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How many new billion dollar firms would it take to permanently increase the US GDP
(gross domestic product) by 1%? According to the Kauffman Foundation, the answer is most likely between
30 and 60. Collectively, the impact from high-growth firms that are able to
realize $1bn in revenue could significantly accelerate the US economic
recovery, and over time greatly increase income and wealth of the average
If, for example, the US economy grew at 4% annually rather than 3%, GDP would
double six years faster (eighteen years versus twenty-four years). Given the
magic of compounding, this extra one per cent would cumulate over a century to produce
roughly three times the level of GDP than would otherwise exist.
Since World War II, the American economy has averaged 3.3% growth per year,
but fell to a negative growth rate during the height of the recession in 2009.
Even as the economy recovers, the Kauffman Foundation says it is widely believed
that the long-run sustainable growth rate has fallen to less than 3%.
In an article last January, Finfacts
reported on what is termed the 'New Normal' - - the view that once the
current phase of deleveraging, de-globalisation and re-regulation is over,
investors and policymakers will “find themselves in a landscape that only
partially resembles that which dominated the 2003-2007 period.”
Real US GDP rose an average of
3.4% per year from 1960 through 2007, according to economists at ratings agency
Standard & Poor's. Last January, S&P said growth would average only 2.6% over
the coming decade.
Mohamed El-Erian, CEO of PIMCO (Pacific Investment Management Co.), which
manages the world’s biggest bond fund, told Bloomberg this week that US policy
makers are reacting to the 'New Normal' by pursuing “increasingly
unconventional” strategies to aid the economy. “The 'New Normal' is still here,” El-Erian said. “What the policy
makers are doing is kicking the can down the road in response to the symptoms of
the 'New Normal,' but they’re not yet changing the medium-term dynamics.”
“What is a danger is that we stay stuck in a new normal where unemployment
rates stay high,” President Obama said on CBS’s “60 Minutes” program
last month. “People who have jobs see their incomes go up. Businesses make
big profits. But they’ve learned to do more with less, and so they don’t hire.”
reported on Thursday that male unemployment among US workers who haven't a
university degree, has fallen from 1960s highs in each of the subsequent
reported last May that the US jobs market underperformed the Eurozone
and other economies in the decade before the Great Recession
Looking over a long stretch of history, despite occasional recessionary periods,
the US job market has steadily increased employment to accommodate a growing
population until the 2000s. During the 1990s (specifically, from December 1989
through December 1999), the economy gained 21.7m payroll jobs. By contrast, from
December 1999 through December 2009, the economy lost 944,000 jobs. Job gains in
the 2000s were weak even if the losses that occurred during the recession are
The Kauffman Foundation, which is the leading organisation in the US for
research on entrepreneurship, asks is there any way that long-run growth rate
can be boosted by a full percentage point? In a new study,Inventive billion
Dollar Firms: A Faster Way to Grow?, the Foundation’s vice president for
research and policy and author of the study, Robert Litan, suggests one possible
“If innovative, high-growth firms historically have been the drivers of
economic growth in both output and jobs, then cultivating the creation of more
such firms will increase growth of the economy in the long run,” Litan said.
“Our challenge is to create environments that foster the growth of these new
successful companies that generate large social benefits.”
The Kauffman paper uses $1bn in sales as a proxy for highly innovative firms.
Using some plausible assumptions about key parameters, Litan estimates that
30-60 more such companies launched every year would achieve the permanent
point increase in economy-wide GDP. This estimate rests on the findings of
Yale economist William Nordhaus that highly inventive companies, like individual
inventors, generate gains to society that vastly exceed the profits earned by
the companies or inventors themselves.
With US GDP currently nearing $15trn, one per cent extra growth
would require an additional $150bn in output annually. Robert
Litan says economists typically would say that the way to generate that
additional growth is for society to somehow increase its "productivity" growth
- - higher ratio of output to inputs over time. He says it however doesn't
translate into how many additional firms and of what kinds it would take to
achieve such an outcome.
The 4% figure implies that, in order for society to benefit from an
additional $150bn in output, inventors (read: entrepreneurs) must develop new
products, services, and processes that collectively earn for themselves only
$6bn a year ($150bn multiplied by 0.04) after taxes. If, as seems reasonable,
the average inventive firm returns 10% on its sales, it would take $60bn in
sales to generate $6bn in profits. "If this $60bn were spread evenly across all billion dollar firms, we have our answer! The economy needs sixty inventive
companies to be formed each year whose revenues eventually mature to an average
of $1bn (because the figure is an "average" some new companies' sales
can exceed $1bn, while other successful enterprises with large social benefits
can fall short of this benchmark)," the report says.
Robert Litan says the challenge is to get more billion dollar companies above
the numbers that would normally be generated - - that is, producing the
necessary incremental improvements in the numbers of successful companies
launched - - is to find, help launch, and nurture individuals and teams who
would not otherwise be or choose to be successful entrepreneurs. He says: "In
other words, we need to find ways of changing the career paths of individuals
with great ideas capable of producing social gains well in excess of private
rewards and turn them into company founders or co-founders. How can the United
States do that?"
“Whatever the ‘magic number’ of highly successful firms may be,” adds
Carl Schramm, president and CEO of the Kauffman Foundation, “the bigger
question is: How do we ensure the creation of those firms here in America?”
One answer, the Foundation believes, is in the creation of
“entrepreneurial ecosystems.” Currently, research universities across the
country are creating mentoring programs for faculty, alumni and student
entrepreneurs. These commercial, private-sector “accelerators” use a
competitive selection process to nurture new potential breakthrough companies in
markets including medical devices and web-based businesses.
Kauffman Laboratories for Enterprise Creation, launched last year, aims to
recruit highly motivated individuals with commercial ideas that have the
potential to produce billion-dollar-plus companies. Kauffman Labs surrounds the
successful candidates, chosen in a highly competitive process, with
entrepreneurial instruction and mentoring from some of the nation’s leading
experts in the same industry or “vertical.” The first Labs program
consisted of outstanding postdoctoral scientists who have developed promising
technologies. The next program, which starts in early 2011, consists of
potential entrepreneurs with innovative commercial ideas in the educational
field. Future Labs programs will be centered on other verticals ripe for
high-growth, innovative startups.
How America can regain its competitive footing, with Michael Porter, Harvard Business School professor: