Why exactly is entrepreneurship important?

Taylor Overton was introduced to entrepreneurship by her parents’ small construction company.

“Payment terms being extended sometimes meant no back-to-school clothes that year,” said Overton. She’s the entrepreneurship director for the Kansas Department of Commerce. “Those realities hit home.”

Overton is cheery and boosterish, as most good economic developers are. I met her this summer at the Global Entrepreneurship Congress in Indianapolis. In an interview, she gently corrected my classic coastal faux pas of placing Kansas City in her state rather than adjacent Missouri. Later, at an off-site launch party she gave a full-throated shout on behalf of her state.

Overton did a stint in supplier diversity at Tesla before joining state government last year. Both jobs involved her helping new and small businesses get a foothold in places where incumbency rules. Lots of Americans think this is a worthy pursuit: Nearly 9 in 10 say small business has a positive impact on their community, a higher rating than religious groups and law enforcement.  

Like Overton, lots of Americans feel emotionally tied to small business, embodied by the Main Street commercial corridor. With due respect to jazz, entrepreneurship is the principal American art form. But like jazz isn’t the only American musical genre, so retail storefronts aren’t the only form of entrepreneurship. 

Happy memories with the local pizza shop or favorite hardware store aside, nostalgia alone doesn’t explain why policymakers and economic developers are so gaga over capital formation. That, I regret to inform you, is better explained by economic data. 

Why exactly entrepreneurship matters

Technical.ly has gone back to first principles to answer why tech jobs matter. Let’s do the same for business starts. 

Entrepreneurship is important for three big reasons: bringing invention to market, creating and storing local wealth and sparking local dynamism for others. 

Look at the numbers:

• Nearly all net new jobs come from new companies. In the 2010s, two-thirds of all new jobs were from small business, per ADP, and since 2019, the US Treasury puts the figure at more than 70%. Influential MIT research from 2013 demonstrated that, more precisely, all net new jobs in a county come from businesses that are 10 years or younger — and are especially active in the first three years. 
• Every 1% increase in entrepreneurial activity in a county correlates with a 2% decline in poverty, and average household income jumps by $500.
• 41% of Americans say they’d launch a business if they could, but just 2% actually do.
• Entrepreneurs have high “multiplier effects,” supporting follow-on jobs beyond even those they employ 
• 8 in 10 American millionaires are “self-made,” per Fidelity Investments, and most were entrepreneurs or involved in private business formation to generate their wealth

Hence why economic development leaders were alarmed by decades-long declining rates of entrepreneurship, worsened by the Great Recession. The share of US employment accounted for by young firms had declined by almost a third over the previous 30 years, per one analysis.

That changed in the pandemic, led by historically high rates of women entrepreneurship. The types of businesses being created remains widespread: As much as Americans say they love small business, not all entrepreneurs want to be called a small business owner — which can imply “not a big business.” Still, many new women entrepreneurs appear to be starting firms to create the workplace flexibility they couldn’t find in traditional employment, one reason why the average number of jobs created by new firms has declined, even as the number of firms has grown.

This is why entrepreneurship is important for different reasons to different communities, said Sherrod Davis, the CEO of EcoMap, a Maryland-founded software provider serving economic development. I interviewed Davis alongside Overton in a podcast booth near the convention floor. They both cheerlead “entrepreneurial ecosystem building,” the growing field of professionals injecting heart into economic development.

“Some people think entrepreneurship matters because it’s crucial to innovate,” Davis said. “Others highlight job creation, or empowering individuals to build personal wealth. Those nuances matter.”

The Index of State Dynamism 

What the economic outcomes are varies by place too.

This summer, Economic Innovation Group, a Washington DC-based research outfit, updated its Index of State Dynamism. This idea of dynamism — economic activity that boosts productivity — is a foundation of our understanding of improving living standards. Entrepreneurship is embedded at the root, deeper than many realize, and so groups like EIG are interested in how it works. Though many entrepreneurial ecosystems take place at local and regional levels, state governments have particular levers for supporting new business starts.

As their research points out, the recent years of entrepreneurial boom erased more than half of the enormous decline since the Great Recession. But the index shows American dynamism is still 11% lower than in the early 1990s. They seek to spot differences states can solve for.

The EIG dynamism index assembles a half-dozen factors that signal economic growth: inventors and housing permits per 1,000 residents, the share of workers at young firms, migration rates. Most factors directly or indirectly relate to entrepreneurship. States perform well or poorly for different reasons. 

High-performing Utah, Idaho and Colorado have little regulation and lots of startup activity, but appear unfriendly to new residents, especially immigrants. Washington DC has lots of inventors, workers and migrants, and is building again to house them, but is only middling in creating new firms. Delaware performs well, but its population growth is driven by older retirees that drag down its rate of inventors and labor-force participation. 

In the middle pack, Maryand and Pennsylvania have a lot of inventors, but lag in encouraging new firm creation, especially outside their prized urban economic engines. Both are building too little housing. Virginia is almost a mirror image: better performing startups and housing, but fewer homegrown inventors. 

Among lower-performing states, West Virginia and Mississippi have made progress in starting new firms but have not invested as seriously in cultivating that entrepreneurial spirit. (Though efforts are underway, in West Virginia in particular.) Louisiana and Alabama have vibrant regional ecosystems but the effects have been heavily concentrated in New Orleans and Birmingham, respectively. 

Remarkably, this remains a rare bipartisan priority.

Insiders were cautiously optimistic to see the Trump administration rebrand the EDA Tech Hubs program and related strategies to put federal dollars into ginning economic activity. This implied a desire to continue place-based economic development investments, especially those aligned with what is called national security. This month, a new notice of opportunity for funding went out to the two-dozen regional coalitions that got federal Tech Hub designation under the Biden administration without funding. They have a new shot at federal industrial policy to jumpstart their economic dynamism.

What can we do next?

The case for entreprenuership’s economic importance is sound, if still isolated in relatively small wonkish circles. Helpfully though, the emotional appeal is widespread for the entrepreneurial cause. National nonprofit Right to Start is launching an America The Entrepreneurial program to build momentum. 

Now it’s a question of local ecosystem builders constructing atop the foundation, say both Overton and Davis — and spreading the message (storytelling is key). Overton’s parents didn’t have nearly as many resources as Kansas entrepreneurs do now. Yet obstacles persist. Time to focus the mind.

“When small businesses aren’t doing well, that’s your indicator,” Overton said. “You can’t just say you’re an ecosystem builder; you need infrastructure — roads, bridges and resources — to navigate it.”