STUDY: Billionaires In The Market Can Smother Breakout Entrepreneurs

Getty/ Paul Kane

Entrepreneurship can smother small business activity rather than being an innovative influence, according to a new study of almost 996 self-made billionaires across 50 countries.

Most measures of entrepreneur activity assume that countries and industries with a lot of small firms and start-ups also tend to be those where most innovative high-growth firms emerge.

“However, an overwhelming majority of the self-employed are not entrepreneurial,” say Magnus Henrekson and Tino Sanandaji of the Research Institute of Industrial Economics, Sweden.

Small businesses generally do not bring innovation to the market and do not plan to grow.

In the United States, most small businesses have no employees other than the owner and are best described as permanently tiny rather than entrepreneurial.

The authors suggest a better measure of entrepreneurship might be the number of billionaires in a country.

The common attributes of countries with more billionaires: higher income, higher trust, lower taxes, more venture capital investment and lower regulatory burdens have higher billionaire entrepreneurship rates.

But this also meant less self-employment, small business ownership and start-up rates.

Australia comes in tenth when the number of billionaires per country are measured against population:

Source: Research Institute of Industrial Economics, Sweden

A good example of how entrepreneurship can suppress small business is Walmart.

Sam Walton founded Walmart in 1962 when his idea for establishing discount stores in small town America was rejected by his employer, JC Penney.

Walmart grew to be the largest private employer in the world.

The study authors say:

“The story illustrates the impact that creative entrepreneurship can have on self-employment and small business. The growth of Walmart was accompanied by, and required, the replacement of thousands of smaller retail operations.”

Even the growth of new industry such as Intel, Microsoft, and Google, which do not directly compete with a large number of small businesses, reduces self-employment.

In their case the mechanism is offering better career prospects for employees, thus raising the opportunity cost of self-employment.

The study, ‘Small business activity does not measure entrepreneurship’, was published by PNAS, the National Academy of Sciences in the USA.

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