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Growth of technology-based startups helps power US economy

November 30, 2017

Despite concern that America’s entrepreneurial engine is severely damaged, new research from the Information Technology and Innovation Foundation (ITIF) finds that the number of technology-based startups has grown by 47 percent from 2007 to 2016, with wage growth higher than the national average. Because of their high growth potential, the authors suggest that technology-based startups should be the primary focus of entrepreneurship policy. To bolster these types of entrepreneurs, the authors propose recommendations across four main areas: tax reform, regulatory reform, STEM skills, and technology transfer.

In How Technology-Based Start-Ups Support U.S. Economic Growth, authors John Wu and Rob Atkinson distinguish between typical startups and their technology-based counterparts. The authors define startups as those firms 10 years old and younger. They analyze 10 technology-based industries, including six manufacturing industries like medical devices and semiconductor machinery, and four service industries like software publishing and scientific R&D. Although these 10 industries represent just 3.6 percent of jobs, they account for more than 70 percent of business R&D investment and nearly 60 percent of R&D jobs. Startups in general comprise roughly half (51 percent) of all U.S. firms, though technology-based startups make up just 2.8 percent of all firms.

The authors find that the number of startups in these technology-based industries increased from 116,000 to 171,000 from 2007 to 2016, while employment grew from 1.2 million to 1.5 million workers during that same time. Wages at technology-based startups are more than twice the national average and nearly three times those at typical startups. Venture capital backs approximately one in nine technology-based startups, according to the authors.

Perhaps unsurprisingly, the authors find a strong correlation (0.75) between a state’s technology-based activity and its overall score in the foundation’s State New Economy Index. California led all states in the number of technology-based startups (30,000) and employment (300,000 workers), while Massachusetts had the highest share of employment in technology-based startups (2.4 percent).  Among congressional districts, the firm share of technology-based startups were highest in Silicon Valley (CA-17), Suburban-Washington D.C., (VA-10), and Houston (TX-02).

To assess the concentration of technology-based startup employment, SSTI used the ITIF data to calculate location quotients (LQ) for each state. Location quotients measure the relative specialization of a location in a particular industry. In this case, an LQ of 1.0 means that a state’s employment in technology-based startups is the same share as its total employment is for the national economy. An LQ greater than one means that technology-based employment is more concentrated in a state than average, while an LQ lower than one means that it is less concentrated.

Technology-based startup jobs are concentrated in a relatively small number of states – in 2016, the location quotient of technology-based startup employment was greater than 1.0 in just 13 states. The states with the highest concentrations of technology-based startup employment are Massachusetts (2.04), California (1.72), and Colorado (1.55), while the states with the lowest concentration are Mississippi (0.42), South Dakota (0.42), and Kentucky (0.49). Levels of concentration tended to be higher on the coasts.

The authors conclude the report with policy recommendations that cut across four categories: tax reform, regulatory reform, STEM skills, and technology transfer. For tax reform, the authors recommend that Congress expand the R&D tax credit from 14 percent to at least 25 percent. They also propose the creation of a new Office of Innovation Policy within the Office of Management and Budget to review the impact that major regulations have on future innovation.  To support STEM skills, the authors suggest a proposal that would fund prizes at colleges and universities that are able to dramatically increase participation in STEM majors. The authors also recommend activities such as increased funding for graduate fellowships and more generous immigration rules for STEM workers. Finally, the authors recommend increased support for technology transfer and commercialization. Recommendations in this category include allocating a share of federal R&D funding for these activities, developing a new proof-of-concept grant-funding program, and directing NSF to establish stronger metrics for universities to evaluate their own commercialization efforts. 

startups, entrepreneurship