Disproved: Politcians claim entrepreneurship is the economy’s job growth engine

When I was close to finishing a degree in economics, I was still a bit unclear about what actually causes economic growth after 4 years of study. Economists have a complicated and sophisticated set of models to understand how economies work, on both a theoretical and empirical level.

When it came to the topic of growth, if I remember correctly, the key factor underlying economic growth was productivity. And the primary driver of productivity were external technology shocks. Which can’t be modelled. They’re just assumed to happen. So basically, the economics department at PENN pulled an intellectual bait-and-switch on me. And I ended up going into software anyway.

Ultimately improvements in technology drove productivity and economic growth of countries. This was true of both developed and emerging economies, with the latter often benefiting from imported technologies, rather than creating their own.

Is entrepreneurship a job growth engine?

This blog doesn’t cover politics. That said, I thought it might be worth drawing your attention to a half-truth that often comes up among politicians (and that’s often repeated as conventional wisdom):

Entrepreneurship is an engine of growth.

Your riskiest assumptions are probably related to your prospects and customers. Establish empathy quickly with your target prospect, figure out what's valuable, and get your innovation into the market.

Unfortunately, it’s not really true if you look at the data. It is true the primary engine of growth are…high growth startups. These tend to be high technology startups or highly innovative ones. These are most likely to be hitting growth rankings like the INC 5000. In the US, these consistently make up a whopping 3% of all new businesses, according to Scott Shane in The Illusions of Entrepreneurship:

“In fact, only about 7 percent of new companies in the United States are started in industries that the government defines as high technology, and only about 3% of business founders consider their new businesses to be technologically sophisticated.”

Industry breakdowns of high growth companies also reflect this insight. For example, on the INC 5000 for 2019, there are: