Entrepreneurship in America recently hit a 40 year low, with far less business creation and new jobs coming from startups than in the past. Productivity numbers show a similar trend, with levels today far below what they were in previous decades. Clearly, these trends are troubling signs that need to be reversed.
To many, this is surprising because we seem to see innovation all around us, from smarter smartphones to speakers that talk to us and respond to our commands. However, the truth is that information and communication technology makes up only 6% of advanced economies. Silicon Valley can't build the future alone.
Even more disturbing is that the decline didn't begin recently, but way back in the 1970s, with just a brief respite during the late 1990s and early 2000s. So if we want to revive innovation and entrepreneurship in America we will have to fix some deep-rooted problems and reverse long-standing trends. Here are three basic things that we can do that will put us on the right path.
1. Start The Low Hanging Fruit
Clearly, the backbone of any innovation economy is entrepreneurship. Yet by a number of metrics, startup activity in America has faltered. Part of the drop is fallout from the financial crisis, although a report by the Kauffman foundation found that things have picked up recently. Still digital technologies like the cloud don't seem to have spurred much business creation.
One reason for the lull is the heavy burden of student loans. In fact, a study done by the Federal Reserve Bank of Philadelphia found that counties with high student debt lag behind in creating new businesses. A less documented factor is rising healthcare costs and the fear of losing corporate healthcare insurance.
Another thing holding us back is the decline in the labor participation rate, which still hasn't fully recovered to pre-crisis levels and has created a dire labor shortage. Two major factors contributing to the problem are high incarceration rates and the opioid crisis. It has been estimated that 6%-7% of prime working age men have a history of incarceration and nearly half of those who are not in the workforce take pain medication daily.
These are uniquely American problems. No other major country has similar levels of student debt, incarceration levels or healthcare costs. Opioid use correlates most strongly with medical practices, not social or economic conditions. This should be low hanging fruit. These are issues which are eminently solvable, but we need to find the will to make it happen.
2. Renew Our Commitment To Science And Technology
We tend to think that the best technology is built by entrepreneurs in a garage somewhere or, possibly, in a corporate lab. Yet the truth is that most technology starts with federally funded research that later gets commercialized by the private sector. That's the engine that drives innovation forward.
To understand how pervasive and important this funding is, just look at an iPhone. Virtually every aspect, from the basic computer architecture and battery to the Internet and GPS, began as a federally funded program. In some cases, such as Google and Qualcomm, major technology firms themselves got their start with grants from the federal government.
Unfortunately, over the past 30 years, federal investments in research have steadily declined, diminishing our ability to innovate. Despite what many say, this gap in investment can't be easily be made up by the private sector, because about half of federal grants go to basic research that is not economically feasible for profit-seeking companies.
It is this type of exploratory research that leads to long-term gains in productivity. For example, a congressional study of research done at the NIH found it to have a return of investment between 25% and 40%. In the case of the Human Genome Project, it is estimated that the $3.8 billion invested in generated nearly $800 billion of economic activity as of 2011.
So to revive innovation, we need to renew our commitment to funding scientific research. While there was an increase during the Obama stimulus and, due to a confluence of factors, a surprising reprieve in the most recent budget, unless we can dedicate ourselves to a long-term, steady effort to invest in discovery, we have little reason to expect better results downstream.
3. Build An Innovation Ecosystem For Hard Tech
For the past 30 years, Silicon Valley has been America's innovation engine. From Apple and Intel to Google and Facebook and thousands of others, the Bay Area has been the place where entrepreneurs go to pursue their dreams. No place on earth can match its combination of talent, ambition and venture capital.
Yet we often forget that the Silicon Valley model was developed for a specific industry at a specific time and is not transferable to every business sector. More specifically, while Silicon Valley's way of doing business is well-suited to software and consumer gadgets, it doesn't do so well with more industrial technologies that don't fit into a 5-year investment horizon.
"The venture capital model works well when the primary risk is finance risk -- as the entrepreneurial team works to scale their business model -- but it's doesn't work so well when technological risk and market risk coincide," Errol Arkilic, an investor that specializes in hard tech ventures told me. "There are just too many unknowns and that requires a different approach."
One model that has shown some promise is the Manufacturing Institutes developed under the Obama administration. These are partnerships between government, academia and the private sector that focus on specific industries, such as chemical processing and advanced fabrics and offer state and local governments the opportunity to build entrepreneurial ecosystems.
Innovation Isn't About Ideas, But Solving Problems
America became the technological superpower of the 20th century because of the problems we solved. We split the atom, developed antibiotics and put a man on the moon, just to name a few. In many cases, these accomplishments were achieved in partnership with scientists in other countries, but the major work was done here.
A big part of our success has been our openness to new people and new ideas. To take just one example, let's take a look at the computer industry. The principles of digital computing were discovered and the first computer itself was developed by Alan Turing in England. Yet Turing, persecuted for his homosexuality, was driven to suicide and further work on computing was mostly done in a secret government lab.
In America, on the other hand, government funded work that was shared publicly. Prominent researchers that were driven from Europe, like John von Neumann, thrived here. The IAS machine, funded by the government, became the basis for the American computer industry. We have dominated the technology ever since.
Today, we have the opportunity to win the 21st century, but seem to have lost our will to explore and discover. We defunded our supercollider in the 1990s and the center of particle physics shifted to Europe. Many of our politicians are openly hostile to scientists and their discoveries. There is no national project, like a moonshot or Human Genome Project, to focus our scientific energies and fuel the next generation of discovery.
Perhaps even more importantly, we seem unable to solve the most basic problems. We can't build a 21st century workforce if we are weighed down by opioid abuse and mass incarceration. Our entrepreneurial spirit is held back by student debt and fears of losing health coverage. These are the most basic problems, they are uniquely American, yet we can't seem to muster the will or the resources to solve them.
The truth is that our prosperity is not a birthright to which we are entitled, but a legacy that must be lived up to. If we want to win the future, we need to prepare for it.