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American entrepreneurship: Vastly overrated?

The United States is a country of entrepreneurs, fearlessly risking everything to make a fortune by bringing new products and services to market. Global leaders like Microsoft, Apple, and HP were started in garages by university drop-outs. Google, Facebook, and many lesser-known internet start-ups carry on the tradition today.

At least, that’s the story as it has been told and retold in a thousand business magazines. And it is true that America is the place where entrepreneurs can make a fortune. The United States has a huge internal market and a fully-developed venture capital industry that knows how to reach that market.

But contrary to popular perceptions, real-life entrepreneurs are very rare in American. According to data from the Organisation for Economic Co-operation and Development (OECD), the United States has one of the lowest rates of entrepreneurship in the world.

In fact, the OECD rates the United States third from the bottom in a ranking of 25 countries in employer enterprise birth rate. Over 50 percent of Americans work for large companies of 250 employees or more. Only two other countries in the world have economies that are so dominated by large firms: Slovakia and Luxembourg.

A major new cross-national study seeks to clarify the situation. The Global Entrepreneurship Monitor (GEM) is a massive cross-national survey of entrepreneurship coordinated by Babson College and London Business School. It includes top-quality population sample-survey data for 69 countries plus expert interview data for many others.

In the GEM data the United States ranks 27th of 69 countries in “Total early-stage Entrepreneurial Activity” (TEA), the GEM team’s preferred entrepreneurship metric. Perhaps surprisingly, at the top of the list are poor African countries like Cameroon, Uganda, and Botswana and poor Andean countries like Ecuador, Peru, and Bolivia.

In fact this makes complete sense. In very poor countries, people have to be entrepreneurial to survive. Rates of entrepreneurship in these countries top 25 percent of the population compared with 14 percent in the United States. Still, the United States ranks higher than any other rich country.

Based on GEM data, China’s entrepreneurship rate is 15.5 percent, slightly above that in the United States.

Among GEM survey respondents between the ages of 25 and 34 the entrepreneurship rate in the United States is 18 percent. GEM does not break out figures for China by age in its summary reports. But a separate survey from Chinese jobs website Zhaopin.com reported that 6.3 percent of 2015 Chinese university graduates plan to start their own businesses, up from 3.2 percent in 2014.

And here we get into trouble. Based on these figures a recent feature in the Wall Street Journal worried that entrepreneurship rates among Chinese graduates are “only 6.3% — compared with around 20% in the US.” On a positive note, the article pointed out that the entrepreneurship rate among Chinese graduates had doubled in just one year. Not bad!

Leaving aside the somewhat questionable doubling of entrepreneurship rates among Chinese graduates, what about that “around 20%” figure for the United States? The GEM survey figure of 18 percent applies to all young adults, not just graduates. But this figure is close to 20 percent, and it too is rising.

According to Prof. Donna Kelley of Babson College, lead US researcher on the GEM survey, American young adults are increasingly entrepreneurial. “In 2014, 18 percent of 25-34 year-olds were starting or running new businesses compared to 15 percent in 2013.”

Starting or running a new business? Really? If these figures seem incredible it is because they are incredible. And I don’t mean “incredible” in the sense of “fantastic!” I mean “incredible” in the sense of “not credible.” They are so incredible as to skirt the boundaries of academic dishonesty.

The GEM survey defines entrepreneurship as “Any attempt at new business or new venture creation, such as self-employment, a new business organization, or the expansion of an existing business, by an individual, a team of individuals, or an established business.”

That’s a pretty broad definition of entrepreneurship. For example, if you are an employee who is involved in helping your global Fortune 500 company find new clients, open new locations, or expand output in an existing plant, you are an entrepreneur. A checkout clerk at a fast food restaurant who asks “do you want fries with that?” is potentially an entrepreneur by GEM’s definition.

That hardly seems consistent with GEM’s press release hype that 18 percent of American youngsters are “starting or running new businesses” — the press release hype that was picked up by global media, including the Wall Street Journal and Forbes magazine.

But it gets worse — much worse. Drilling down into the GEM documentation reveals the exact procedure through which respondents are classified as entrepreneurs. People are classified as entrepreneurs if they answer “yes” to a series of questions about entrepreneurial activity. These questions identify as entrepreneurs people who engage in entrepreneurial activities, whether on their own behalf or on behalf of their employers.

So far, so good. But strangely, people are also classified as entrepreneurs if they answer “I don’t know” to those same activity questions. Thus people who don’t know whether or not their jobs include any entrepreneurial activities are included in the group of people exhibiting “early-stage entrepreneurial activity.” By sleight of hand and looseness of terminology they then end up being called “entrepreneurs.”

GEM respondents are only excluded from being categorized as entrepreneurs when they explicitly answer “no” to the series of questions about entrepreneurial activities. This is laughably bad research methodology. But it does serve the purpose of inflating entrepreneurship numbers — and perhaps justifying funding for future surveys.

The GEM project seems to have collected invaluable international data about entrepreneurial activities. A proper analysis of GEM data could yield important insights into global entrepreneurship rates. But until someone entrepreneurial undertakes such an analysis, take GEM’s claims about entrepreneurship rates with a grain of salt.

The fact is that American entrepreneurship rates are low and declining, as official data from the US Census Bureau demonstrate. Jeff Clinton, CEO of the Gallup polling organization, gets it right when he asks if American entrepreneurship is “dead or alive?” The correct answer may be: “not dead — yet.”

The United States is a venture capital and business development powerhouse, and many Americans (myself included) are proud to think of themselves as entrepreneurial. But most entrepreneurial Americans act entrepreneurially on behalf of large organizations. That may be the smartest way to be entrepreneurial, but it does not make you an entrepreneur.

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Sydney-based globalization expert Salvatore Babones is available to speak on the Chinese economy (demographics, growth, technology), the Belt & Road Initiative, global trade networks, and Australia-China relations. Contact: s@salvatorebabones.com