Innovators Matter Most

Robert E. Litan

The U.S. in the midst of the most entrepreneurial era in its history, with more than 500,000 Americans involved in launching their own companies each year and an estimated 10% to 15% of all working adults engaged in some kind of entrepreneurial activity. And among these entrepreneurs, it is the innovators who matter most.

Their enterprises are the ones which create the jobs and industries of the future — as they have lifted the economy’s productivity in the past. The automobile, the airplane, the telephone, air conditioning, the personal computer and its software, and Internet search engines — all were launched by innovative entrepreneurs rather than large companies.

So how do we foster more of these innovators? Experience has shown us some of the public policies over the past several decades that have reduced obstacles to innovation and increased the potential rewards of entrepreneurial risk taking.

The removal of legal barriers to entry — and the lifting of price controls– in the transportation and telecommunications industries has lowered costs and barriers to entry for new firms throughout the economy. Reforms that permitted pension funds to invest in venture-capital partnerships helped unleash the growth of a new form of entrepreneurial finance. The 1980 Bayh-Dole Act, which allowed universities to commercialize technologies developed with federal funds, has promoted university-based innovation.

What next? Recently, the Kauffman Foundation, with the assistance of Inc. magazine, asked some of the nation’s most successful entrepreneurs what they needed to grow. They cited four challenges, and academic research has helped to pinpoint the policies that best respond to each of them.

Ensuring a skilled work force. Entrepreneurs say that the biggest constraint on growth is finding “talent” — highly skilled, entrepreneurial workers. Thus we will need major improvements in K-12 education, which are unlikely to come about without more charter schools: parents and students being able to choose their schools, and principals and teachers with more freedom, and accountability.

We also can use as many skilled immigrants as are willing to come here. Recent surveys indicate that immigrants have been essential in forming a quarter of our rapidly growing high-tech companies. We ought to be encouraging, not limiting, the entry of such people. How about giving permanent residency to any foreign student who obtains a math or science degree at one of our universities — since these skills are key to the formation and growth of high-growth companies of the future?

Reforming health care. Escalating health-care costs rank high on entrepreneurs’ lists of concerns. They’re not alone. Workers are anxious about losing their own health insurance, especially if they take the risk to leave their stable jobs to form their own businesses.

The obvious answer to both challenges: Phase out current tax linking employment with health care, using the revenue to subsidize the purchase of health insurance by those of limited means. President Bush has offered one approach, surely there are others. Whatever is done, prohibit insurers from discriminating or refusing to insure based on an individual’s pre-existing health conditions (as we do for genetic conditions).

Promoting innovation. We already do a great job innovating and commercializing. But we can do better, by enhancing government funding of research in basic science and engineering; reforming patent law so that protections are not so overly broad that they inhibit the creation of innovative, new firms; improving ways for university-developed ideas to be commercialized; and funding efforts to identify and take advantage of innovations developed abroad, just as foreign companies have been doing with U.S.-based innovations for decades.

Limiting costly regulation and liability litigation. Because of their small size, entrepreneurial firms are especially vulnerable to excessive regulation and liability litigation. Accordingly, entrepreneurs have the most to gain from sensible reforms requiring all major federal (and state) regulations to be implemented only if estimated benefits exceed costs, and by adopting further liability law reforms (without reducing incentives for all companies to make safe products). Two reforms would help curb frivolous litigation: adopting the “English rule” — loser pays — on attorneys’ fees for litigation with commercial parties on both sides; and limiting the award of punitive damages where defendants have complied with prevailing regulatory standards.

These proposals are quite different from the ones policy makers in Washington and elsewhere traditionally discuss when trying to promote entrepreneurship — such as increasing the budget of the Small Business Administration, or reserving a certain percentage of federal contracts for small business. Entrepreneurship Week USA begins this weekend. What better time to begin a serious debate on these larger issues so vital to our economic future?