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A relative handful of young, high-growth companies create a disproportionate share of the net new jobs in the U.S., according to a new study by the Ewing Marion Kauffman Foundation. Encouraging these "gazelle" firms, which break away from the pack and take off rapidly, might be accomplished through tax, regulatory, and immigration reform, says Dane Stangler, author of the study, "High Growth Firms and the Future of the American Economy." Stangler, a senior analyst at the foundation, spoke recently to Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.
Karen Klein: Small, privately owned companies are notoriously difficult to study because there is little official data on them. How did you approach this study?
Dane Stangler: We asked the U.S. Census Bureau to do a special tabulation for us from their Business Dynamics Statistics database. They were able to break down their private company data along age of business, type of business, growth of firms, and that kind of thing.
You found that the top-performing 1% of young businesses, between three and five years old, create 40% of new jobs in any given year in the U.S. Was that surprising?
We had identified these high-growth, high-employment gazelle companies in an earlier study, but it is probably surprising to the general public, given that most of the focus on job creation is on larger companies and well-established smaller ones.
The average business in the economy adds two to four new jobs annually. The companies in that top 1% contribute about 88 new jobs per year, but the frantic pace usually lasts only about one to three years. Of course, many of these companies grow fast and then fail. Helping them isn't going to contribute to more stability in the economy. But 1,000 of them will grow to substantial size and become the iconic businesses of the future.
One of the statistics in your report says that without startup companies, net job creation in most years would be negative. Is that why you encourage efforts to increase the number of startups in general in the U.S.?
Yes. Of course, many startups don't create significant numbers of jobs for the first several years, but one of the only sources of positive job creation is new businesses. And even if they stay small, the average startup company brings four new jobs into existence. Also, if we encourage people to start more new companies in general, we can expect that some of them will turn into gazelles that add large numbers of new jobs.
What are some ways we can encourage more business formation and potentially spark more gazelles?
Certainly, access to capital is a major barrier to new businesses. While most startup capital comes from the proverbial trilogy of family, friends, and fools, and venture capital is not that important for most fast-growing companies, they do need external capital when they hit an expansionary phase.
The Obama Administration has taken a couple of good steps, such as raising the guarantee on small business loans, and seems to recognize the importance of these companies. I think we also need to think of new forms of capital financing. As we enter an era of tighter financial regulation, and financial innovation becomes a bad term, we have to remember that the democratization of capital has helped young businesses in the past 30 years.
What kind of tax and regulatory reform could help encourage small business formation and growth?
A study done by the Milken Institute shows that lowering corporate tax rates and increasing the R&D tax credit would have expansionary effects on the U.S. economy. I also think the number of taxes and business regulations that kick in when a company hits a certain size threshold can be discouraging.
A lot of the entrepreneurs we talked to said that the most disappointing thing they faced in business was the amount of paperwork and regulatory burden they got stuck with as their companies grew. That can act as a disincentive to expansion or a disincentive to starting a company in the first place. It would be great to find some way to commoditize the paperwork and regulatory burdens so they're not so labor-intensive for growing companies.
Another point you make is that it's important to resist adding regulations that govern hiring, firing, and bankruptcy.
It's very important for employers to be able to hire and fire fluidly and to be able to exit a failed business quickly and without regulatory or other stigma. As paradoxical as it sounds, the U.S. gains a huge growth and productivity advantage from business failures, because they facilitate the reallocation of all sorts of resources, including people.
In our urge to prevent the next fiscal crisis, we have to make sure that we don't hinder the process of company deaths, births, or acquisitions.
Your study talks about targeting immigrant entrepreneurs for help. Why?
We have done studies in the past that show the huge importance of immigrant entrepreneurship in this country. Something like one-quarter of tech companies in the U.S. were founded by immigrants—and that's even truer in places like Silicon Valley. Basically, they are a free source of job creation for us.
It's something of a radioactive issue today, because people say, "How can you promote more immigration when we have all these Americans out of work?" But many immigrants clearly make jobs for Americans; they don't take them. With all the anxiety over China and India overtaking the U.S., it is crucially important that we remain open to those immigrant entrepreneurs.
You even recommend something like an immigrant entrepreneur visa program.
Or expansion of the EB-5 visa for immigrant investors who are bringing in money. It wouldn't take huge changes to include immigrant entrepreneurs in that program. In fact, there's a bill pending in the U.S. Senate that would establish a visa for immigrants who have $250,000 set aside to start a company. That's a wonderful first step, and it could be expanded so it's not tied only to entrepreneurs who already have the money.
One of the major programs of the Obama Administration is to extend tax credits to small companies that hire new employees. Is that going to be effective if it targets companies across the board, and not just those high-growth gazelles?
Well, that's what we're trying to find out. Job creation and entity formation is such a dynamic process that it's hard to address it statistically. You certainly don't want to provide incentives for artificial hires that will later be gratuitously destroyed at companies that are going under anyway.