Foreign Affairs: Start-Up Slowdown, by Robert Litan
This article originally appeared in ForeignAffairs.com and can be found in the Foreign Affairs January/February 2015 issue.
Americans like to think of their country as a cradle of innovation. After all, the United States has produced many of the world’s finest entrepreneurs, from Andrew Carnegie and Henry Ford to Steve Jobs and Mark Zuckerberg. The American obsession with innovation has even invaded popular culture. Shark Tank, a reality television show in which entrepreneurs pitch to potential angel investors, has reached its sixth season and draws more than six million viewers a week. Silicon Valley, a new comedy on HBO, follows the founders of a technology start-up as they attempt to strike it rich. Meanwhile, the near-celebrity status of prominent tech entrepreneurs, such as Zuckerberg and Elon Musk, has spurred interest in the so-called STEM subjects—science, technology, engineering, and math—and in entrepreneurship more generally.
The numbers, however, tell a different story. Over the past 30 years, the rate of start-up formation in the United States has slowed markedly, and the technology industry has come to be dominated by older companies. This presents a risk to innovation, because the most transformative leaps forward tend to come not from established firms but from entrepreneurs with little to lose. Indeed, start-ups commercialized most of the seminal technologies of the past several centuries, including the car, the airplane, the telegraph, the telephone, the computer, and the Internet search engine. If the United States wishes to reclaim its status as an innovation hub, it must reform a wide swath of policies—including those covering immigration, business regulation, health care, and education—to support new businesses.
A NATIONAL DECLINE
Data on start-ups in the United States were not regularly compiled until 2008, when the U.S. Census Bureau created the Business Dynamics Statistics database, which tracks firm start-ups and shutdowns across the country. Using the data from 1977 to 2012, my colleague Ian Hathaway and I have published a series of reports for the Brookings Institution highlighting a startling observation: the ratio of new firms to all firms, or the “start-up rate,” has been steadily decreasing. In 1978, start-ups—defined in the database as companies less than a year old—accounted for nearly 15 percent of all U.S. firms; by 2011, that figure had slipped to just eight percent. For the first time in three decades, business deaths exceeded business births.
This national decline mirrored similar shifts in all 50 states and in all but one of the country’s 366 largest metropolitan centers. This includes California, with its two wellsprings of innovation, Silicon Valley and the Los Angeles–Orange County region, where entrepreneurship rates once soared above the national average. The downward trend has affected all major industries, even the life-sciences sector, which includes pharmaceutical and medical-device businesses and has traditionally played a major role in new job creation. In 1990, around 2,600 new life-sciences firms started up, a number that grew to roughly 3,000 in 1997; by 2011, that number had fallen to 1,995.