Entrepreneurship and growth

I have spent this past week at Stanford University attending the Forum for American/Chinese Exchange at Stanford. FACES is arguably the most prestigious of the many student conferences that have sprung up in the last decade devoted to U.S.-China relations. It is no surprise that business is a frequent topic at a conference like FACES. Not only do the United States and China have the two largest economies in the world, they also have the most dynamic. A lot of that dynamism is due to entrepreneurs.

Entrepreneurship and innovation are the talk of our times. For the last century, they have been the greatest drivers of economic growth and development, the catalysts for 20th-century economist Joseph Schumpeter’s “creative destruction,” whereby the old and inefficient are cast aside and replaced by more competitive and productive ideas or technologies. The process is similar to Darwin’s theory of evolution by natural selection, in which organisms best suited to their environments, “the fittest,” survive and reproduce, passing on their favorable traits.

Silicon Valley is the ultimate environment for testing new ideas, and it is something that people all over the world are trying to emulate with limited success. What gives? Institutional disparity among different countries is part of the answer. In the United States, we have a mature financial system that makes investing easy and straightforward. There are laws that protect intellectual property and make it easy to start a business. Perhaps most importantly, there are bankruptcy laws in place that allow entrepreneurs to fail and learn from their mistakes. Most of the entrepreneurs I have talked to share more failure stories than success stories, and they seem grateful for the second chance.

But institutions cannot be the only answer: There are a host of other nations that have banks, laws and traditions similar to the ones we have here. They consciously try to mix these ingredients together but seldom come out with anything like Silicon Valley. And to be fair, Silicon Valley was neither a planned nor expected center of innovation. California, now the global epicenter for innovation, owes its success more to chance than any true foresight on the part of its lawmakers or the U.S. government. It just so happened that a law passed in 1872—long before the innovators of Silicon Valley roamed the earth—would provide a crucial foundation for sustained innovation.

This law, part of the original California Civil Code, forbade the binding of workers in the state to non-compete contracts. In passing this legislation, lawmakers sought to shift labor movements away from dying industries like gold mining.

The law is enforced today as it was legislated more than a century ago, and the inability to enforce non-compete contracts—whether they are from California or not—is a particular draw to highly skilled workers in search of the maximum return on their abilities. Some of the appeal of Silicon Valley, then, was not the product of design, but rather of chance.

But even to say that an institutional infrastructure is a necessary condition for great innovation is a stretch. Just look at China. Its banks are immature, its intellectual property laws are substandard and its tradition is hardly a risk-taking one. But China is growing, and a lot of that growth can be attributed to its entrepreneurs responding to a wider universe of opportunities. Perhaps China has stumbled on a new model of innovation: It has government-designed centers for technological innovation in Chongqing, and Hangzhou is described as “a national experimental city” and “a key national base” for technology development. These could be a new parallel to America’s organic Silicon Valley.

For many, the success of companies like Google and Facebook represents the particular institutional strengths of the American system: easy access to credit, an abundance of loans, strong venture capital activities and a culture that embraces failure as the first step toward success. Considering today’s economic reality, however, it may be time to critically consider the strengths and weaknesses of American innovation. Our reliance on a fixed formula for entrepreneurship—even if that formula accounts for the possibility of failure—could trap us in a paradox of conventional (and unproductive) innovation. Now is the time to consider new models and new approaches that challenge our expectations, starting with those being implemented outside our own borders.