Americans like to think of their country as a cradle of innovation. After all, the United States has produced many of the world’s finest entrepreneurs, from Andrew Carnegie and Henry Ford to Steve Jobs and Mark Zuckerberg. The American obsession with innovation has even invaded popular culture. Shark Tank, a reality television show in which entrepreneurs pitch to potential angel investors, has reached its sixth season and draws more than six million viewers a week. Silicon Valley, a new comedy on HBO, follows the founders of a technology start-up as they attempt to strike it rich. Meanwhile, the near-celebrity status of prominent tech entrepreneurs, such as Zuckerberg and Elon Musk, has spurred interest in the so-called STEM subjects—science, technology, engineering, and math—and in entrepreneurship more generally.
The numbers, however, tell a different story. Over the past 30 years, the rate of start-up formation in the United States has slowed markedly, and the technology industry has come to be dominated by older companies. This presents a risk to innovation, because the most transformative leaps forward tend to come not from established firms but from entrepreneurs with little to lose. Indeed, start-ups commercialized most of the seminal technologies of the past several centuries, including the car, the airplane, the telegraph, the telephone, the computer, and the Internet search engine. If the United States wishes to reclaim its status as an innovation hub, it must reform a wide swath of policies—including those covering immigration, business regulation, health care, and education—to support new businesses.
A NATIONAL DECLINE
Data on start-ups in the United States were not regularly compiled until 2008, when the U.S. Census Bureau created the Business Dynamics Statistics database, which tracks firm start-ups and shutdowns across the country. Using the data from 1977 to 2012, my colleague Ian Hathaway and I have published a series of reports for the Brookings Institution highlighting a startling observation: the ratio of new firms to all firms, or the “start-up rate,” has been steadily decreasing.