Introduction
Over the last few decades, empirical evidence has suggested that business dynamism and entrepreneurial activity have been declining in the United States. In one well-known study on business formation and growth, Decker et al.
(2014) find that the pace of business dynamism has declined over recent decades and that there has been a falling trend in the pace of job creation. An important aspect of the declining trends is a marked decline in the firm startup rate, which they note naturally leads to a reduction in the number of young firms operating in the economy.Furthermore, using the Census Bureau Business Dynamics Statistics, Haltiwanger et al. show a declining startup rate and stagnant startup size (Haltiwanger et al. 2010). Goldschlag and Tabarrok (2018) also find this decline in the annual number of business startups, using the Census
L. Palagashvili (B)
Mercatus Center, George Mason University, Arlington, VA, USA e-mail: lpalagashvili@mercatus.gmu.edu
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A. John and D. W. Thomas (eds.), Entrepreneurship and the Market
Process, Mercatus Studies in Political and Social Economy, https://doi.org/10.1007/978-3-030-42408-4_8
Bureau Business Dynamics Statistics.[40] Moreover, in a 2014 report by the Kauffman Foundation, which tracks the rate of entrepreneurship from year to year, the authors explain that over the last few decades “the percapita entrepreneurship rate has been steadily declining, meaning that even as the population expanded and the overall number of new businesses formed each year held steady or grew, the pace slowed, failing to keep up with population growth” (Kauffman Foundation 2014, 7). The overall conclusion of the 2014 Kauffman report is that a decreasing business creation environment indicates that the state of entrepreneurship in the United States is slowly declining.[41]
Some empirical research has connected this decline in entrepreneurial activity with the rise of regulation—thereby linking to the vast amount of research on how the institutional and regulatory environment has a significant impact on the extent of entrepreneurial activity (Klapper et al.
2006; Coyne et al. 2005; Nystrom 2008; Boettke and Coyne 2009; Bruhn 2011; Monteiro and Assunςao 2012; Bripi 2013; Branstetter et al. 2013; Boudreaux 2015; Sobel et al. 2007).The argument is that an increase in the regulatory burden for entrepreneurs in the United States has contributed to a decline in overall entrepreneurship. This increase in regulation burden can be seen in variety of measurements. Take for example the administrative requirements in the business regulations component of the Economic Freedom of the World Index—the United States had a score of 7.92 (10 as the best score) in 2000 and as low as 3.88 in 2012, and now sits at 5.06 in 2017. Business bureaucracy costs and business “favoritism” also worsened during this period. In the World Bank's Doing Business Index, some components such as the cost of starting a business, the cost of registering property, and business taxes have also declined since the early 2000s. Furthermore, using the Mercatus Center's RegData on intensity of regulations by industry, Al-Ubaydli and McLaughlin (2015) show that just between 1997 and 2012, the regulatory burden (as measured by the Code of Federal Regulations) has risen by more than 28% to “a staggering number in excess of one million individual restrictions.”
However, as aggregate measures of entrepreneurship have been declining and the regulatory burden for entrepreneurs has been increasing, technology-enabled startups were proliferating and venture capital and angel funding going to startups was increasing. In one study, the number of technology startups increased by 47% from 2007 to 2016 (Wu and Atkinson 2017, 17). Wu and Atkinson explain, “while it's true that fewer mom-and-pop shops are forming, technology-based startup formation appears robust. and has grown” (2017, 17). During the same period, the amount of venture capital funding increased by 100% and the number of venture capital deals to tech startups increased by a 140% (Ritcher 2018).
At one point, the U.S.
venture exit density, defined as the number of venture-backed M&A and IPO exits in a year, reached a 15-year high in 2014 (Kauffman Foundation 2017). This is during the same time where the Kauffman Foundation was also reporting a low in the entrepreneurial index. And more specifically, the Kauffman’s report of “Main Street Entrepreneurship” was also declining during this time period (Kauffman Foundation 2016). Main Street entrepreneurship refers to businesses that have fewer than fifty employees and have been in existence for longer than five years—attempting to capture “mom-and-pop” businesses. Main Street entrepreneurship had been declining since 2008, until the trend reversed itself in 2016 (though still below the long-term average). The term “Main Street” is used to invoke an image of storefronts as one is walking down the main street of a city. These tend to be hair salons, restaurants, bars, grocery stores, local banks, hardware stores, accountant services, retail stores, galleries, and the standard “brick-and-mortar” stores one would expect to see on a typical “Main Street.”Thus, while the narrative and some of the data point to the conditions for entrepreneurship declining, regulations increasing, and specifically main street entrepreneurship being on a decline, technology startups have been proliferating over the same time period. Why was this happening? One way to reconcile these empirical obser vations is by understanding how the macroeconomic environment of “easy credit” has led to a funneling of money to technology startups. Returns from investing in technology startups have also been high—leading more investors to enter and hence resulting in more growth in the number of startups. But this is not the full explanation because the ability to launch a startup and the subsequent success of a startup also depends on the same regulatory environment that other entrepreneurs and businesses had to face. Thus it is important to discuss how regulations may or may not be hindering technology startups.
in the empirical economics literature, regulations have been found to disproportionally burden small businesses as compared to large businesses because of the differences in certain group characteristics. This paper theoretically explores the channels and links by which regulation may impact different types of entrepreneurial ventures—Main Street businesses vs. Silicon Valley startups—in more detail.[42] These particular channels are different than the ones discussed in distinctions between small and large firms because both Main Street and Silicon Valley startups tend to be “small” firms, but are quite different on other important margins that matter for regulatory impact. in other words, why might regulations be hindering some “small” businesses and not others?
I provide a more nuanced theoretical description of the channels by which the negative impact of regulations may have a greater “weight” on “Main Street” entrepreneurs than on the “Silicon Valley” entrepreneurs. These three main channels are as follows: (1) Regulatory burden: Federal and state regulations on labor create more burden on Main Street because of their use of low-skilled labor; (2) Regulatory compliance: The incentives to comply with existing regulations are lower in Silicon Valley startups; (3) Regulatory entrepreneurship: Silicon Valley startups are engaged in the business of changing regulations and operate despite the industry-specific regulations that may other wise prevent or hinder Main Street entrepreneurs.
Thus, i provide a preliminary discussion and opportunity for an avenue of empirical research to investigate the potential ways in which regulations over the last few decades may have disproportionally burdened Main Street entrepreneurial ventures over Silicon Valley entrepreneurial ventures. This discussion is supplemented by original fieldwork interviews of startups and venture capital investors conducted in the United States.[43] Interviews were conducted between May 2017 and December 2017.
The primary U.S. cities in the analysis included San Francisco and neighboring cites (“Silicon Valley”), New York City, Boston, Los Angeles, and San Diego. A handful of cities were also chosen as the “Silicon Prairie” cities—these included: Austin, Pittsburgh, Omaha, Chicago, Denver, and Boulder. There were a total of 88 interviews—including 45 interviews with startup entrepreneurs and c-level executives, 12 with investors, 10 with accelerators and incubators, and the remaining 21 with startup lawyers, advisors and mentors, researchers, and others in the startup ecosystem.The following sections will proceed as followings: Section “Over view of Entrepreneurship and Regulation” will provide a literature review and summar y of the research at the intersection of entrepreneurship and regulation, with discussions of how regulations impact different types of entrepreneurial ventures. Section “Differences Between Main Street vs. Silicon Valley Entrepreneurs” will provide an overview of the main differences between Main Street and Silicon Valley entrepreneurs that are relevant for how regulations may impact each type of entrepreneur in different ways. Section “Differences in Regulatory Impact” will provide a preliminary analysis of the main channels for how regulations may by different for these different groups, and Section “Conclusion” concludes.