Tuesday, May 27, 2008

Age and Entrepreneurship

Tim Kane, a senior fellow at the Kauffman Foundation has started a new blog with Robert Litan, called growthology. Among one of many great posts, Tim points us to an op-ed by Michael Malone that appeared in the WSJ a while back. From the article:

The entire world seems to be heading toward points of inflection. The developing world is embarking on the digital age. The developed world is entering the Internet era. And the United States, once again at the vanguard, is on the verge of becoming the world's first Entrepreneurial Nation.


The most compelling statistic of all? Half of all new college graduates now believe that self-employment is more secure than a full-time job. Today, 80% of the colleges and universities in the U.S. now offer courses on entrepreneurship; 60% of Gen Y business owners consider themselves to be serial entrepreneurs, according to Inc. magazine. Tellingly, 18 to 24-year-olds are starting companies at a faster rate than 35 to 44-year-olds. And 70% of today's high schoolers intend to start their own companies, according to a Gallup poll.

An upcoming wave of new workers in our society will never work for an established company if they can help it. To them, having a traditional job is one of the biggest career failures they can imagine.

There certainly is a trend towards emphasizing entrepreneurship in academia, whether in business school curricula or in undergraduate courses and I just spent the past year studying the topic. My classmate David Miller has a great blog on campus entrepreneurship and is doing his dissertation on that topic. His site is great and worth reading and the topic is generally neglected in favor of more traditional subjects like technology transfer. Nonetheless, there is a tendency for people to become wide eyed when talking about entrepreneurship and I wish there was less hyperbole in the literature. Malone's article, while very good, fell into that camp for me. For example, there are a lot of numbers in just the second paragraph but I wonder how many of them accurately describe the state of the world?

Are 18-24 year-olds really starting so many businesses? And what of the 70% of high schoolers that plan to start their own companies? Do they really? This is a familiar problem in the literature. Whenever you interview people and ask them if they would like to be a small business owner, for example, the common response is positive. Of course it is. It's like asking if someone wants a unicorn or a 40 foot yacht. Who really enjoys working for someone else? This is why economists focus on revealed preferences - that is what people do, not what they say. So I take these results with a good deal of skepticism.

And these survey results don't jive with other work either. Earlier this month the Kauffman Foundation released a fascinating survey on technology entrepreneurship and education (HT). From the study, which is available here:

A common belief is that U.S.-born tech founders of technology companies tend to be young. We found that about 1 percent were teenagers when they started their firms. More than twice as many were older than age fifty than were younger than twenty-five. Many, in fact, were in their sixties when they founded their startups.

The vast majority of U.S.-born tech founders were older than twenty-five. The average and median age of key tech founders was thirty-nine.

This comports with other research on the median age of small business owners, across a wider range of fields. There are fascinating questions regarding age and entrepreneurship, but I think that if we take the results of this study seriously, then we should be extra cautious about the claims in Malone's piece. The survey is short so be sure to read it and let me know in the comments if you have any thoughts.

Finally, from Ben Jones:

Great minds produce their greatest insights at substantially older ages today than they did a century ago. This upward age trend is not due simply to an aging population, but comes from a substantial decline in the innovative output of younger innovators. Meanwhile, there is no compensatory expansion of innovative output at later ages. Innovators are the engines of technological change and, other things equal, the less time an innovator spends successfully innovating, the less her lifetime output. The estimates point to a 30% decline in life-cycle innovation potential over the 20th Century.

Innovators build directly on earlier knowledge and spend significant portions of their early years in education. This human capital acquisition provides a possible explanation for the trends we see. In a simple optimization framework, the accumulation of knowledge — a rising distance to the frontier — can explain increased educational attainment. Whether or not this particular theory is correct, the economics literature has focused little on the human capital investments of innovators. Given that innovators spend some of their youngest and potentially brightest years undertaking educational investments, understanding the tradeoffs at the beginning of the life-cycle may be firstorder for understanding the ultimate output of these individuals. Certainly, great innovation is less and less the provenance of the young.

From "Age and Great Innovation." To be clear, innovation is not the same as entrepreneurship, but they are not so different and again, from these results we should not expect a sudden entrepreneurial spirit among the young to spontaneously emerge.

I don't mean to sound snarky, I do think we are an entrepreneurial nation and probably have been for the last 30 years. And we've been incredibly innovative for much longer. I just don't think the story is mainly one of youth. While there are plenty of young geniuses, they are the exception and are not representative of business founders, even in high technology industries. This will be a topic I hope to explore in more depth in future posts.

Sunday, May 25, 2008

Assorted Links: Methodology

It is summer and I at least, do not have any classes. Lest we all let our brains atrophy, here are some interesting methodological links to keep our minds active:
  1. What's New in Econometrics? (NBER)
  2. 10 thoughts on social network analysis (Social Science Statistics Blog)
  3. The Monty Hall Problem (YouTube)
  4. Indiana Jones and the Quest for the Giffen Good (parts one, two, three)

Friday, May 2, 2008

Immigration and Innovation

What is the impact of skilled immigration on innovation? A new paper by Jennifer Hunt, prepared for an NBER conference on labor studies attempts an answer. From the abstract (HT):
I combine patent, decennial census and other data to measure the extent to which skilled immigration increased innovation in the United States from 1950-2000. I instrument the change in the share of skilled immigrants in a state with the initial share of immigrant high school dropouts from Europe, China and India, and consider changes of between ten and 50 years. I find that a one percentage point rise in the share of immigrant college graduates in the population increases patenting by 8-15%; the equivalent range for immigrants with post-college education is 15-33%. A one percentage point rise in the share of immigrant scientists and engineers in the workforce increases patenting by at least 41%. The effects are similar in the short and long run, and appear to be much larger than the effect of skilled natives, especially in the short run. This may be related to my finding that natives are crowded out by immigrants in the short run, but not in the long run. My analysis shows the importance of convergence among states for the evolution of patents. [emphasis added.]
There are plenty of studies that attempt to estimate the costs of immigration, and fewer that measure the benefits, but this paper fits into a unique niche because few authors have investigated this specific link, at least as far as I know. If you take these results seriously and apply them in a policy context, I think it clear that the paper supports Richard Florida's idea that the world is in a global competition for talent, and that while the US has been successful at attracting talent in the past, we are not well suited to compete in the future. Any thoughts from our immigration experts?

Thursday, May 1, 2008

How to Measure Innovation

In an email Ryan brought our attention to a good forum hosted by Stephen Dubner. Writing at the Freakonomics blog, Stephen asks several commentators to discuss how we should measure innovation and what impact it has on society.

One of the respondents, John Seely Brown, co-chairman of the Deloitte Center for Edge Innovation, provided a thoughtful answer but then asked an interesting question himself by channeling Douglas North:
What innovation over the last several hundred years has led to the most wealth creation?
I was once asked this by a group that was hoping I would say it was the microprocessor. But no, my guess was that it was the creation of the modern corporation (Ltd. in the U.K., Inc. in the U.S.).

The great innovation in the modern corporation was ownership without liability. This allowed shares to be sold on an open market and, unlike other forms of ownership, limited a shareholder’s liability to the price paid for the shares and nothing more. This made it possible for ordinary people to become investors.

My goal here is not to argue that I was right, but rather to suggest that institutional innovations tend to have pervasive and subtle influences on our lives. And in periods of great change, like now, they may well have more impact on us than any other kind.

On a related theme Alex Tabarrock offers some thoughts on the role of limited liability and Stephen Bainbridge responds. The corporation, and the trusts before them, played an important role in the development of the modern economy and facilitated economies of scale and scope. But for Schumpeter, as Phil notes in his article below, the corporation was a funny institition. Schumpeter defended big business and touted the cost savings and innovation that occured when entrepreneurs founded successful companies and reworked the existing methods of production and pushed forward the innovative frontier.

At the same time, however, the large corporation also represented the onset of socialism, as the large, bureaucratic enterprise engulfed small and medium sized businesses and wiped out the entrepreneur. From this dismal future socialism was a natural progression. Of course, it is the entrepreneur in Schumpeter's The Theory of Economic Development that lives on today, and with the downfall of the Soviet Union we no longer worry so much about the threat of socialism. Today it is far more popular to focus on the role of private equity, but the corporation lives on as a useful and important institutional innovation.

Read all of the responses and be sure to follow the links as well. Then offer your comments below. Any thoughts from my co-bloggers? Anything you want to add Ryan?