Overcoming Barriers to Entrepreneurship in the United States
Edited by Diana Furchtgott-Roth
Lexington Books
“Entrepreneurs produce new ideas, some of which, if allowed to develop, lead to greater wealth and economic growth. Other ideas are doomed from the start. The beauty of our economic system is that it separates the productive ideas from the unproductive and allows the former to flourish.” With this introduction, editor Diana Furchtgott-Roth properly recognizes entrepreneurship as one of the crucial factors that makes American business different: the willingness of individuals to try, and the willingness of our society to permit failure and reward success.
The collection of essays in “Overcoming Barriers to Entrepreneurship” break new ground on the causal factors that matter for the creation and development of small businesses, including the absence of language or cultural barriers, access to external funding and low taxes.
What explains the low levels of entrepreneurship among some minority groups? Robert Fairlie and Christopher Woodruff isolated the closely related effects of language and cultural barriers, while taking advantage of locational differences in their sample of Mexican immigrants, and conclude that language is the more important barrier to immigrant entrepreneurship. “With respect to self-employment rates, perhaps the most interesting result comes from the analysis of ethnic enclaves. Almost a third of the Mexican-born population lives in [areas] where more than half of the population identifies itself as being of Hispanic descent. In these areas, self-employment rates are much higher than elsewhere and reach levels comparable to those for Asian and European immigrants.” Interestingly, however, Mexicans have lower entrepreneurial propensities than other Hispanics, which the authors argue may reflect a relative lack of start-up capital.
Junfu Zhang finds that locating in Silicon Valley increases the ability of entrepreneurs to attract venture finance and complete their funding needs faster. But Silicon Valley firms also tend to either go out of business relatively quickly or perform much better than average. This success reflects more than funding – venture capital also creates access to the guidance and human networks of experienced business people. “To understand the importance of the VC industry in local economic development,” Zhang explains, “one should conceptualize VC as a combination of monetary, human and social capital. Human capital can be understood as the venture capitalist’s grasp of technology, market, and business, along with his or her track record and reputation in company creation and venture investing.”
Donald Bruce and Tami Gurley-Calvez find that entrepreneurs face a huge tax burden. In addition to income and payroll taxes, entrepreneurs have to pay “corporate income tax (for those that incorporate), unemployment insurance and workers compensation taxes, the potentially short-lived estate tax and a menu of state and local taxes,” they write. They carefully consider the alternative tax rates faced by entrepreneurs if they abandon their business ambitions to become wage earners, and find that differences in tax rates favoring employees over employers discourage people from operating their own businesses.
“Embarking upon an endeavor that requires venture capital funding means that the risk being taken is subjected to the market – and that is a pretty severe test,” writes telecom analyst Eric Meltzer in his essay. Access to capital is indeed helpful, but the right personal influences and practical experience need to accompany that capital for it to be very effective. Lowering marginal tax rates and simplifying the tax system would avoid penalizing entrepreneurs and would boost new business formation. Tapping the vitally important and growing resource of immigrant entrepreneurial ambition and talent, educational opportunity, especially an emphasis on English language skills, is also crucial.
Charles Calomiris is Henry Kaufman professor of Financial Institutions at Columbia University.