SOURCE: Ewing Marion Kauffman Foundation

Ewing Marion Kauffman Foundation

December 07, 2010 08:00 ET

New Kauffman Study Finds That as Few as 30 New Billion Dollar Firms Can Significantly Accelerate GDP Growth

Finding, Recruiting and Nurturing Innovative Entrepreneurs Can Help Generate the "Home Run" Companies Essential to Economic Recovery

KANSAS CITY, MO--(Marketwire - December 7, 2010) - How many new billion dollar firms would it take to permanently increase the U.S. GDP by one percentage point? According to the Kauffman Foundation, the answer is most likely between 30 and 60. Collectively, the impact from high-growth firms that are able to realize $1 billion in revenue could significantly accelerate the U.S. economic recovery, and over time greatly increase income and wealth of the average American household.

Since World War II, the American economy has averaged 3.3 percent growth per year, but fell to a negative growth rate during the height of the recession in 2009. Even as the economy recovers, it is widely believed that the long-run sustainable growth rate has fallen to less than 3 percent.

Is there any way that long-run growth rate can be boosted by a full percentage point? In a new study, Inventive Billion Dollar Firms: A Faster Way to Grow?, the Kauffman Foundation's vice president for research and policy and author of the study, Robert Litan, suggests one possible way.

"If innovative, high-growth firms historically have been the drivers of economic growth in both output and jobs, then cultivating the creation of more such firms will increase growth of the economy in the long run," Litan said. "Our challenge is to create environments that foster the growth of these new successful companies that generate large social benefits."

The Kauffman paper uses $1 billion in sales as a proxy for highly innovative firms. Using some plausible assumptions about key parameters, Litan estimates that 30-60 more such companies launched every year would achieve the permanent percentage point increase in economy-wide GDP. This estimate rests on the findings of Yale economist William Nordhaus that highly inventive companies, like individual inventors, generate gains to society that vastly exceed the profits earned by the companies or inventors themselves. 

The potential economic impacts demonstrate that if the economy grew at 4 percent annually rather than the average of 3 percent, GDP would double six years faster (18 versus 24 years). With compounding, this extra 1 percent would cumulate over a century to produce roughly three times the level of GDP than would otherwise exist.

"Whatever the 'magic number' of highly successful firms may be," adds Carl Schramm, president and CEO of the Kauffman Foundation, "the bigger question is: How do we ensure the creation of those firms here in America?"

One answer, the Foundation believes, is in the creation of "entrepreneurial ecosystems." Currently, research universities across the country are creating mentoring programs for faculty, alumni and student entrepreneurs. These commercial, private-sector "accelerators" use a competitive selection process to nurture new potential breakthrough companies in markets including medical devices and Web-based businesses.

Kauffman Laboratories for Enterprise Creation, launched last year, aims to recruit highly motivated individuals with commercial ideas that have the potential to produce billion-dollar-plus companies. Kauffman Labs surrounds the successful candidates, chosen in a highly competitive process, with entrepreneurial instruction and mentoring from some of the nation's leading experts in the same industry or "vertical." The first Labs program consisted of outstanding postdoctoral scientists who have developed promising technologies. The next program, which starts in early 2011, consists of potential entrepreneurs with innovative commercial ideas in the educational field. Future Labs programs will be centered on other verticals ripe for high-growth, innovative startups.

About the Kauffman Foundation
The Ewing Marion Kauffman Foundation is a private nonpartisan foundation that works to harness the power of entrepreneurship and innovation to grow economies and improve human welfare. Through its research and other initiatives, the Kauffman Foundation aims to open young people's eyes to the possibility of entrepreneurship, promote entrepreneurship education, raise awareness of entrepreneurship-friendly policies, and find alternative pathways for the commercialization of new knowledge and technologies. In addition, the Foundation focuses on initiatives in the Kansas City region to advance students' math and science skills, and improve the educational achievement of urban students, including the Ewing Marion Kauffman School, a college preparatory charter school for middle and high school students set to open in 2011. Founded by late entrepreneur and philanthropist Ewing Marion Kauffman, the Foundation is based in Kansas City, Mo. and has approximately $2 billion in assets. For more information, visit www.kauffman.org, and follow the Foundation on www.twitter.com/kauffmanfdn and www.facebook.com/kauffmanfdn.

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