth — a titan who always seemed to be climbing out of helicopters or into limousines," according to a piece in The New Yorker. Burnett and Trump each earned several hundred million dollars and it enabled Trump to get into the franchising business that put the name Trump on many properties that he didn't own. Crucially, the image as a successful entrepreneur familiar to TV viewers over a decade, paved a path to the US presidency for a man who was called a "con man" by Michael Bloomberg — an authentic successful entrepreneur.

In 2009 The Economist in a special report titled, The United States of Entrepreneurs, noted, "People the world over admire its ability to produce world-changing entrepreneurs, such as Bill Gates, wealth-creating universities, such as Harvard and Stanford, and world-beating clusters, such as Silicon Valley."

However, beyond the myth and hype, entrepreneurship was declining in the United States and in other rich countries while innovation was spluttering in both the US and Europe.


The rate of new employer business startups has fallen in most rich countries in the past 30 years. In the US the share of firms aged 16 or older has increased by about 50% since the late ’70s, according to the Brookings Institution and these include the major internet companies.

The increasing concentration of older bigger firms has resulted in higher markups — the ratio between the cost of a good or service and its selling price — since the1980s and lower labour income shares.

The rate of job changes among workers (reallocations) has also fallen.

The Organisation for Economic Cooperation and Development (OECD), a think-tank for 36 country governments including 25 rich or advanced economies, says that "1) On average across OECD countries and over years, young firms (less than 5 years old) account for about 20% of employment but create almost half of new jobs 2) Transformational entrepreneurs’ startups – on average 4% of all micro startups — create between 22% (the Netherlands) and 53% (France) of new jobs 3) Business dynamism, has been declining in most OECD countries and industries, and the most dynamic sectors —  typically the digital-intensive ones — have experienced the largest decline 4) Better policies in the area of bankruptcy procedures, contract enforcement and civil justice efficiency can unleash the growth potential of young firms 5) Startups are more exposed to policies than incumbents, especially in volatile and risky sectors, where more high-growth firms operate.

Business dynamism is a term for the process by which firms continually are born, fail, grow, and contract, as some jobs are created, others are destroyed, and others still are turned over. Research has firmly shown that the process is vital to productivity and sustained economic growth. Entrepreneurs have a critical role in this process, and in net job creation.

The UK in recent years has had one of the highest rates of business dynamism. In 2018 the UK's employer business birth rate, as a proportion of all active employer businesses, was 13.4% and the employer business death rate for 2018 was 11.4%. In the US in 2016 the rates were 8.4% and 7.7% while in Ireland the rates for 2016 were 4.4% and 1.5%. In 2015 the Irish rates were 4% and 3.5%. 

Most employer startups/ young firms die or never grow. Typically in the US, a fifth of jobs in new firms are lost in the first year of operation. US research also shows that while small firms create more jobs during periods of high unemployment, they create fewer during periods of full employment.

In the post-2000 period, a decline in high-growth young businesses in key innovative sectors like high tech suggests there has been a decline in transformational entrepreneurs in this sector. 

"Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker."

— Paul Krugman, the American economist, wrote in 'The Age of Diminishing Expectations' (1994).

The OECD says productivity is ultimately a question of “working smarter” – measured by ‘multifactor productivity’ – rather than “working harder”. It reflects firms’ ability to produce more output by better-combining inputs through new ideas, technological innovations, as well as by way of process and organisational innovations.

Productivity in both the US and Europe declined before the onset of the Great Recession in 2008 and it remains low.

The think-tank also shows in a 2019 report that the share of income from economic activity going to labour through wages has continued to fall over the past 15 years in many countries, most markedly in manufacturing. By 2017, the sharpest falls were in Ireland, Poland and Portugal but labour income shares have also declined substantially in Australia, Hungary, Israel, Japan and the US.

Robert Gordon’s book 'The Rise and Fall of American Growth' (2016) showed that the annual real growth rate of US output per hour fell from 2.8% between 1920 and 1970 to 1.6% since then.

Joseph Schumpeter (1883-1950) the Austrian-born economist, described capitalism as “the perennial gale of creative destruction" and that is in peril from large firms that restrict competition.

Demographics have been a factor in falling startups. It is also argued that the rise of intangible inputs (advertising, training, management, R&D, IT and data), provide an advantage to big firms that rely more heavily on these inputs in their production process, resulting in a negative effect on the entry of new firms, and also on long-term growth and innovation. See here.

Information and Communications Technology (ICT) and globalization have enabled big multinational chains to develop global supply chains and efficient distribution networks while merger and acquisition (M&A) activity has reached record highs in recent years.

So-called superstar firms dominate productivity growth, while "Weak productivity growth means stagnating wages. As the best firms pull away from the rest, so does the pay of their workers compared to the average Joe. As a few firms become increasingly profitable, a larger slice of the pie ends up with their investors and smaller portions for their workers. Dominant firms can also mean dominant employers in labour markets and less bargaining power for workers. Last but not least, if weaker competition reduces the pressure on businesses to innovate, long-run growth suffers." 'Superstar firms are running away with the global economy.'

Finfacts: The poor state of entrepreneurship in Ireland

Finfacts: When 600-year old French word entrepreneur replaced capitalist


The greatest breakthrough innovations in the coming years would be solutions to head off the devastating threat of climate change.

I cited Prof Robert Gordon above and in his 2018 paper, he said: 

"In the US data the rapid productivity growth of 1920–70 reflects the importance and broad scope of the Great Inventions of the Second Industrial Revolution, and the temporary revival of 1996–2006 reflects the impact of the Third (digital) Industrial Revolution. But the transformative change in business methods made possible by the digital revolution was largely over by 2006. Prospective innovations over the next two decades, including 3-D printing, autonomous vehicles, robots, and artificial intelligence are likely to evolve gradually rather than suddenly causing a sharp jump in productivity growth or a massive loss of jobs."

The US National Science Foundation says that although total R&D spending in 2017 by the United States ($483bn,  in constant 2010 purchasing power parity dollars) exceeds China’s R&D expenditures ($443bn), China’s annual investment in experimental development* surpasses that of the United States. China’s spending on experimental development has grown rapidly in recent years to over $370bn in 2017, nearly $70bn greater than the United States.

The NSF says US spending on applied research has grown steadily since the early 1980s, rising to nearly $100bn in 2017. US expenditures on basic research have shown a similar trend and were just below $85bn.

The authors of a paper published last year said, despite the rise in R&D spending, the US innovation ecosystem has splintered since the 1970s, with corporate and academic science pulling apart and making application of basic scientific discoveries more difficult. The analysis also shows that Venture Capital (VC)-backed scientific entrepreneurship has helped to bridge this gap between corporate science and academia — but only in a couple of sectors.

"These findings suggest that if we want to see greater productivity growth, we need to explore alternative ways to translate science into invention."

For example, AT&T’s Bell Labs, home to the transistor and information theory, boasted 14 Nobel Prize winners and five Turing Award recipients among its alumni.

By the 1980s, a combination of shareholder pressure, heightened competition, and public failures led firms to cut back investments in science.

Big Tech firms tend to rely on acquiring firms to boost their innovation. The table below shows the number of acquisitions since their public stock exchange listings.

Google/ Alphabet  238
Microsoft 226
Apple 110
Amazon  86
Facebook 81
Source: Crunchbase 

McKinsey, the consultancy in a 2019 paper said that, "Over the past 20 years, Europe’s share of superstars globally dropped by about 50%, while it remained constant for the United States and Canada and increased significantly for the Asia–Pacific region."

"R&D also is becoming increasingly concentrated, and Europe is losing share, particularly in digital sectors. Just 250 companies generate close to two-thirds of global business R&D investment. In this group, while European automotive players dominate, European companies’ R&D spending by software and computer services firms was only about 8% of the global total, well below 11% for Chinese companies and far behind the 77% for US-based companies in 2018."

* Experimental development is systematic work, drawing on knowledge gained from research and practical experience and producing additional knowledge, which is directed to producing new products or processes or to improving existing products or processes.

1940-2008 references in Google Books