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'Home-Run Firms' Generate Growth

Article by Matthew Denhart February 13, 2013 //   8 minute read

Recently I interviewed Bob Litan about his 2010 study titled “Inventive Billion Dollar Firms: A Faster Way to Grow.” The study was published by the Kauffman Foundation and examines how many new high-growth startup firms the U.S. economy would need to boost economic growth to 4% per year. The study is available for download here. An expanded version of Litan’s original study will appear as a chapter in the Bush Institute’s forthcoming book, “The 4% Solution” — which will be published by Crown in July 2012 and is available for pre-order, here Litan is currently vice president for research and policy at the Kauffman Foundation, a senior fellow in economic studies at the Brookings Institution, and a growth fellow of the Bush Institute’s 4% Growth Project.  The transcript of our interview follows: MD: At a recent tax conference held April 10th here in New York City, you mentioned a study that you published. The study is titled “Inventive Billion Dollar Firms: A Faster Way to Grow,” and was published by the Kauffman Foundation. In it you explain one way to boost U.S. GDP growth by one full percentage point, say to go from 3% a year to 4% a year. What’s the suggestion? RL: Well an unconventional way of looking at the economy is to imagine the economy as really nothing more than an agglomeration of all the firms that are producing output of goods and services within it. If you look at it that way, then if you want another 1% of growth, you either need more firms or you need more output from the existing firms that are currently doing business. The way I approached this question or this challenge was to ask myself: How many more new, what I call “home-run firms” — firms that let’s say grow up to have more than a billion dollars in sales over some reasonable period of time —would you need in order to lift the entire economy up by an additional 1% in perpetuity? The reason I focused on home-run firms is that these are the firms that are likely to have huge spill-over benefits for the rest of the economy. Imagine for example a company like Apple that builds a platform; there are lots of apps that you put on a platform. Or in the case of Microsoft, they had an operating system and there are lots of apps that are built for that. Or imagine the car. When the car was invented you had a whole infrastructure that was surrounded by suppliers and the people who provided the inputs for the car. So when you have these major firms that grow-up, they tend to have large spill-over effects for other firms and it’s through the process of creating those spill-over effects that we generate that extra 1%, and so that’s the calculation I went through. MD: It’s a fascinating study and it can be found on the Kauffman Foundation’s site. We’ll put a link on our site as well, but Bob, I’m dying to know: How many firms is it? RL: So you want to know and the answer is somewhere between 30 and 60 per year. That is you need 30 to 60 of these firms that grow-up to be billion dollar or more firms over some period of time, and you need them year-in and year-out. That doesn’t mean every year, but on an average basis. That sounds like either a small or large number depending on your perspective. It’s a small number relative to the total number of startups that we have every year which is somewhere in the 400,000 to 600,000 range. So that doesn’t sound very challenging. On the other hand if you ask me the next question: “How many such firms have we had historically,” the answer is, on average over the last 150 years, we create about 15 of these firms every year. In order to get an additional 1% entirely from home-run firms, it would require a huge increase in the number of firms we’ve had of this kind historically. The good news is that we don’t need all the growth to come from these home-run firms. We can get singles, doubles, and triples along the way that would diminish the need for having a new Apple or a new Google every year. MD: What are some examples of a single or a double? So, if a home run is Apple, Steve Jobs’s creation, what’s just a single, something a little more realistic? RL: Well, I’d say a lot of the firms that are on the Inc. 500 list every year. Inc. puts out a list of 500 fast-growing private firms and they are in all kinds of industries — whether in food retailing, or franchising, or construction, or insurance, or specialized manufacturing — firms that may be making in sales $10 to $50 million. But going from zero to $10 to $50 million to me is at least a single or a double, and the more such firms that we create that are like that the better off we’ll be. MD: Definitely, so home-run firms are great; singles, doubles, and triples are also wonderful and all are growth inducing. So, let’s put it this way: What’s the single best policy reform that you can think of to create a nurturing environment for these types of firms, whether they be a double or a home-run firm? RL: If I could pick one thing, it would be to let more high-skilled immigrants into this country. Because one thing we see from the data is that immigrants in general create new businesses at a faster rate than native-born Americans. But if you look at successful tech-companies in particular, you see that immigrants have founded or co-founded such companies at twice the rate of their presence in the population. In other words, roughly 25% of all successful hi-tech companies are founded or co-founded by immigrants, and yet immigrants only comprise about 12% to 13% of the population. That’s a reform that doesn’t cost any money — which is good today in Washington — and it helps replenish and renew the energy and vigor of our economy. MD: Certainly, great, well thank you, Bob. Thanks for joining me. Thanks for your great paper and it sounds like immigration is one reform that can help us achieve 4% growth through more successful startup firms. RL: I would emphasize high-skilled immigration in particular. MD: Exactly, because immigrants usually fall into two categories: High- and low-skilled, and high-skilled immigrants are what we need for fast growth. RL: And not only that, we already have the high-skilled here, we train them in our colleges. There are over 100,000 every year that are in our colleges and yet we have to send them home after their visas expire. It’s just crazy and we ought to let them stay here, especially if they get degrees in science, technology, engineering, and math, the so-called STEM degrees. Those are the people we want to retain.