Entrepreneurship is the engine of economic growth but sadly it has been in decline. The number of new firms created each year has been decreasing for the last three decades. This means less innovation and disruptive new products. But we can reverse this trend with the following policies.
First, we should ease immigration restrictions for high-skilled workers. Immigrants have fueled innovation and entrepreneurship for generations. They are twice as likely as regular citizens to start a business and also more likely to patent new high tech technologies. Innovative companies like Google, EBay, and Apple were founded by immigrants or their children. Easing immigration restrictions will allow more potential entrepreneurs to live their dream.
Second, we should make urban housing more affordable. Cities have become centers of economic growth and innovation but are too expensive for many to afford. The solution is to increase the supply of new homes to put downward pressure on prices. Therefore, we should ease zoning restrictions and reduce red tape to allow for more buildings to be built quickly. This will allow more people to live in cities and afford to take a risk starting a new venture.
Third, we should counter policies that protect incumbent firms. Large established firms don’t like competition from new firms. They often use their economic power to lobby governments to create barriers to entry through protectionist policies. New firms and entrepreneurs usually don’t have the economic means to fight back in the political arena. For instance, incumbent car dealerships used their lobbying power to block the innovative new firm Tesla Motors from selling directly to consumers in New Jersey. Governments can counter this by creating and financing an agency to lobby on behalf of entrepreneurs. This new agency’s goal would be to help reverse the asymmetry between incumbent and new firms, and to promote an entrepreneur-friendly economic ecosystem.
The decline in new firm growth is an alarming trend. But it is reversible. Bringing in more high-skilled immigrants, making cities affordable, and countering incumbent firms’ political power are key. Enacting these policies will bolster the creative destruction that makes economies grow.