News
Popping the bubble of business start-ups
S
cott Shane wants to poke holes in the prevailing view that people who start new companies are innovative job-creators laden with creativity and courage. Some are, but they are exceptions rather than the norm, he claims in his new book, The Illusions of Entrepreneurship (Yale University Press). Only “a small sliver” of new businesses actually deliver the vaunted new jobs and economic growth commonly attributed to entrepreneurship, he declares. It’s not that Shane is antibusiness. In fact, he’s professor of entrepreneurial studies at respected Case Western Reserve University. But he wants to deflate “entrepreneurial myths” and tame any wild expectations that start-ups lead to job-creating nirvana. Here are some of his “mind-clearing” findings (backed by 30 pages of research endnotes): • America is not as entrepreneurial as people think, and it’s becoming less so. The rate of self-employment has been declining for many decades. “For all the talk about how often Americans start businesses, we do it a lot less often than people in other countries,” says Shane, claiming that Peru, Uganda, Ecuador and Venezuela all have more than twice the start-up rate of the U.S. • Wealthier countries typically have lower rates of selfemployment because higher wages make it more expensive to own a business, in which case why not work for someone else. • Only a third of people who start a business get it up and running within seven years. Almost half (46 percent) The Marketplace July August 2008
that are still alive after five years are home-based. • Those who start new businesses don’t do so because they are bursting with innovative new ideas or because they plan to employ a lot of people. “Most people start businesses simply because they just don’t
a business to do what they’re already doing. And it doesn’t necessarily earn them more money. “The typical entrepreneur works more hours but earns less money than he would have earned had he worked for someone else,” Shane claims. • But the news isn’t all bad. Despite harder work and lower income, the self-employed report higher job satisfaction. “Entrepreneurship provides a very important nonfinancial benefit: it makes people happier.” According to Shane, the typical entrepreneur is not someone with extraordinary skills or hidden psychological
like working for someone else,” says Shane. • The media likes to feature dazzling new start-ups, but in reality most new businesses are in run-of-the-mill industries like construction or retail trade. “The typical start-up isn’t innovative...it produces the same products and services as existing businesses....” • That’s because people tend to start businesses in fields they already know. “Entrepreneurs don’t select industries because they are good for start-ups but rather because they know these industries and because it is easy to start businesses in them.” • A common denominator of people who start businesses is that they don’t like working for someone else. So they start 22
powers, but rather “a middleaged white guy who just wants to earn a living and doesn’t want to work for someone else.” Shane fears that prevailing erroneous views about entrepreneurs produce unsustainable hopes. “The myths about entrepreneurship are so strong that, as citizens, we have fashioned public policies around them,” he says. “Unfortunately, the truth is that entrepreneurship is not a panacea.... Making policy decisions on the basis of myths about the impact of start-ups leads to a lot of wasted resources ◆ and bad incentives.”
