Embracing entrepreneurship.

AuthorMuntean, Susan Clark

Which public policies are most effective at enhancing economic performance? On two occasions in the past six months, I have presented research findings on this topic to members of the Indiana General Assembly. I made two interesting observations during these meetings. First, there is an apparent translation problem between the quality of our top entrepreneurship programs and the actual creation of new employment-generating ventures in the state. For example, entrepreneurship programs at Ball State University and Indiana University both rank in the top 10 of all entrepreneurship programs nationally, but according to a study funded by the Kaufmann Foundation, Indiana ranks 44th nationally in the percent of employment accounted for by young firms. (1) Second, I observe a disconnect between, on the one hand, the recognition of entrepreneurship's importance to Indiana, and on the other hand, the lack of knowledge regarding what to do to create an entrepreneurial economy. There is significant uncertainty exhibited among our elected leaders regarding what they should be doing to grow the economy through increasing entrepreneurial activity.

What the Research Shows

Scholars, public officials, successful entrepreneurs and financiers must come together to rapidly devise and implement effective strategies to take Indiana from its agrarian and industrial past to its entrepreneurial and globally competitive future. Empirical research strongly suggests that the old economic models and economic development strategies are not the answer. (2) We need to question the wisdom of chasing after mature and declining industries through traditional strategies, which often represent a race to the bottom among states who give away the store in the form of foregone tax revenues in order to secure visible "wins." These short-sighted strategies include temporarily delaying a plant's closure or claiming large job creation numbers at low-skilled, labor-intensive call centers, distribution centers, service providers and big-box retail shops.

A better focus would be on maximizing the contribution of small, fast-growing and relatively young businesses. According to the Statistics of U.S. Businesses, about 90 percent of employers nationally have fewer than 20 employees. (3) In 2007, 85 percent of all Indiana businesses were micro businesses (fewer than 20 employees) and employed approximately one out of every five workers in the state. (4) Importantly, high-growth small businesses are the types that provide the greatest percentage of net new jobs. (5) Between 1994 and 2006, U.S. firms with fewer than 20 employees represented approximately 94 percent of all high-impact firms (those with high employment and high revenue growth) and accounted for approximately one-third of job growth among all high-impact firms. (6) As seen in Figure 1, small businesses created nearly double the number of net new jobs created by large businesses, according to the most recent data available.

FIGURE 1: Net Jobs Created in Indiana by Firm Size, 2005 to 2006 Less than 500 Employees...

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