Politics & Policy

How Congress Can Address America’s Startup Shortage

Sen. Marco Rubio (R., Fla.) on Capitol Hill, April 10, 2019 (Erin Scott/Reuters)
Marco Rubio has introduced legislation that would help small businesses compete in the global market.

American business dynamism is in troubling decline. New business formation has been falling for decades, replaced by large incumbents and “superstar” firms with the scale needed to compete globally. A boon for some, this slowing market churn has come at the cost of depressed innovation and productivity growth for many more, whether in the form of rural stagnation or rising urban inequality.

Facing up to these trends has led lawmakers from both major parties to reconsider the role that public policy plays in ensuring that economic growth is more broadly shared. But getting the diagnosis right still matters. To get at the root cause of the problem, policy must focus on reviving business dynamism, boosting productivity growth, and helping young businesses break into international markets.

Senator Marco Rubio (R., Fla.) aims to do just that. As chairman of the U.S. Senate Committee on Small Business & Entrepreneurship, Rubio has introduced the first comprehensive reauthorization of the Small Business Act in nearly 20 years. The ambitious overhaul of the Small Business Administration (SBA) would provide many long-overdue modernizations and support small businesses with high growth potential in internationally competitive sectors.

A new Innovation Growth Loan program, for example, would enable small manufacturers in R&D-intensive sectors to finance the sorts of capital investments needed for firms to scale up quickly. The program is carefully designed to fill the gap in patient finance that has long plagued American manufacturers.

Larger loans would be released in stages, and with a penalty for firms that failed to meet basic benchmarks of revenue growth. Performance would be rewarded, while the risk of abuse would be minimized. These guardrails, in other words, would ensure that the program concentrates on growing productive ventures rather than on merely propping up stagnant businesses. The reform makes analogous enhancements to small-business investment companies (SBICs) as well, expanding the pool of private venture capital for advanced manufacturing. It’s a model inspired by Israel, which used a similar approach to grow its high-tech sector and earn its reputation for being a “start-up nation.”

Eligibility for both of these enhanced financing models would be extended to small businesses engaged in research and development through federal grants and contracts, and to firms that operate in sectors restricted from receiving foreign investment for national-security reasons. For these small businesses in particular, improved access to capital is critical to enable the successful commercialization of new, often publicly funded technologies. All told, these reforms would give young businesses in emerging industries a path to grow and gain a foothold in the global market. And because of the SBA’s fee structure, it comes at no cost to taxpayers.

The reauthorization pushes the SBA to support exporters as well, by consolidating outdated export-oriented programs into a single, flexible export-finance initiative. Encouraging small businesses to export is important, as the intensity of international competition forces companies to learn quickly, innovate, and become more productive. This presents a promising alternative to current trade wars. It would help American entrepreneurs to lead the industries of the future, rather than merely protecting the industries of the past.

The problems created by flagging business dynamism go hand in hand with the crises of income inequality and rural economic decline. So too will their solutions. As demographic changes put pressure on economic growth, and as the value of a college degree as a minimum credential in the labor market skyrockets, reviving productivity growth and an internationally competitive manufacturing base become all the more important. In a rare exception in our age of polarization, the Senate Small Business Committee has developed a truly bipartisan strategy to address structural problems head on. Whether America maintains its reputation as a start-up nation rests on what Congress does next.

—Samuel Hammond is the poverty and welfare analyst for the Niskanen Center. Connor O’Brien is a student at the University of Chicago’s Harris School of Public Policy.

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