Startup formation has precipitously declined for firms operated by US PhD recipients in science and engineering due to increasing burden of knowledge, greater work complexity in R&D, & more administrative work

Declining Business Dynamism among Our Best Opportunities: The Role of the Burden of Knowledge. Thomas Åstebro, Serguey Braguinsky, Yuheng Ding. The Institute of Social and Economic Research, Osaka Univ, August 2020. https://www.iser.osaka-u.ac.jp/library/dp/2020/DP1099.pdf

Abstract: We document that since 1997, the rate of startup formation has precipitously declined for firms operated by U.S. PhD recipients in science and engineering. These are supposedly the source of some of our best new technological and business opportunities. We link this to an increasing burden of knowledge by documenting a long-term earnings decline by founders, especially less experienced founders, greater work complexity in R&D, and more administrative work. The results suggest that established firms are better positioned to cope with the increasing burden of knowledge, in particular through the design of knowledge hierarchies, explaining why new firm entry has declined for high-tech, high-opportunity startups.

Discussion

We have established a couple of new facts regarding business dynamism among high-tech, high-opportunity startups run by PhDs in science and engineering. Since 1997, the share of founders in these startups has declined by around 38 percent, not limited to any particular founder demographic or ethnic group or occupation, and this decline is widespread across regions of the United States. The share of workers at startups has followed the same path of decline.

There is a significant trend toward an increasing amount of work experience among founders (although not their age), pointing to the burden of knowledge as an explanation for the decline in startup rates. Probing this idea in the data, we show evidence that founders are rewarded for building experience, as they have had to perform an increasing number of R&D tasks over time while also increasing the number of other tasks that they have to perform. Nevertheless, founders’ earnings generally do not reflect that added workload, as average earnings have been declining, especially for less experienced founders.

The data further suggest that established firms have an advantage over startups in creating a division of labor in R&D, in particular by introducing more hierarchical layers, reducing knowledge workers’ span of control, and allocating more experienced workers to positions with greater managerial responsibility. Further, established firms compensate workers for performing more R&D tasks and supervising more individuals. These developments are not seen among founders. The differences follow from the natural limits imposed by running a small firm with less division of labor and a high amount of multitasking by the founder. The largest firms are even more active in reorganizing job tasks, increasing the depth of hierarchy at twice the rate of all established firms.

Why don’t founders hire more specialized workers and start with bigger teams and build a richer hierarchy, as established firms do? Although we do not address this follow-on question, we can at least speculate. Some of the answers might be that startups face high uncertainty about the viability of their businesses and thus start small, and either grow or exit as uncertainty diminishes; and/or most startups are financially constrained and cannot afford to hire larger teams. We leave it to future research to explore these ideas.

As noted in the introduction, a steady flow of great new high-tech firms is generally agreed to be necessary for an economy to remain vibrant in the long run. In this sense, our findings present cause for concern. It is not immediately clear what the remedy is. Typical regulatory actions, such as changing taxation rates or restricting or enlarging businesses’ operating conditions would likely have no effect. And restricting established firms’ ability to make organizational design changes seems highly unlikely to pass any legislature. Our findings suggest that if the goal is to restore business dynamism in the high-tech sector, alleviating the burden of knowledge should be front and center in the strategy to attain it.