Profit Minded

Defining Entrepreneurship Based on Billionaires

You may be self-employed, but are you an entrepreneur? Economists Magnus Henrekson and Tino Sanandaji would say “not likely.”

Their definition of entrepreneurship excludes Mom & Pops, sole proprietors, and any business that is not innovating and growing. In fact, the Swedish scholars argue, in countries and regions where entrepreneurship is most rampant, self-employment is less common.

In a study published in the current edition of the Proceedings of the National Academy of Sciences, Henrekson and Sanandaji, who work at the Research Institute of Industrial Economics in Stockholm, claim they found an inverse relationship between entrepreneurship and rates of self-employment. “Countries with higher income, higher trust, lower taxes, more venture capital investment, and lower regulatory burdens have more entrepreneurs but less self-employment,” they say.

What’s an entrepreneur then? The researchers adopt the definition of the early 20th century Austrian economist and Harvard professor Joseph Schumpeter, who argued that entrepreneurs’ innovations bring about progress and improved living standards for society. Schumpeterian entrepreneurship refers to high-impact, growing, and innovative firms. It’s an important distinction, Henrekson and Sanandaji say, because public policies designed to promote innovation would be misguided if all self-employed or small businesses were lumped into the category of entrepreneurship.

To be sure, they note, most of the self-employed in the U.S. are in industries not exactly known for "creative destruction" or catalyzing social or economic progress: construction, landscaping services, auto repair, restaurants, trucking, farming, cooking, cleaning, day care, and hairstyling.

In an attempt to zero in on the real entrepreneurs, however, the authors come up with what seems like another questionable yardstick: a 20-year collection of the Forbes billionaires list—a list that in 2013 included a gambling mogul, the patriarch of an Italian chocolate dynasty, a Saudi Arabian prince, and the Brazilian man who has the controlling stake in Anheuser-Busch InBev—not exactly people whose innovations have brought about progress and improved living standards for society.

Still, many on the list are responsible for launching companies that have changed the world—Bill Gates, Jeff Bezos, Larry Page and Sergey Brin—and four of every ten of the world’s billionaires is American, the researchers say. And, they point out, the U.S. has the second lowest self-employment rate among developed nations.

The scholars deduce that jobs created by billionaire entrepreneurs—such as those at Wal-Mart, Google, and Oracle—are more appealing than self-employment to Americans. Entrepreneur-launched companies including Intel, Microsoft, and Google, they say, offer “better career prospects for employees, thus raising the opportunity cost of self-employment.” But they also acknowledge that some high-impact entrepreneurial endeavors squash small businesses. Wal-Mart is one obvious example, and, they say, “firms such as Home Depot, Gap, Ikea, H&M, and Amazon have… reduced the number of self-employed and small business owners in their industry.”

The trouble, they say, is that “when entrepreneurship is defined as self-employment or small business ownership, it makes sense to view entrepreneurship and so-called small and medium sized enterprises policies … as essentially interchangeable terms.” Elucidating the difference would lead to “knowledge about how to spur technological progress through entrepreneurship policies.”

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