Entrepreneurs and Innovators


Dr. Robert E. Litan

How to Foster Entrepreneurship

Editors’ note

In addition to his current post, Dr. Robert Litan is a senior fellow in Economic Studies at the Brookings Institution, where he previously was Vice President and Director of Economic Studies. During his career, Dr. Litan has co-authored two Congressionally-mandated studies for the Treasury Department on the role of the Community Reinvestment Act after the Financial Modernization Act of 1999. During 1996 to 1997, he served as a consultant to the Treasury Department and was the lead author of its report to Congress on the future of the financial services industry, and in 1998 to 1999, he was the main author of the Report of the President’s Commission to Study Capital Budgeting. In 1998, he also chaired the National Academy of Sciences Committee on Assessing the Costs of Natural Disasters. During 1995 and 1996, he was Associate Director of the Office of Management and Budget. From 1993 to 1995, he was Deputy Assistant Attorney General, in charge of civil antitrust litigation and regulatory issues at the Department of Justice. From 1977 to 1979, he was the regulatory and legal staff specialist at the President’s Council of Economic Advisers. In the early 1990s, Dr. Litan was a member of the Commission on the Causes of the Savings and Loan Crisis.

Will you provide a brief overview of your role in leading the research and policy area for Kauffman Foundation and the critical work you do within the organization?

I’ve been here about six years, and one of our main missions, which we are well on the way to accomplishing, is to considerably lift the importance of entrepreneurship within the economics profession narrowly and, more broadly, on the policy stage – federal, state, and local – which we do by funding research from top scholars.

The second thing we do is finance the construction of large databases, because you can’t do research without data. We started focusing on well-known economists and high-level professors at business schools. We’ve since branched out into funding top-notch legal scholars on the notion that the law can have both a very important positive and negative impact when it comes to entrepreneurship. You need a sound legal infrastructure to give people certainty that the money they make they can keep and that the contracts they write will be enforced. However, if taxes get too high, or regulation too excessive, or uncertainty too great in the legal environment, it will discourage entrepreneurship.

We now finance, or have backed, the work of some of the leading economists in the country, including Ned Phelps at Columbia, who won the Nobel Prize in 2006. In the next 10 or 20 years, I wouldn’t be surprised to see several more Nobels awarded to the people we’re funding.

We also influence the direction of research. When we started, there was no recognized category of entrepreneurship research within the economics profession. The American Economic Association didn’t even have a special category called entrepreneurship; it now does. One of our largest grantees is the National Bureau of Economic Research, and we fund two working groups on entrepreneurship and innovation, and have been doing that for five years. We’ve also funded a variety of data initiatives.

In addition to all that, we write incessantly, and that distinguishes us from a number of other foundations. We’re not just a provider of money; it’s important for us to push scholars and policy-makers to better understand these issues. Often, the best way to do that is to write ourselves, because a lot of the academics that we fund will be writing things to make points and earn tenure within their profession, but they may not be reaching a broader audience. Carl Schramm has written The Entrepreneurial Imperative, and the two of us co-authored Good Capitalism, Bad Capitalism, which is being used as a textbook in a variety of courses around the country. All this writing and research is necessary, not just so that economists can better understand what’s driving entrepreneurship and what policies are needed to promote entrepreneurship and innovation but, ultimately, to reach a policy audience. It’s very important to have entrepreneurship and innovation on the top of minds of economists who then go into government service.

The other way we have policy influence is through direct contact. We have developed a nonpartisan reputation and a level of stature that allows people from different political perspectives to feel comfortable asking us for information.

How broad are the distribution channels you use to disseminate your information, and how do you communicate the results of your research?

We distribute our research primarily through the Web. We disseminate through conventional media but, increasingly, we’re using Internet media and blogs in particular, like the one we founded last year, Growthology. In February, we held an economic bloggers conference and had a great turnout from some very prominent bloggers. In addition, we take advantage of social media to spread the word: we have an iTunesU channel, a YouTube channel, a Scribd channel, several Facebook pages, and a Twitter account. We have also developed a partnership with RealClearPolitics and RealClearMarkets to post our research and other content on an Entrepreneurship Resource Center on the RealClear sites.

Influencing public policy is very challenging. How have your efforts in this regard evolved, and is public policy doing what’s needed today to spur entrepreneurship and innovation?

Not yet. This great recession initially diverted a lot of attention from entrepreneurship and innovation as we struggled to just keep the economy alive for the past year. As we move out of the recession and the stimulus fades, the next big question is, what’s going to keep the economy going after the stimulus is gone? Our view at Kauffman is that if you look at economic history, what keeps economies going, especially our economy, is the constant renewal that’s offered by new firms. One of the studies we financed documented that between 1980 and 2005, all of the net new employment created in the economy came from jobs that didn’t exist five years before. This statistic says that if we’re going to have job growth, we’re going to have to create it through the development of new firms.

Another lesson we have learned from history is that the great breakthrough innovations that have driven advances in living standards were all originally developed by entrepreneurs, not by big established businesses. These include the automobile, airplane, air-conditioning, personal computer, mainframe computers and, of course, the zillions of Internet companies like Google. So it is more than likely that the next big thing will come out of some brilliant individuals or a team of entrepreneurs rather than a large company. That’s why it’s so important to have policy to facilitate the development of these entrepreneurial enterprises.

There are a few public policy areas that need attention in order to accomplish this. At the top of the list is serious immigration reform. We need to attract and retain highly skilled immigrants, because our research has shown that immigrants account for the founding of a disproportionate number of successful high-tech companies. So we need policies that provide stable green cards to foreign graduates who come to the universities here to get degrees in science, technology, engineering, and math. We need permanent visas for people who come to the United States from abroad to study because they’re not going to found businesses if they can only stay here for six years on an H-1B visa.

The second area that needs more attention is the financing of entrepreneurship, but not through public financing, because having the government in the venture capital business would be a big mistake. But we need to think about creative ways to facilitate the flow of capital to high-growth entrepreneurs. At the top of my list would be a reform of Sarbanes-Oxley, which was passed in an era of corporate scandal, but has proved to be much more costly than anticipated. We don’t take the position that Sarbanes-Oxley ought to be repealed, but there are innovative ways to make it less onerous for a lot of businesses. For example, there is a $75 million market cap exemption under Sarbanes-Oxley for smaller businesses; one idea could be to lift that exemption to maybe $1 billion. Another variation would be to give an opt-out on Sarbanes-Oxley. You could say to companies that are going public, “you can choose to either certify that you’re Sarbanes-Oxley compliant or not,” and let the market decide whether or not it wants to give you money.

A third area of funding reform, and this is where the government could have some benefit, is in something called “proof of concept centers.” The federal government channels an enormous amount of money to universities to come up with the next big thing. But there is not enough attention on getting those innovations out of the university lab and into the marketplace. We think there are probably some regulatory fixes that could apply here, but there are also opportunities for funding. For example, there are lots of innovations that come out of universities, whether they’re biotech, nanotech, or cleantech, that may hold preliminary promise, where the concept hasn’t been funded to the next stages of development or testing. There are a number of excellent university centers that focus on this very thing – “proving” a promising new concept. Private money generally doesn’t finance these proof of concept centers because it’s too early and too risky. One thing the government should think about doing is using some of its R&D money to support university-based proof of concept centers so new technologies have a better chance of being successfully commercialized.

The fourth and fifth areas are health care and taxation. We know that entrepreneurs who start businesses face much higher costs of insuring their employees than do bigger companies, because they don’t have enough workers to have a big enough risk pool. So small businesses, especially high-growth ones, have a hard time paying for health insurance. A related issue is what we call the “entrepreneur lock” problem. There are a lot of entrepreneurs or would-be entrepreneurs who, if they didn’t have to worry about health insurance, would form companies on their own. So there is a strong argument for at least having a bare bones or minimum health insurance package that would cover catastrophic costs and that would be affordable to enable would-be entrepreneurs to start living their dreams.

Whatever financing we do on health care, we can’t kill the goose that lays the golden egg. If you raise marginal tax rates above 50 percent, you’re going to more than likely discourage entrepreneurship. We don’t have an institutional view of how health care ought to be financed, but we probably ought to look at trying to de-link jobs from health care, and one way to do that would be to cap the expectability of health insurance by employers.

From a public policy point of view, how challenging is it to get the message across when a majority of those you’re dealing with in public policy positions have never been entrepreneurs and have never had to grow companies?

We’re having an impact. You’re already seeing a rebellion about having health care financed solely by raising marginal tax rates. The main argument policy-makers are using is that they’re worried about punishing entrepreneurs in their districts.

Second, there is increasing bipartisan agitation about what we’re going to do for the next round. We may or may not have another stimulus package but, starting in the fall, and maybe into next year, you’re going to see more attention paid to trying to promote the next entrepreneurial revolution, and we’re on the leading edge of that.

When you joined Kauffman, what made you feel it was the right fit and, some six years later, has it been what you expected?

In some ways, it’s exceeded my expectations and completely shifted my mindset. I’m from Kansas originally, so that was one of the reasons I came back to the Midwest, but also, everybody reaches a point in their lives when they want another challenge and this seemed like an exciting place to be. At Kauffman, we have an eclectic group of people. It’s exciting to be at a place with so many people with different backgrounds, and yet we all check our backgrounds at the door; people who have Ph.D.s do not flaunt them. Everyone here is an equal contributor; there is a real esprit de corps and teamwork at this place. We hang out with entrepreneurs, venture capitalists, angel investors, academics, government people, and journalists, and there aren’t many places in the world where you can rub shoulders with all these different kinds of people. It’s a privilege to work here.