Report: R&D-intensive tech startups make outsized contribution to economic growth
December 5, 2017
WASHINGTON — The number of technology-based startups in the U.S. economy grew a robust 47 percent in the last decade, according to a detailed analysis released Nov. 28 by the Information Technology and Innovation Foundation (ITIF), a leading science and tech policy think tank. The report found that these technology-based start-ups, while accounting for a relatively small share of all businesses in the economy, are especially important drivers of America's overall growth because they make outsized contributions to employment, innovation, competitiveness, and productivity growth.
"Technology-based startups are star players for the economy. They offer better-paying, longer-lasting jobs than other startups, they innovate more, and they are more likely to export their goods and services, which makes a disproportionate contribution to growth," said ITIF President Rob Atkinson, who co-authored the report. "There is a false impression that because some technology-driven companies have become hugely successful, there is now no room for new entrants. But that's clearly not the case. Technology and innovation-driven startups are thriving. Policymakers should take care to continue nurturing them with the right tax policies, regulatory environment, research incentives, and market conditions."
The report quantifies entrepreneurship in 10 technology-based industries over the last decade (2007-2016) at the national, state, and congressional district levels. The highest number of technology-based startups in any state is more than 30,000 in California.
In Nevada, 1,574 technology-based startups employ 9,686, according to the study.
According to the report, technology-based startups—defined as firms 10 years old or younger in tech-based industries—have been getting better at creating jobs and staying in business. The report finds:
- The number of these tech-based startups grew 47 percent from 2007 to 2016;
- Tech-based industries have the highest employment multipliers—one tech-based job creates five jobs in other industries;
- Wage growth among tech-based startups was higher than overall U.S. wage growth from 2007 to 2016 (20 percent versus 3 percent);
- VC-backed startups grew employment and sales 40 percent faster than non-VC-backed startups on average.
- Massachusetts had the most employment in tech-based startups as a share of its total workforce in 2016 (2.4 percent).
- Among congressional districts in 2016, the leaders in tech-based startup employment as a share of the workforce were California's 17th district (Silicon Valley) and 49th district (covering parts of Orange County and San Diego), both with 6.4 percent.
In order to increase the startup rates for technology-based firms and enable them to grow faster, the report urges policymakers to focus on tax reform, regulatory reform, improving STEM skills, and improving federal technology-transfer policies.
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The authors provide a series of specific examples:
- Expand the Alternative Simplified Credit for research and development from 14 percent to at least 25 percent.
- Amend Section 469 of the tax code to permit passive investors to take advantage of the net operating losses and research tax credits of companies in which they invest.
- Amend Section 382 of the tax code to make it easier for small companies to carry net operating losses forward even as they continue to attract new investors.
- Create a new Office of Innovation Policy within the Office of Management and Budget.
- Charge the Small Business Administration's Office of Advocacy with focusing solely on federal regulations that affect new firms in technology-based industries.
- Appropriate approximately $325 million over five years for the National Science Foundation (NSF) to award prizes to colleges and universities that dramatically increase the rate at which freshmen STEM students graduate with STEM degrees and that demonstrably sustain the increase.
- Shift more permanent resident slots away from family-based and other related immigration programs toward immigrant workers with advanced STEM skills.
- Establish an automatic set-aside program that allocates a modest percentage of federal research budgets to technology-commercialization activities.
- Develop a proof-of-concept "Phase Zero" individual and institutional grant award program within major federal research agencies at the national level.
- Direct the NSF to partner with the National Institute of Standards and Technology (NIST) to develop a metric for universities to report entrepreneurship and commercialization information annually.
"All levels of government—local, state, and federal—have a role in implementing policies that support technology-based startups," said John Wu, ITIF Economic Analyst and lead author of the report. "Government leaders should promote policies that will help current and future technology-based startups emerge and grow so they can then go on to generate long-lasting, high-paying jobs, increase innovation and productivity, and improve the global competitiveness of the U.S. economy."
The Information Technology and Innovation Foundation (ITIF) is an independent, nonpartisan research and educational institute focusing on the intersection of technological innovation and public policy.