Entrepreneurship and innovation make our business culture worth celebrating. But they pose challenges, too
Who can doubt that on this Fourth of July, as on most in recent years, we'll again see the Age of the Entrepreneur turned into a symbol. Politicians in particular are fond of this. The spirit of enterprise will be said to reflect everything from freedom, courage, and the work ethic to most of the attributes in the Boy Scout Law -- to represent, in short, America at its unique and rambunctious best.
But when all the flag-waving and fireworks are over, a question remains: are we really so special? Is our business culture different? Or are all nations gravitating toward the same way of economic life, the same patterns of creation and demise for companies and jobs?
This time, it turns out, the politicians are right. The facts show that we are different. Compare U.S. business patterns with the histories of millions of individual businesses in Canada, the United Kingdom, and Sweden over the past 10 or 15 years. The United States is yeastier. There is more bubbling here -- more activity, more people starting companies, more young businesses growing.
Americans are two and a half times as likely to create jobs by starting a company as are our allies in the United Kingdom (see figure 1). We are also far more likely to wipe out jobs by closing companies down. The lives of our businesses are far more turbulent.
Our new jobs are more likely to come from innovative young companies that grow. Figure 2 reveals the stark contrast between the United States and Sweden. We depend heavily on smaller businesses for job creation, and Sweden relies almost solely on larger ones. Canada's experience lies in between.
Turbulence itself is not, of course, desirable. We pay a heavy price for ours -- plants close and people are forced to move their homes and change their employers. What do we get for it? Jobs. Between 1974 and 1984, for example, Americans created 18 million jobs while, during the same period, the Common Market nations lost 3 million. In Europe, as here, this was a time when baby boomers -- some 4 million of them -- flooded the labor market, with staggering unemployment the result.
Even by their own measurement systems, European unemployment rates are unsettling: Belgium 13%, France 10%, the Netherlands 15%, Italy 13%, Spain 19%, and the United Kingdom 13%. These figures, though, mask massive social welfare programs that we do not support, and that absorb people from the ranks of the unemployed. True unemployment (as we would measure it) in the Netherlands, for example, is much closer to 25%. In Belgium, I have been told, it has approached 30%. We fret, as well we should, about a high youth unemployment rate of 13%. In the United Kingdom it was 22%, in France 25%, in Spain 44%.
Why do we start so many more companies? Why are smaller ones more likely to grow and create jobs here? Any explanation begins by noting how differently the playing fields (to use the current idiom) are laid out. The Europeans fund their social programs with high marginal tax rates. Regulations abound. There are endless rules governing a business's right to close facilities, relocate operations, lay people off, or reduce wages. The result is poor growth.
So why, an American might ask, can't the Europeans see the advantages of a more open, freewheeling system like ours and change the rules? The answer is not that they can't do so, but that they don't want to. They share a value system fundamentally different from ours -- one that has deep feudal roots and that favors social protection and minimum living standards over allover aggressive growth and the possibility of inequality. They view our poor and ill-housed and badly cared for as an unacceptable systemic weakness, and more than ample reason for rejecting our approach.
We revere the entrepreneur in this country. No matter how bad those speeches are on the Fourth of July, for us the entrepreneur really is a symbol of innovation, imagination, freedom, and courage. Europeans, though, view entrepreneurship as a practice of the lower classes. It is not an accident that only 1.7% of the graduates from Dutch universities go to work for a small or midsize company -- it is simply "not appropriate" for them to do so. Whatever the differences, a characteristic we share with the Europeans is a high level of innovation and inventiveness. Of all Nobel Prizes awarded in science and medicine since 1950, for example, the United States accounts for 53%, Europe 39%, and the rest of the world only 8%. We are alone, however, in that we dream things up and we do a good job of bringing them to market. On the following page, figure 3 summarizes our uniqueness when degree of entrepreneurship and sources of innovation are considered jointly.
What about the rest of the world? We now function in a world economy that makes physical proximity to Europe largely irrelevant. We are concerned as much with Japan and Korea as we are with Germany and Spain.
We have much less data about the rest of the world, but that which we do have suggests that the rest of the world, at least statistically, is more like us. The Japanese now derive nearly all of their new jobs from small and midsize companies (figure 4). My Japanese friends assert that the Koreans are much more like us than like them -- although no one has any facts to support or refute the assertion. A survey of 4,000 small-business owners in 10 countries revealed, though, that Third World entrepreneurs are more aggressive even than we. The percentage of small-business owners planning to increase future employment is 77% in the Third World. In the United States, it's 67%, and in other developed nations, 57%. It would seem that we are not alone in our reliance on small growing firms to create jobs, and that Europe is an exception rather than the world norm.
Taken in total, what does all this mean? If our business climate is special, what are its benefits? What are its costs?
First, there is no more fertile soil in the world for starting a business. Nowhere is the access to innovation more closely aligned with a culture that supports people who want to grab for the ring. We tolerate, and even applaud, the sort of people who name computers after fruit and software after flowers. Those of you considering a move out on your own, or those of you already there, cannot complain that we have an inferior climate in which to work.
But the climate is far from perfect. What may be Mecca for the entrepreneur can be a nightmare for the 15% of our work force with no health insurance, or for any of the 10 million Americans who involuntarily lose their jobs each year, or for the roughly 10 million more each year who must change careers to remain viable in the work force. Our yeastiness is costly. Turbulence exacts a price that Europeans have already decided they are unwilling to pay. And here the price is being paid by a growing number of Americans who are afraid and want protection.
We will have two options for dealing with their fear: 1) slow our system down, or 2) be more creative about coping with turbulence and job mobility. To slow the system down, of course, would be to give up the culture that has created almost 10 million jobs already in this decade and that has consistently produced one of the lowest unemployment rates in the world.
A far more American solution would be to come up with our own special way of handling mobility. We need to help people learn new skills. We need to make it easier (and less threatening) for people to move from one place to another and from one company to another. In short, we need to be as inventive about coping with change as we have been in creating it. The exact mechanisms by which we can do this merit discussion in their own right -- and I will return to this topic in a future column.
The important point now, as we celebrate Independence Day, 1987, is that the ideals we fought for so many years ago have yielded a unique economic climate that offers large measures of opportunity and that now poses great threats to many of the people who labor to make it work. Because we are unique, we can't draw heavily upon the experiences of others for our solutions -- we must create our own. That, in my opinion, is the greatest challenge we'll face over the next 20 to 30 years.