How Technology-Based Start-Ups Support U.S. Economic Growth

Abstract

Technology-based start-ups have long been an important driver of America’s economic growth and competitiveness. But while these firms provide outsized contributions to employment, innovation, exports, and productivity growth, many policymakers focus more broadly on helping all business start-ups without regard to type. Such a broad-based focus risks reducing overall economic growth for three key reasons. First, most owners of new non-tech-based firms have no intention of growing beyond just a few employees. Second, small, non-tech-based firms on average have much lower productivity and wage levels than technology-based start-ups. And third, most non-tech start-ups are in local-serving industries (e.g., retail) and as such create few or no net new jobs. As such, the focus of entrepreneurship policy should be squarely on spurring more technology-based start-ups. Over the last few years a common narrative has emerged that new business formation is down and that this has been a significant contributing factor to the recent underperformance of the U.S. economy. There is a parallel narrative which holds that large technology firms are crushing technology-based start-ups, using their power to enter markets that start-ups otherwise would occupy. Therefore, a critical question for the future of the U.S. economy is the current state of technology-based start-ups. ITIF attempted to answer this question by examining data on more than 5 million firms in 10 technology-based industries from 2007 to 2016. As it turns out, neither claim is true. While it is true that fewer “mom and pop” start-ups are forming — a trend policymakers should be largely indifferent to — technology-based start-ups have increased. But policymakers should not accept the recent increases in technology-based start-up activity as justification for inaction. Instead, they should promote policies that will help current and future technology-based start-ups emerge and scale into larger firms that will generate long-lasting, high-paying jobs, increase innovation and productivity, and improve the global competitiveness of the U.S. economy.