A Better Way to Build Democracy

The Kauffman Foundation’s Carl Schramm argues that exporting entrepreneurship is the most effective foreign-policy option

It's a long held and well-worn truism that entrepreneurship is the engine that drives the American economy. The Small Business Administration frequently trots out its statistics that small businesses represent 99.7% of all employer companies, create an estimated 80% of all jobs, and generate more than 50% of nonfarm private gross domestic product. And nearly all Presidential Administrations, whether Democrat or Republican, have publicly endorsed the significance of the entrepreneur to the American economic system.

However, Carl Schramm, president and chief executive of the Ewing Marion Kauffman Foundation in Kansas City, Mo., the nation's largest foundation to promote entrepreneurship, says that while entrepreneurship is this country's strongest resource, it should also form the bedrock of American foreign policy. Schramm, an economist and lawyer who co-founded HCIA and Patient Choice Health Care as well as Greenspring Advisors, a consulting and merchant banking firm, expands on his concept of exporting American entrepreneurship abroad and the changing nature of the American economy in his new book The Entrepreneurial Imperative (HarperCollins, 2006).

Schramm recently spoke to BusinessWeek.com staff writer Stacy Perman. Edited excerpts of their conversation follow.

What is the entrepreneurial imperative?

It's the nature of the economy changing profoundly in terms of entrepreneurship in every respect. So much so that I think we should call this phase of the economy "entrepreneurial capitalism." It's imperative that all institutions and people who anticipate working think in entrepreneurial terms.

Entrepreneurship is often referred to as the backbone of the American economy. What, if anything, is new in this area for you to write about?

This is pulling the insight together if you add up all the changes. [The book] paints a picture of the economy significantly different than how most people think about it, which is huge government, [domination of] the interests of big companies, and big unions. That was once an accurate portrayal, but increasingly there are new firms [owned by] individuals, the number of people working for [big] companies is declining, and unions are half of what they were 30 years ago.

You say that if America exports entrepreneurial capitalism and other nations copy this economic model, as a result, our own wealth will grow. How so?

Really, what I'm saying is that we're in a much better position if the whole world is trading and creating wealth like ours. To the extent that it makes domestic America richer, it makes the rest of the world richer. We're running faster and have a huge lead in institutional support, entrepreneurship, and a huge amount of human capital. We don't have the same numbers as China's 1.3 billion to our 300 million [population]. But we outrank everybody in the highest-quality PhD.s raised in American universities. We're [also] producing highly skilled, technically trained people for industrial positions.

You say that by fostering the means to create wealth in every country it will make the world more stable. But doesn't that also mean more competition for America?

Positively, it means more competition for the U.S. Then it again comes to the question of imperative. America has to understand that it's in a much more competitive environment [than it was before], but it can sketch out a future that continues to create wealth and be more entrepreneurial than any other country.

I think America is up to the challenge. We have the infrastructure and the cultural preconditions to be much stronger at entrepreneurship.

You take a dim view of debt forgiveness toward developing countries, which seems to be quite in vogue right now. Why?

I believe that it's much smarter to think about spending our money in developing countries in developing human capital and stability in markets, so that people can begin businesses rather than forgiving debt, which enriches corrupt regimes.

Even giving scholarships by the hundreds of thousands to [their citizens] to study here and develop skills to start businesses and create markets back in their own countries is better. Debt forgiveness is the continued subsidization of nonmarket economies and empowers authoritative regimes that are often opposed to the emergence of a free market.

Are there other areas in the world that are particularly adept at entrepreneurship, and why?

Ireland, for two reasons. One, they invested 30 years ago in a whole new approach to education. It began to create an enormous quantity of human capital of highly technologically trained people. Secondly, they turned to the U.S., and many companies went there and helped infuse an entrepreneurial culture there.

Israel is virtually the same. They invested very heavily in highly trained people. Israel has an entrepreneurial economy. The rate of business founding there is equal to the U.S. on a per capita basis.

England is working hard on this, but is coming from a position that's very far behind. The reason is that for a long time under various political regimes, the state was the prime actor. Only post-Thatcher has entrepreneurship come forward. Britain has put forth entrepreneurialism as a policy matter. We'll see where that goes. The U.S. doesn't do that. We are entrepreneurs—they talk about it.

There's no dispute that China and India have very entrepreneurial cultures, but they don't have sustained social institutions that permit big scale entrepreneurship to emerge. China has a mixed economy, and the government is still in charge of deciding how to deploy capital and who can start a business. These aren't optimum conditions. In the U.S., we have total freedom to do what we want. In India, there are many new businesses, but many operate extra-legally. But the people there are tremendously entrepreneurial.

You say that business schools are failing us. Why?

They still operate, teach, and research on an Old Economy [model] predicated on big government, business, and unions. I don't believe they've moved to the 21st century. They're caught in a mid-20th century model. There's no economic context that's contemporary. They're still preparing graduates for a life of being a consultant to a [big] company.

One of your key themes is that entrepreneurship should be the key to our foreign policy, how so?

Simply put, if our job in foreign policy is to propagate democracy […] we have plenty of evidence that the application of military force isn't always successful. Advancing a model of our economy doesn't need a concentrated state effort.

In the past, we helped governments in developing countries by shoring up regimes. This [new] model goes directly to individuals. Where it touches the state is in engendering institutions of entrepreneurial capitalism. Essentially, it has never been tried, and it hasn't even been tried as a point of foreign policy. I think it could be an adjunct or a collateral part of our strategy.

What are we doing in Iran to engender a free-market economy? [What are we doing to] widen the base of creating a sense of new economic development, one that isn't imposed but a new, indigenous culture? A species of entrepreneurial capitalism can grow up with a little urging, spending, and technical assistance of the right kind.

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