Entrepreneurship & Poverty Reduction

This post examines a long-simmering tension within the entrepreneurship advocacy community – a tension between those who focus on entrepreneurs with high-growth potential ("gazelles") and those who emphasize entrepreneurship as a path out of poverty. On one side are such influential organizations as the Kauffman Foundation, the Council on Competiveness, and increasingly, the U.S. Department of Commerce. On the other side are broad segments of the poverty-reduction community, especially its asset-building wing.

Those who favor targeting future gazelles note that while virtually all net job growth is attributable to firms less than five years old, only a tiny fraction of those firms create most of the new jobs. A major new World Economic Forum study, Global Entrepreneurship and the Successful Growth Strategies of Early-Stage Companies, finds that "the top 1% of all companies...contributes 44 % (40%) of total sector revenue (job) creation." The general argument is that the founders of high-growth firms are more innovative and ambitious than most small-business owners and succeed by commercializing new technologies. Therefore, public policy should focus on identifying and assisting such high-potential startups.

This view is enjoying increasing favor among policymakers. At the federal level, President Obama's Startup America is specifically designed "to celebrate, inspire, and accelerate high-growth entrepreneurship" (emphasis added). Many states, well-tracked by SSTI, support VC funds aimed at facilitating the growth of early-stage firms. Even regions are getting into the act, a good example being the Minneapolis Saint-Paul region's Entrepreneurship Accelerator. In the words of a recent Brookings report, its mission is "to provide the financial resources and expert entrepreneurial assistance needed to transform high-potential opportunities into high-value startups capable of attracting angel or venture capital."

The poverty-reduction community worries that such a focus on gazelles obscures the contributions of other entrepreneurs and draws resources from them. It claims that self-employment itself is job creation, and emphasizes the productive potential of those who lack opportunities to achieve it. It favors public policies that support individual development accounts, micro-enterprise programs, and entrepreneurship training for anyone trying to start a business. It likes the federal Self-Employment Assistance program and Self-Employment Tax Initiative, about which more in future postings. It is less enthusiastic about programs that target high-growth entrepreneurs – individuals who are usually well educated and middle-class.

It bristles in particular at the writings of Case Western University economist Scott Shane, the award-winning author of The Illusions of Entrepreneurship (Yale U. Press, 2008) and "Why encouraging more people to become entrepreneurs is bad public policy" (Small Business Economics). Shane argues that the typical start-up is less productive than existing firms and that their owners work longer hours, earn less, and face higher insecurity than those with similar levels of human capital who work for someone else. He is particularly critical of policies that promote self-employment by the unemployed and those with low levels of human capital, arguing that they are less likely than others to succeed.

Shane makes important points, but assumes that the self-employed can find jobs. He also overlooks the value of the skills learned while trying to launch a business of one's own, the value of having and pursuing a goal when down on one's luck, and the impact on one's children of role-modeling work and initiative. Finally, while he makes a good point about the tendency of typical entrepreneurs to start businesses in unpromising industries, he does not consider the possibility that entrepreneurship programs can steer clients accordingly. In fact, he does not examine the outcomes, as far as I know, of microenterprise programs, such as the fairly positive ones reported by FIELD's MicroTest project.

On the other hand, the market is precisely what the poverty-reduction folks too often fail to consider. That is, in helping one client start a pizza parlor, child-care service or landscaping business, they tend to downplay the difficulties of succeeding in such competitive markets. Equally serious, they ignore the risk of their clients' success reducing the incomes of unseen other providers who are also struggling to survive.

One key to market expansion – and thus prospects for normal start-ups --is the kind of innovation-based entrepreneurship (and "intrepreneurship") that enhances a region's competitiveness. This is all the more true in a global economy where other regions are also innovating rapidly, thus threatening even the existing markets for any one region's tradable services and products. A new report on innovative entrepreneurship in Maine points out that while the number of technology start-ups is high, their subsequent growth rate is not because they don't focus on markets that are growing, which lie far beyond Maine's borders. In short, those concerned about poverty-reduction should support targeted investments in high-growth entrepreneurship.

At the same time, the advocates for high-growth entrepreneurship should do more to promote entrepreneurship broadly. The reason is not that it represents an efficient way to grow the economy and create jobs. Rather, it is that "done right," promoting self-employment expands opportunity for those left behind by an innovative economy's "creative destruction," and thus serves the goal of shared prosperity. It also broadens the pool of entrepreneurs in a world where there is no magic formula for pre-identifying gazelles. As Graham Toft has shown, the growth of young firms is often quite uneven. And the ambitions of entrepreneurs themselves often change, with today's life-style or survival-oriented entrepreneur discovering new possibilities and new interest in exploiting them.

The tension between advocates of high-potential and broad-based entrepreneurship echoes the debate between the advocates and critics of international development aid. In their new book, More than Good Intentions, Dean Karlan and Jacob Appel make the good point that sometimes aid works, sometimes it doesn't, that the key questions are which kinds and when, and that answering those questions requires rigorous evaluations and the application of behavioral economics. Similarly, the advocates of high-growth and broad-based entrepreneurship should show more respect for each other, more skepticism about the claims of their own champions, and more commitment to the empirical evaluation of specific policies and programs.

Related Content