U.S. cedes its competitive edge in entrepreneurship
October 10, 2018
There was a time when the U.S. was the only game in town when it came to attracting venture capital for startup businesses.
No longer. The U.S. is still the No. 1 venue for startup activity, but its share of the global pie is shrinking at a rapid pace, according to a new study for the Center for American Entrepreneurship by Ian Hathaway, research director at the CAE and a senior fellow at the Brookings Institution, and Richard Florida, University Professor at the University of Toronto’s School of Cities and Rotman School of Management.
The relative reduction in U.S. dominance of global venture-capital activity — from more than 95% in the mid-1990s to about two-thirds in 2012 to a little more than half today — is a result of both a natural, evolutionary process and official government policies.
The natural forces include widespread access to technology and its reduced cost, which has “democratized” innovation, Hathaway explained in a telephone interview. Second, other countries are devoting more resources to R&D and to improving their university systems. Third, “the massive reduction in income inequality globally and the rise of the emerging-market consumer” means that entrepreneurs can now innovate at home.
It’s why Shanghai and Beijing have joined the San Francisco Bay area, New York City and Boston as the top startup hubs, according to the study.
Read more on wsj.com: Can the U.S. Keep Its High-Tech Edge?
On the official side, while other countries are sweetening incentives to attract foreign talent through immigration policies, the U.S. is moving in the opposite direction, creating all sorts of obstacles to legal, skills-based immigration.
Take the Immigrant Entrepreneur Rule, for example. This Obama administration initiative would have allowed immigrant founders of startups to remain in the U.S. for up to five years as long as they meet certain benchmarks, including raising a specified amount of capital. The implementation of the rule was delayed by President Donald Trump shortly after he took office. In May, the Department of Homeland Security proposed rescinding the proposed program.
“There is no argument for rescinding the Immigrant Entrepreneur Rule,” said John Dearie, president and founder of the Center for American Entrepreneurship. “It is not a threat to national security. It is not a threat to law and order. It does not take jobs from Americans because these people are coming here with an explicit aim to start companies.”
The U.S. is the only industrialized nation that does not have a visa designed for foreign entrepreneurs looking to establish a new business. The Startup Act,which would create entrepreneur visas and green cards for immigrants with degrees in STEM fields (science, technology, engineering, math), has been stalled in the U.S. Congress for six years.
The not-so-subtle message from the Trump administration that foreigners are not welcome and need not apply is affecting everything from high-skilled immigration to foreign student enrollment.
Much to the consternation of technology companies, the Trump administration is cracking down on the popular H-1B visa program for high-skilled immigrants. Under the guise of strengthening protections to combat abuse, the DHS is making it more difficult for visa applicants, using technicalities — misspelling on an application form, for example — to discourage interested parties, according to Hathaway.
The number of foreign student visas has declined sharply as well to fewer than 400,000 in fiscal year 2017: a drop of 17% from 2016 and 40% from 2015. This year, the U.S. imposed new restrictions on the extension of F-1 student visas, dampening prospects for foreign students to remain in the U.S. to work after graduation.
These actions to restrict the ability of foreigners to study, work and start businesses in the U.S. stand in direct contrast to the benefits immigrants offer. Numerous studies have found that immigrants are twice as likely to start a new business as native-born Americans. In fact, immigrants started more than half of the billion-dollar startup companies in the U.S. and hold key positions in over 70% of them, according to a 2016 study by the National Foundation for American Policy.
These new companies create thousands of good jobs for Americans. (Immigrants don’t steal jobs from Americans, as President Donald Trump is wont to say.)
Both Dearie and Hathaway stressed the primary role that human capital, or talent, plays in the innovative process.
“Capital follows talent, innovation follows capital, and manufacturing and jobs follow innovation,” Hathaway said.
If the U.S. actively seeks to repel talent, it will be “giving away the innovation store,” Dearie said. Once lost, that dominant position will be hard to regain “as alternate innovation and entrepreneurship centers around the world root, grow and thrive,” he said.
To be sure, the U.S. still dominates global startup activity, with more venture capital investment today than ever, with the exception of the dotcom peak in 2000. But America’s share is shrinking.
Erecting walls to keep out talent will only accelerate the process, especially at a time when other nations are rolling out the welcome mat for talent, innovation and entrepreneurship.