Is Entrepreneurship Really That Easy?
Once again, Scott Shane, a business professor at Case Western, writes a critique of small business development programs using unstated assumptions and ignoring prior research. Last time I wrote about the numerous problems I found in his journal article, Is Encouraging Entrepreneurship Bad Public Policy?, but this time, I’m glad someone else has called him out. In his New York Times article, Is Entrepreneurship Really That Easy, he gets taken down by Robert Litan, Vice President of Research and Policy at The Kauffman Foundation. The comment can be found here, but I include it in its entirety here because the whole thing is just so darn juicy:
Scott Shane raises interesting points regarding new firms and job creation—it is always good to have healthy debates about facts when spending large amounts of money. But perhaps next time he might respect the facts. Professor Shane’s academic perspective is that potential entrepreneurs cannot be coached, encouraged, or developed. Our extensive research and experience supports an alternative point of view, one that seeks to tap the promise of the people of Detroit.
Professor Shane cavalierly delights in ridiculing data derived from the Kauffman Foundation’s 15-year national experience with our FastTrac program that Detroit will implement. The New Economy Initiative in Detroit estimates that 4,500 people will go through FastTrac over a three-year period—given that 500 people lined up on the first day (yesterday), this could turn out to be a gross underestimate. We anticipate that 1,200, or 30 percent, of these entrepreneurs and business-builders who sign up will actually launch a business, a figure below the FastTrac national average of 40 percent.
We then used figures from the nation’s only longitudinal database on new firm creation, the Kauffman Firm Survey, on which Professor Shane was one of the lead initial investigators. These data indicate that the average new business has 2.6 employees (including the founder). We raised this to an average of 4 employees for legitimate reasons: first, Bureau of Labor Statistics data indicate that the average new firm has 4-6 employees; second, both land and workers are highly inexpensive in Detroit, which has been hit harder by the recession than almost any other city. The New Economy Initiative also aims to save the jobs of 20,000 workers now employed at the top 150 minority suppliers in the Detroit area. This is a highly skilled pool of workers that should not simply be abandoned: NEI will assist by converting auto parts assembly lines into the production of different products such as wind turbines. With these job projections, we simply applied standard calculations of the ripple effect created by new jobs in terms of wages and consumption.
The much broader and more pressing issue is, how can we help the people of the Detroit region recover? Over the past 30 years, according to Census Bureau data, net job creation in the United States has occurred entirely in firms less than five years old. No entrepreneurs, no new jobs. So the real question here is, if not entrepreneurs, to whom can we turn for job creation? The large and well-entrenched companies that have so clearly failed (which the people of Detroit perhaps know better than anyone anywhere)?
The Kauffman Foundation does not hold out promises of overnight, sensational cures to national economic problems. We do, however, believe in the power of individuals to take hold of their future and use their potential and ingenuity to build new companies that expand human welfare. The estimates of jobs created and saved reflect our long and rigorous analysis of how entrepreneurs grow the economy.
We would have been happy to share the basis of our analysis with Professor Shane, had he asked. It’s too bad for New York Times readers that instead of conducting even a few minutes of research (a simple phone would have sufficed), Professor Shane launched this misdirected attack on a proven method to create jobs and opportunities for the residents and unemployed workers of Detroit.
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