Almost 60% of US jobs in firms founded before 1980
Americans started fewer businesses in 2013 than in 1980 when the population was 28% smaller and the drop in startups in recent decades has coincided with concentration among older businesses damping competition and innovation.
The Kauffman Foundation, an entrepreneurship think-tank, says that today, numerous economic indicators are flashing warning lights that competition is diminished. New firm formation has struggled to recover to pre-recession levels, as firm deaths are as likely as firm births. The most profitable American firms are earning an increasingly greater share of industry profits and are more likely to perpetuate that level of profit-making. Industries that used to be represented by tens of firms have shrunk to a mere handful. A dearth of firm activity and shortsighted policy choices have weakened true competition with deleterious effect. This hurts entrepreneurs and weakens our nation's economic potential.
The Economist wrote in a briefing last March:
The naughty secret of American firms is that life at home is much easier: their returns on equity are 40% higher in the United States than they are abroad. Aggregate domestic profits are at near-record levels relative to GDP. America is meant to be a temple of free enterprise. It isn’t...A very profitable American firm has an 80% chance of being that way ten years later. In the 1990s the odds were only about 50%. Some companies are capable of sustained excellence, but most would expect to see their profits competed away. Today, incumbents find it easier to make hay for longer...The excess cash generated domestically by American firms beyond their investment budgets is running at $800 billion a year, or 4% of GDP. The tax system encourages them to park foreign profits abroad. Abnormally high profits can worsen inequality if they are the result of persistently high prices or depressed wages. Were America’s firms to cut prices so that their profits were at historically normal levels, consumers’ bills might be 2% lower. If steep earnings are not luring in new entrants, that may mean that firms are abusing monopoly positions, or using lobbying to stifle competition. The game may indeed be rigged.
The US has a licensing system for a multiplicity of professions that is in effect a public charter system to restrict entry.
A paper by the Brookings Institution says that the regulatory practice is known as “occupational licensing,” has spread to cover around 30% of the US workforce, up from just 5% in the 1950s. The practice now has a significant bearing on workers of all skill levels, and extends far beyond the occupations of doctors, lawyers, nurses, and teachers.
It is important to realize that occupational licenses are not mere state-sponsored certificates to signal that workers have completed some level of training; occupational licensing laws forbid people from practicing in their occupation without meeting state requirements. If the rationale for licensing an electrician is to protect public safety, it is difficult to see what rationale supports licensing travel guides. Yet, twenty-one states require a license for travel guides. Among these, Nevada has created the highest hurdle: a person hoping to be a travel guide in that state must put in 733 days of training and shell out $1,500 for the license.
The Kauffman Foundation says that Americans are staying put and not switching jobs as frequently, according to measures of labour market dynamism that combine hires and separations to show overall movement between jobs.
The Foundation says one way incumbents ward off new entrants is through occupational licensing, which limits the entry of entrepreneurs and new businesses into the economy by requiring entrepreneurs to take classes, pass tests, and pay fees before they can legally open their business.
Non-compete agreements restrict labour mobility by forbidding would-be-entrepreneurs from founding a business that competes with their employer. These restrictions at least delay, and may block, the formation of new businesses.
The entry of new firms into markets contributes to economic dynamism, spurs growth, and speeds improvements in welfare. The US economy has become increasingly dominated by older businesses. Today, 57% of employment is in firms established before 1980, which only comprise 17% of all firms.
State boards that regulate licensed occupations can further restrict competition when they are captured by industry practitioners. The Kauffman Foundation said this was the case in 2015 in North Carolina, where the Federal Trade Commission targeted the state's dental board for violating antitrust law. The state's board was made up of dental professionals, elected by other dental professionals, and it attempted to prohibit individuals from selling teeth whitening kits without a dental license. State boards are only protected from antitrust violations if they are carrying out clearly expressed state policy and are under active state supervision.
The Kauffman Foundation says innovation is more likely to occur in a competitive market where opportunities and resources for developing new products (and to earn profits) are up for grabs.
When patents and other forms of intellectual property protection become overly broad, legal challenges are easier to bring and increase in number. This threat of litigation by patent holders dampens incremental innovation of the original technology.
Intellectual property rights can be critical in shaping the environment for innovation if they reduce the incentive to compete. The Foundation says litigation from non-practicing entities holding patents between 1990 and 2010, known as patent trolls, resulted in half a trillion dollar loss in wealth, mainly for technology and software companies stemming from reduced innovation incentives.
The Foundation also says that there is reason to believe that antitrust enforcers have given too much deference to claims of cost-savings and consumer benefits in mergers and not enough to preserving competition that would be lost by a merger. Adjusting that enforcement approach, especially in industries where intellectual property plays an important role, can have positive consequences for young companies trying to compete with established firms and discourage efforts by established firms to buy their competition.
Preserve Entrepreneurial Entry
The Foundation advocates limiting the scope, duration, geography, and eligibility of non-compete agreements.
It says examine what occupational licenses truly protect public health and safety, and eliminate those that are unnecessary or replace them with less burdensome regulation. The principle to follow is appropriate protection with minimal burden.
Require licensing boards that oversee regulated professions to be accountable to elected officials and composed with greater numbers of non-licensed practitioners.
Don't Favour Big over Small or Old over New
Reconsider the targets and effectiveness of economic development tax incentives, which overwhelmingly go to large businesses and therefore make entrepreneurial competition more difficult.
Allow laws and regulations to change as entrepreneurs innovate and bring new products, services, or business models to market.
Avoid carve-outs, exemptions, or other special privileges that competitively advantage a single or select few businesses.
Bolster congressional capacity to counter rent-seeking by increasing staffing and salary.
High-growth firms (companies that are adding jobs at a rate of more than 25% a year) account for about 15% of all companies, but they account for roughly 50% of total jobs created.
Michael Malone, author of "The Intel Trinity: How Robert Noyce, Gordon Moore, and Andy Grove Built the World's Most Important Company" (HarperBusiness), wrote in the Wall Street Journal in 2014:
Why are large tech companies losing the ability to innovate? Entrepreneur and author Salim Ismail studies the new generation of "exponential corporations," enterprises that grow 10 times faster than the average rate. He believes that established companies simply aren't structured for this kind of speed. So their only choice is to buy those companies that can still innovate rapidly. If Mr. Ismail is correct — and the current dynamic in Silicon Valley suggests that he may be — we're on the brink of a major restructuring of business strategy, venture capital and almost every part of the high-tech world. It may be time to stop waiting for famous tech companies to roll out the hottest new product and start investing in startups that can sell their innovations to big companies. Tech appears to be evolving into a different kind of field: one that is, paradoxically, more static at the top but also more dependent on entrepreneurship than ever before.
Google has acquired about 200 startups since it went public in 2004 while Ireland has seen hundreds of taxpayer-backed tech startups since the dotcom bust but no scaleups.
The Kauffman Foundation says in a recent report that high-growth startups are being launched at a faster pace han in past years while a new paper by the MIT economists Scott Stern and Jorge Guzman shows that in 15 US states between 1988 and 2014 there was no long-term fall in the formation of what they call “high-quality” startups. Stern and Guzman found that the rate at which these kinds of startups are being formed has not dropped — in fact, 2014 saw the “second-highest level of entrepreneurial growth potential” ever. However the researchers found that these companies are not succeeding as often as such companies did in the past.
Even as the number of new ideas and potential for innovation is increasing, there seems to be a reduction in the ability of companies to scale in a meaningful and systematic way.