Entrepreneurship matters. And the rate of entrepreneurship differs across the Atlantic. Of the 100 largest public companies in the U.S., 31 were founded by an entrepreneur during the post-war era. In Europe, the corresponding figure is only seven out of the 100 largest firms.
While these new firms in the U.S. created over four million jobs, those in Europe created about a million. A slightly different measure is the 500 largest global firms listed by the Financial Times. Amongst the U.S. firms on the list 29 percent were formed after 1950. This compares with merely eight percent in Europe.
Looking at these figures, one could believe that America has a culture of business-ownership that is the envy of Europe. In fact, the U.S. has a lower rate of self-employment than most other industrialized countries. Self-employment is the highest in Greece, Turkey, Spain, Portugal and Italy, countries with low rates of innovative entrepreneurship. Within the U.S., the self-employment rate in Silicon Valley is half that of the average of California. Clearly, the concept of entrepreneurship is very much different from that of self-employment.
According to Austrian economist Joseph Schumpeter an entrepreneur is an innovator and an agent of change. The economic role of the entrepreneur is to take society from one equilibrium – a state where things are stable but also stagnant – to another.
By creating new firms and new products the entrepreneur fosters economic growth. Schumpeter also explained that established firms could be hurt from new competitors. Through a process of “creative destruction,” existing economic structures are shattered and replaced by new and normally improved methods of doing things.
Schumpeter’s theory is still relevant today. Washington Post columnist Jennifer Rubin has provided a powerful description of the destructive forces which Steve Jobs represented: “Steve Jobs was perhaps the most creatively destructive force on the planet in the last twenty years.
That dude is still destroying entire industries even after he’s dead. Imagine if you worked for a company that made compact disc players or in music publishing when the iPod debuted. Imagine if you worked for Motorola’s flip-phone division when the iPhone arrived.
Look at what is currently happening in the laptop computer market since the iPad came out. Steve Jobs single-handedly destroyed hundreds of thousands of jobs all around the world. Far more than he created at Apple and Pixar. Do we mourn those lost jobs? No, because they were technological advances that freed up labor and capital for more productive uses. That’s capitalism.”
Entrepreneurship and self-employment
Typically, when academics or for that matter politicians talk about entrepreneurship they look at something quite different: the number of self-employed. The reason is that it is difficult to quantify the number of Steve Jobs and similar individuals in the world. The number of self-employed is in contrast easily identified amongst public data. Of course, the two concepts share some common ground.
Self-employed individuals, including entrepreneurs, rarely work for someone else; they operate a business and need to wrestle with issues such as risk, uncertainty and responsiveness to opportunity. Unlike those employed by others, the self-employed have no guaranteed monthly income and their effort tends to be more directly linked to their income. When their business does badly, they tend to lose rather than earn money. If entrepreneurship were defined merely as creating a business, it would make sense to equate it with self-employment.
However, entrepreneurship also includes the ambition to innovate and grow. In this respect, the majority of the self-employed individuals are not really entrepreneurial. When asked directly, four out of five business owners would not even define themselves as entrepreneurs. And approximately nine out of ten of the self-employed report that their firm does not engage in any innovative activity. So while a percentage of self-employed are true or potential entrepreneurs, not all of them are.
This conflation of self-employment and entrepreneurship might appear to be an academic detail, but it has real-world implications. Policies such as high taxes and stiff regulations can hamper entrepreneurship. By preventing the rise of successful large employers, the same policies can force those who would otherwise be employed by large firms to create their own small businesses. Since the rate of self-employment has for long been used as the way to measure entrepreneurship, it has been difficult to show which policies hurt and which improve the business climate.
In order to get around these difficulties, we have worked on constructing a measure of high-impact entrepreneurship. The basis of our analysis is the comprehensive work that Forbes Magazine annually does when compiling the list ‘The World’s Billionaires’. We build upon Forbes’ work by distinguishing the individuals who have amassed a billion dollar fortune through entrepreneurship. These somewhat more than a thousand individuals belong to the wealthy elite that are often accused of enriching themselves on the expense of others. In fact, the opposite seems to be true.
The list of entrepreneurial firms is in and of itself powerful evidence validating Adam Smith’s notion that private wealth creation tends also to create value for society.
American companies founded by billionaire entrepreneurs include Microsoft, Apple, Intel, Google, Yahoo, Oracle, Cisco, Sun Microsystems, Bloomberg, PayPal, AOL, Facebook, E-bay, Dell, Hewlett-Packard, Gateway, Priceline, Amazon, Wal-Mart, Home Depot, Best Buy, Family-Dollar, GAP, Urban Outfitters, Ralph Lauren, Nike, Trader Joe’s, Starbucks, Subway, Blackstone, Bridgewater, KKR, CNN, Fox News, Univision, HBO, The Weather Channel, Black Entertainment Television, DreamWorks, LucasArts, Ultimate Fighting Championship, Ty Inc. (Beani Babies), Conair, Enterprise Rent-A-Car, Dolby Laboratories, Bose, University of Phoenix and FedEx.
Europeans firms include IKEA, Aldi, Zara, Armani, Benetton, Red Bull GmbH, Swatch Group and Virgin group. Other examples are Japan’s Sony, Honda and Softbank, Canada’s Blackberry and Cirque du Soleil, Israeli’s Check Point Software and Hong Kong’s Cathay Pacific Airways.
Self-made wealth more common in the US
The richest individuals in capitalist market economies to a surprisingly large extent appear to earn their wealth by creating new value, rather than inheriting it or acquiring it illegitimately. In total all over the globe 58 percent of the billionaires in the Forbes sample are self-made entrepreneurs. The rest inherited their wealth or sometimes accumulated their wealth without entrepreneurship.
Again, the difference between both sides of the Atlantic is significant. In Western Europe 42 percent of the billionaires are self-made entrepreneurs, with most of the rest having inherited their wealth. In the U.S., 70 percent of billionaires are self-made entrepreneurs. In countries such as China that have only recently opened to capitalism, virtually all billionaires are self-made entrepreneurs.
This indicates that the American Dream – the notion that it is possible for individuals to rise to the top through effort, luck and genius – is still alive. Self-made billionaire entrepreneurs have created millions of jobs, billions of dollars in private wealth and probably trillions of dollars of value for society. Moreover, the American Dream is increasingly the Global Dream. What is especially striking is that until very recently almost all billionaires were Western, but today the majority comes from outside the U.S. and Europe.
However, it should be recognized that some billionaires have not earned their wealth by particularly fair means, with oligarchs in Russia being an obvious example. These types of billionaires are common in societies with high corruption and insufficient protection of property rights. It does, however, not appear to be common in advanced economies with strong institutions, where billionaire entrepreneurs tend to create productive and innovative companies.
Where do we find most SuperEntrepreneurs?
The number of SuperEntrepreneurs varies significantly across countries. Hong Kong has the most, with around three SuperEntrepreneurs per million inhabitants. The second highest rate of entrepreneurship is found in Israel, where there are close to two SuperEntrepeneurs per million inhabitants, followed by the U.S., Switzerland and Singapore. Mexico, with a population of over 100 million, only has six SuperEntrepreneurs, or 0.06 per million inhabitants.
When comparing large regions, the gap in super-entrepreneurship can be clearly seen. The U.S. is roughly four times as entrepreneurial as Western Europe and three times as entrepreneurial as Japan. The same relations hold regardless of whether we look at our measure of SuperEntrepreneurs, large firm founders or venture capital investment as a percentage of GDP.
Typically, countries where a large share is self-employed have few SuperEntrepreneurs. Small businesses of course play a key part in a thriving market economy. The high rates of self-employment found in countries such as Greece and Turkey, however, manifest that many individuals are forced into running their own venture, since few good jobs exist. In successful market economies with high rates of entrepreneurship on the other hand, the situation is different. Many who would otherwise have become small business owners become local managers in thriving large corporations.
In an influential study, Harvard economists Andrei Shleifer and Edward Glaeser have identified the legal origin of societies as an important determinant of economic outcomes. They argue that countries with different legal origins tend to vary in the strength of property rights and degree of rule of law; and that most countries are influenced by a small number of legal regimes. To simplify their analysis, legal origins can be divided into four categories: English, French, German and Scandinavian.
The U.K., former British colonies such as the U.S., Canada and Australia and several other countries are characterized by English legal origins. French legal origins have influenced a larger set of countries: France itself, Belgium, the Netherlands and Italy, and a large number of countries in Africa and Asia.
Spain was also heavily influenced by French legal views and practice, and spread these further to its many colonies in Latin America and elsewhere. Germany influenced the legal systems of Austria, the former Czechoslovakia, Greece, Hungary, Italy, Switzerland, Yugoslavia, Japan, Korea and Taiwan. Japan, China and Taiwan also relied on German laws during modernization. Lastly, Scandinavian legal origins are found amongst the Scandinavian nations.
In our study, we find that SuperEntrepreneurship is closely related to legal origin. The share of highly successful entrepreneurs is twice as high in nations with English legal origin than those with German legal origin. Compared to the Scandinavian nations, the nations with English legal origins have almost three times as many SuperEntrepreneurs.
The lowest share is found amongst nations with French legal origins, which is less than one-fifth of that of nations with English legal origins.
So, not only the U.S. but also other Anglo-Saxon countries stand out as being highly entrepreneurial. As we show in the second part of this two-part essay series, the reason is that policies differ amongst countries with English, German, French and Scandinavian legal origins.
When academics use self-employment as a measure of entrepreneurship, it is difficult to find a consistent link to policy factors such as taxes or regulation. Our measure of SuperEntrepreneurs, however, closely relates to taxation, regulation and protection of private property. Free economies are simply much more entrepreneurial than regulated ones.
Tino and Nima Sanandaji have written the book “SuperEntrepreneurs” for the Center for Policy Studies in London.