2012 State of Entrepreneurship Address: "A Roadmap for State Growth"

8/3/2019 2012 State of Entrepreneurship Address: "A Roadmap for State Growth"

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Address

EntrEprEnEurship

statE of

2012

February 9, 2012


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2012 by the Ewing Marion Kauffman Foundation. All rights reserved.


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STATE OF ENTREPRENEURSHIP ADDRESS | A ROADMAP FOR STATE GROWTH | FEBRUARY 9, 2012 1

Good aternoon, and thank you all or coming today.

Its a great honor to be delivering this years State o

Entrepreneurship address. I am aware that I am ollowing

in the very large ootsteps o Carl Schramm. He made

countless contributions to the Kauman Foundation during

his nearly ten years as President and CEO, and none bigger

than advancing rigorous scholarship and debate about

entrepreneurship and its central connection to economic

growth.

That scholarship continues, and today the Foundation

is releasing two reportsone lays out an agenda or

state-level policymakers to oster entrepreneurship, and

the other showcases barriers to entrepreneurship imposed

by state and local governments. These papers build on

past scholarship sponsored by the Kauman Foundation,

including an important book released at last years State

o Entrepreneurship event called Rules for Growth, which

ocuses on promoting innovation and growth through legal

reorms, primarily aimed at the ederal level, but also some

at state and local governments.

Much o the material in the two papers released

today is ocused on the law, which makes it particularly

interesting to me. Some years agomore than I care to

admitI was a law proessor at Columbia and, later, the

law schools dean. Through those experiences, I developed

some understanding o the intersection between law and

economics, and how the two disciplines can complement

and conict witheach other. Today I will highlight some o

the conicts, and draw on the papers to lay out a roadmap

or helping states, in particular, oster entrepreneurial

growth.

Were ortunate to have with us today two individuals

who are well positioned to initiate reorms at the state level.

One is the Governor o Nebraska, Dave Heineman, who also

serves as chairman o the National Governors Association.

The other is the Governor o Delaware, Jack Markell, who

is vice chair o the NGA. Were looking orward to hearing

rom them later.

There are a number o reasons why our ocus on

entrepreneurship, which up to now has been aimed

primarily at ederal policymakers, has turned to the state

and local level. Ill emphasize two. First, with gridlock in

Washington, states and localities have more opportunities

or reorm and ewer institutional obstacles. Second, our

scholars discussions with entrepreneurs turned up a fnding

that will be surprising to someits state and local lawsand regulations that matter to them as much, or more, than

ederal statutes do.

Like so many other sectors o the U.S. economy, there

has been a downturn in entrepreneurship over the past ew

Third Annual

State o Entrepreneurship AddressA Roadmap or State Growth

The National Press Club, Washington, DC

February 9, 2012

By Benno C. Schmidt,Interim President and CEO, Ewing Marion Kauffman Foundation


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STATE OF ENTREPRENEURSHIP ADDRESS | A ROADMAP FOR STATE GROWTH | FEBRUARY 9, 20122

years. In act, dating back to even beore the onset o the

recession, the number o jobs created by startup companies

less than fve years old was declining. This is a worrying

development, given that, until the recession, new frms over

the past three decades generated virtually all net new jobs

in the U.S. economy. Moreover, because major technological

advances are disproportionately commercialized by new

frms, the slowdown also portends slower growth in living

standards.

The biggest economic payo rom the ormation o

new frms comes when some raction o them grow, ideally

as rapidly as possible, consistent with achieving sustained

proftability. Remarkably, the top 1 percent o growing frms

o all ages account or 40 percento net new jobs created

in any given year. Fast-growing youngcompanies (those

three to fve years old), or about 1 percent o all companies,

account or 10 percent o net new jobs. So an importantchallenge or policymakersat all levels o governmentis

to create the conditions that enable an increase in the

number o ast-growing job creators or to enhance the pace

at which the most successul frms expand.

We need to oster new thinking about how to

stimulate job creation. The old model or doing this is

colloquially known as smokestack chasing, whereby state

and local governments try to attract companies by oering

them generous packages o subsidies and tax preerences.

Other countries are moving away rom this approach,recognizing that its short-sighted, and that theres no

guarantee companies will stay once their benefts end.

States should move away rom it, as well. A much more

benefcial long-term strategy is to create an environment

that supports innovation and entrepreneurship, and attracts

the individuals who will launch companies that create jobs

that remain where they are created and generate valuable

tax revenue or state and local governments.

The bottom line rom our reports is simple: States

should do all they can to make it easier to start a

business. Im sure at least one o our panelists will agree

wholeheartedly with that. Bill Aulet, who leads MITs

entrepreneurship center, will be sharing his views on our

panel rom the perspective o someone who has started

multiple businesses.

Unortunately, while the United States traditionallyhas been one o the easiest places in the world to launch

and grow a business, that is no longer true. Globally, the

United States ranks ourth overall in the World Banks Doing

Business rankings, but 72nd in terms o how easy it is or

new and young companies to pay taxes, and 13th overall

on the indicator o starting a business, which includes

procedures, days, cost, and paid-in minimum capital.

These numbers underscore the need or states to

reduce the paperwork, time, and eort involved in the

administrative niceties o frm ormation. This requiresan easy-to-use, one-stop place or online business

registration and, ideally, consolidation o physical space or

in-person registrations, as well. States also should make

business shutdown and liability costs as low as possible,

since not all new ventures succeed.

The Doing Business survey has spurred a healthy

competition among countries to improve their rankings

by making their business environments more hospitable

to business creation. There should be a similar survey

here in America, with states ranked annually on a variety

o indicators measuring how their policies help advance

innovation and entrepreneurship. This recommendation is

contained in a comprehensive proposal our Foundation

released last summer, and is contained in the bipartisan

Startup Act introduced in the U.S. Senate by Senators Mark

Warner and Jerry Moran.

Id now like to turn to some specifc issues, and start

with one o the little-noticed changes in U.S. regulation

in the past ew decades, which is the prolieration o

occupational licensing.

Remarkably, the top 1 percent o growing frms o all ages accountor 40 percent o net new jobs created in any given year.


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STATE OF ENTREPRENEURSHIP ADDRESS | A ROADMAP FOR STATE GROWTH | FEBRUARY 9, 2012 3

Improving schools has a ripple eect, as the availabilityo high-quality education actors into the location decisions o

companies and workers.

In the United States, hundreds o proessions and

other occupations are licensed by states, with strictness

o regulation varying by state. The median number

o occupations licensed by states is eighty-eight. But

licensing has ballooned over the past several decades:

The percentage o the American workorce covered by

occupational licensing has grown rom less than 5 percent

in the 1950s to more than 20 percent today.While the benefts derived rom this licensing are

unclear, the costs are clear: Occupational licensing thwarts

competition and acts as a barrier to entry or entrepreneurs

seeking to provide services to consumers through new

business models at lower cost and/or higher quality.

Existing licensing restrictions can be liberalized

without sacrifcing health, saety, or quality o service. In

the legal proession, or example, specialized certifcates

could be issued or routine legal services in areas such as

estate, divorce, and bankruptcy law, as well as business

incorporation. The eect would be to stimulate new

competition, helping to reduce prices and raise quality.

States are uniquely positioned to undertake reorms

to the legal proession, or the simple reason that the

practice o law is governed by state law. A more streamlined

approach also would reduce what is now an enormous

investment o time and money by law students. Law

licensing reorm also could save consumers billions o

dollars per year, while oering opportunities or a new wave

o legal entrepreneurs.

We will hear more about the eects o licensing

rom our ourth panelist, Morris Kleiner, a proessor at

the University o Minnesota, who has studied and written

extensively on occupational licensing issues.

Another area ripe or state-level reorm is education. I

speak rom some experience here, having spent many years

working to bring greater innovation and reorm to the K12

sector. While there is an ongoing debate about eective

educational methods, we know that ending the de acto

monopoly government holds over education will help states

oster innovation and entrepreneurial disruption, which is

long overdue.Improving schools has a ripple eect, as the availability

o high-quality education actors into the location decisions

o companies and workers. Opening up the education sector

to entrepreneurs, by lowering barriers to the ormation

o charter schools in particular, also could have a huge

positive eect on a states attractiveness to other, existing

companies.

Id also like to touch on one element o university

education. As many o you know, the Kauman Foundation

has been a long-time advocate or improving the process

o technology commercializationspecifcally, to permit

university aculty members to retain the right to license

the technologies they develop, without having to gain

approval rom a universitys technical transer ofce.

Taking innovations rom the laboratory to the marketplace

is essential to unleashing the economic power o these

innovations. State governments are in an ideal position to

act on this idea without waiting or the ederal government

to move, and they can do so directly or through their

inuence over state regents who oversee universities. States

are critical because much academic research takes placein state universities, and because the agship campuses o

these state systems oten have as part o their mission a

responsibility to contribute to the state economy.


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STATE OF ENTREPRENEURSHIP ADDRESS | A ROADMAP FOR STATE GROWTH | FEBRUARY 9, 20124

Now is the time or the states to become more aggressive aboutserving as laboratories o innovation and entrepreneurship.

Connected to the discussion about education and

entrepreneurship is access to talented employees, because

we know that a leading challenge or entrepreneurs is

recruiting talent. States can help build a supply o skilled,

entrepreneurial workers and contribute to the mobility o

those individuals, so theyre ree to switch jobs, change

companies, and start new businesses.

A critical element o promoting mobility is maintaining

the right legal environment. Regrettably, many states, in

hopes o re-creating Silicon Valley, enact all manner o

public programs to promote and help entrepreneurs, but

leave in place a legal ramework that adheres to a dierent

model o employment.

Heres a small but telling examplenon-compete

agreements, which stie the spread o talent and ideas

and, thus, a states economic perormance. While these

agreements are widespread, enorcement varies rom

state to state. Studies have ound that ull enorcement

o non-competes reduces startup activity, patents, and

venture capital. Two states that do not enorce non-compete

agreements are Colorado and Caliornia, while New Jerseys

enorcement is vigorous. These variations have been cited as

a possible reason why states dier in their entrepreneurial

activity.

I will conclude with a ew suggestions about state-

level tax policy.

The central objective must to be to avoid taxes and

regulations that distort business activity by avoring one

sector over another. Tax credits and incentive programs do

just this, distorting the environment or new and young

frms and all other companies. Yet, nearly every state oers

business tax incentives: At last count, orty-one states

oered corporate income tax exemptions, orty-fve oered

tax incentives or job creation, and orty-nine allowed sales

and use tax exemptions on new equipment.

The type and structure o a states taxes also can

matter. In particular, some studies have shown that property

taxes have a negative impact on new businesses because

they must be paid irrespective o company perormance.

The best option is to pursue simplicity and a wide base

in the corporate income tax structure. These eatures are

important particularly or young, growing companies, on

which greater complexity and more distortions will inict ahigher compliance burden.

The notion o states as laboratories o experimentation

and reorm is a hallmark o Americas ederalism. Now

is the time or the states to become more aggressive

about serving as laboratories o innovation and

entrepreneurshipcreating an ecosystem ree o needless

licensing and regulation that unleashes job creation and

triggers productivity gains.

The reorms being released today are not a one-size-

fts-all packagedierent measures will work or dierentstates, but were confdent that every state will be able to

fnd ways they can be more supportive o innovation and

entrepreneurship while maintaining a level playing feld.

The National Governors Association is ideally

positioned to lead the way in building support or state and

local reorms. And the great news is, they are working to do

just that, through the NGAs Growing State Economies

initiative. Beore we enjoy our lunch, Id like to invite

Nebraska Governor and NGA Chair Dave Heineman, who is

leading this work, to speak to us or a ew minutes about

their plans.

Thank you very much.


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2012 State of Entrepreneurship Address: "A Roadmap for State Growth"