Reminder: If we care about job growth, we need to produce more new businesses – not just rely on existing big ones

by Ryan Streeter on April 19, 2012. Follow Ryan on Twitter.

I still run into a lot of business leaders and economic development professionals who are unaware of just how much job growth comes from young, fast-growing firms. Most of our positive obsession with entrepreneurship is actually divorced from this reality. We focus on it for a range of good reasons, but there’s still widespread ignorance of where almost all of net new job creation comes from: firms under 5 years old.

It’s not the “small businesses” that politicians always talk about that are the heart and soul of America as much as it’s “young businesses” (most of which, of course, are small).

Although my Star column today is focused on the burgeoning startup ecosystem in Indiana, the ideas in it have national implications. The main idea in this section could use some national debate:

Because entrepreneurs matter, public institutions across America have long tried to produce more of them through education and venture funding. The irony, though, is that these things only work when you already have entrepreneurs around. According to the Kauffman Foundation, entrepreneurship programs at universities have increased tenfold and venture capital funding twenty-fold since the 1970s, and yet the business formation rate in America has stayed the same. When you see a burgeoning startup culture in a particular city, it usually has more to do with entrepreneurs begetting more entrepreneurs than anything public institutions are doing.

This raises the larger question of what public policy can do to foster the creation of more firms, and especially fast-growing ones.

One thing that I reference in the piece without getting into it is simply the cost of people. Exhibit A would be health care. In my column I reference a study¬†(PDF) on firm formation in Indiana by Timothy Slaper and Ryan Krause of Indiana University, but I don’t mention that in their study they cite Obamacare as a negative drag on new firms. Lots of anti-Obamacare advocates make this point in general, but very few have good survey or other research to show Obamacare affects hiring and compensation in the minds of small/new business owners right now. Slaper and Krause’s study is an interesting step in the right direction on this front.

Anecdotally, I run into small business owners all the time who complain about the increasing amount of time they spend “complying” with various rules and regs besides health care, though the latter is almost always on their minds in terms of uncertainty about how to calculate employee costs just a few years out.

The other factor I think is on the table for public policy (though admittedly it’s hard to know which policies to pursue) is active recruitment of highly educated people, especially those with talent in growth industries, as Jim Russell points out here. City and state leaders who think about this issue most creatively will be rewarded significantly in the coming decades.