Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

Where Jobs and Growth Really Come from: New Businesses

Focusing just a small fraction of our economic development resources on supporting entrepreneurs can benefit all communities. And it’s good politics.

New business opening
Almost all net job growth comes from new businesses rather than older, established companies. (Shutterstock)
America is emerging from the pandemic with a radically changed business environment. Remote work has become widely accepted. The easing of supply-chain problems is causing manufacturing to return. An upswing in business starts has countered a massive multi-decade decline. Some observers, like Rana Foroohar in her book Homecoming: the Path to Prosperity in a Post-Global World, argue that we are leaving the decades-long era of globalization behind and entering a new period of economic localization. However, these macro trends raise the question: How do we ensure that future prosperity is more evenly spread, rather than concentrated in just a handful of communities as it has been in past decades?

What America needs now is to shift our thinking on where jobs and growth come from. The outdated way — but one that still dominates headlines — is to focus on large established companies. But that’s not what the research says actually matters: Older companies generally shed jobs in hard times and usually don’t hire those workers back. Instead, the right approach is to support the starting and growing of new businesses. That’s where almost all net job growth comes from.

In his 2023 State of the Union address, President Biden poetically said, “Every time somebody starts a small business, it’s an act of hope.” We should match that hope with action. The place to start is to earmark just a small fraction of the funding and other resources we now devote to attracting established businesses to nurturing the entrepreneurs who create the most jobs.

The geographic inequalities of the old economy are stark. While the most prosperous ZIP codes saw 11.8 percent job growth in a recent five-year period, the most distressed ZIP codes saw a decline of 2 percent in jobs. Rural areas have seen a 44 percent decline in new business formation since 1995. Three states — California, Massachusetts and New York — captured 73 percent of venture capital funding to fuel high-growth businesses in 2020.

These trends, however, are not a reason to be discouraged. Instead, they should motivate us urgently to create a level playing field for everyone to pursue their entrepreneurial dreams. I have traveled America, and I know firsthand that our aspiring entrepreneurs are ready to do their part. But government has to do its part as well, by breaking barriers at all levels.

That’s not only good government but good politics. A recent bipartisan survey shows that 94 percent of American voters agree that “it is important to America’s future that citizens have a fair opportunity to start and grow their own business,” and that near-unanimity crosses party lines. At a time of great political polarization, Americans want a level playing field for aspiring business-starters.

Creating that level playing field enables every community to unleash its own inherent capacity to spark new businesses. I talk constantly with entrepreneurs in my role as founder and CEO of Right to Start, a national nonprofit championing entrepreneurial opportunity as a civic priority. I have seen enormous talent, drive and ambition in every community, but would-be entrepreneurs are typically more hindered by government than helped. What can government do to get out of the way?

First, governments at all levels should embrace the concept of “5 percent to start.” The idea is simple: Make sure that 5 percent of key government spending that typically bolsters large, established companies instead goes to nurture small, nascent businesses. Ensuring that entrepreneurs receive a mere 5 percent of government contracts, workforce development investment and economic development funding would be a major boost to revitalizing entrepreneurship nationwide.

A commitment of 5 percent of government contracts should go to “new entrant” businesses that have never won those contracts before — especially businesses in their first five years and in underserved communities. Similarly, local workforce development boards should diversify 5 percent of their spending into a range of entrepreneurial training and support programs; this could drive billions of dollars to help entrepreneurs across the nation. In addition, government agencies should allocate 5 percent of existing economic development programs (including Community Development Block Grants and other community redevelopment and assistance funds) to supporting entrepreneurs. This, too, would energize our nation’s startup economy, driving as much as $1 billion to help entrepreneurial businesses. And none of this would require any new spending.

Second, states and cities should create offices of entrepreneurship, with a mandate to strengthen policies and programs supporting the growth of entrepreneurs. These offices could also serve as one-stop shops for entrepreneurs to learn new skills, benefit from technical support and get access to key resources.

Third, state and local governments should eliminate all first-year business licensing and registration fees for someone establishing a new business, including home-based businesses. Why should governments expect fees to be paid before a business even has revenue, especially considering that 56 percent of Americans don’t have personal savings to draw from? Governments will receive far more in tax revenues in the long run by not standing in the way of new businesses getting born.

Legislation to achieve these ends, with bipartisan support, has been introduced this year in at least 10 states. It is even creating new political alliances, as rural areas and communities of color come together to support entrepreneurship.

America’s elected officials and future candidates for office face a pivotal choice: Will they choose to remain with the old economy that led to so much inequality and ignore the voters on a nearly unanimous issue, or will they listen to America’s voters and forge a new entrepreneurial era for all?

Victor W. Hwang is the founder and CEO of Right to Start.

Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management.
From Our Partners