Small business activity does not measure entrepreneurship

Entrepreneurship policy mainly aims to promote innovative Schumpeterian entrepreneurship. However, the rate of entrepreneurship is commonly proxied using quantity-based metrics, such as small business activity, the self-employment rate, or the number of startups. We argue that those metrics give rise to misleading inferences regarding high-impact Schumpeterian entrepreneurship. To unambiguously identify high-impact entrepreneurs we focus on self-made billionaires (in US dollars) who appear on Forbes Magazine’s list and who became wealthy by founding new firms. We identify 996 such billionaire entrepreneurs in 50 countries in 1996–2010, a systematic cross-country study of billionaire entrepreneurs. The rate of billionaire entrepreneurs correlates negatively with self-employment, small business ownership, and firm startup rates. Countries with higher income, higher trust, lower taxes, more venture capital investment, and lower regulatory burdens have higher billionaire entrepreneurship rates but less self-employment. Despite its limitations, the number of billionaire entrepreneurs appears to be a plausible cross-country measure of Schumpeterian entrepreneurship.Given the prominence of entrepreneurship, it may come as a surprise that there is no consensus on how it should be defined in empirical research. Sometimes entrepreneurship is used to refer to anyone operating a private business, regardless of size and activity. Driven by greater data availability, most empirical studies rely on definitions such as the self-employment rate, the number of startups, and small business activity (1). In other contexts, entrepreneurship refers to the subset of firms that are innovative and growth-driven (2, 3). This Schumpeterian definition of the entrepreneur as an innovator and as a driver of growth dominates in theoretical entrepreneurship research and in entrepreneurship policy (4, 5). Thus, when academics and business leaders were asked to define entrepreneurship, the most common choices were the creation and growth of new ventures and innovation. By contrast, the creation of a mom-and-pop business was not viewed as entrepreneurship (6).Leaving aside the semantic discussion of what exactly constitutes entrepreneurship, there is an important empirical issue of how well commonly used operationalizations capture the rate of Schumpeterian entrepreneurship. An implicit assumption appears to be that countries and industries with a large number of small firms and startups also tend to be those where most innovative high-growth firms emerge.However, an overwhelming majority of the self-employed are not entrepreneurial in the Schumpeterian sense, as they never bring a new innovation to the market and do not plan to grow their business. In the United States, the industries with the largest concentrations of self-employed men are construction, landscaping services, auto repair, restaurants, truck transportation, and farming. For women, the corresponding industries include private households (cooks and maids), child day care services, restaurants, and beauty salons. The majority of small businesses in the United States have no employees other than the owner. Nor do most small businesses eventually grow large. Most small businesses are best described as permanently small rather than nascent entrepreneurial firms.Shane (7) argues that necessity-driven and opportunity entrepreneurs should be treated separately, documenting a negative cross-country correlation between having many high- and low-expectation startups. Baumol (3) distinguishes between “innovative” and “replicative” entrepreneurs, where the former are the type of entrepreneurs studied by Schumpeter (2). Hurst and Pugsley (8) forcefully argue against using self-employment as synonymous with entrepreneurship. They estimate that only 10–20% of small businesses report any innovative activity at all and point out that when new startups were asked about growth ambitions, 75% of respondents stated that “I want a size I can manage myself or with a few key employees” (ref. 8, p. 96). Different types of business owners also differ in terms of personality traits (9).Both types of businesses are important for a well-functioning economy, but their workings are entirely different. Innovative and replicative businesses operate in different ways, but are not easily distinguishable in statistics, which means that special approaches must be designed for empirical analysis.One way through which scholars have attempted to distinguish the different classes of firms is by restricting attention to “high-impact entrepreneurs” (10, 11), which is to say those that grow rapidly. The difficulty of estimating the rate of high-impact entrepreneurship in a standardized way across countries has thus far prevented cross-country comparisons.We propose a measure of high-impact Schumpeterian entrepreneurship across countries using information from the Forbes Magazine worldwide list of billionaires during 2 decades. Our measure of high-impact entrepreneurship is based on the accumulation of wealth for founders of new business ventures. We compare this measure to quantity-based empirical proxies for entrepreneurship such as self-employment, small business ownership, and number of startups. Henceforth in the paper for the sake of brevity, “entrepreneurship” refers to billionaire entrepreneurship, the focus of this paper.For each billionaire, the source of wealth was investigated, allowing us to identify 996 self-made billionaires who became rich by founding new firms. Using these individuals to construct a per capita rate of high-impact entrepreneurship, we show that this measure is robustly and negatively correlated with self-employment rates, small business ownership rates, and the rate of startup activity.