Friday, March 4, 2016

Business innovation as shots on goal

Ben Casselman at FiveThirtyEight has an interesting write-up of some new research purporting to reveal a set of patterns that predicts startup success:
They find that ambitious startups share certain qualities. Their names, for example, tend to be shorter and are less likely to include the founder’s name. They tend to be set up as corporations, not limited liability companies, and they are often incorporated in Delaware, a state known for its business-friendly regulations. They often apply for patents early in their corporate lives. By looking at those and other variables, Stern and Guzman calculate what they call an Entrepreneurial Quality Index — essentially a measure of how likely a new company is to achieve high growth.
This contrasts with the more epistemically humble 'shots on goal' approach, which basically says that predicting start-up success is really tough, so the best we can do is make general claims about things like the volume of new businesses and success rates.

The fact that many small-bore businesses exist with limited scopes is undoubtedly true. But trying to identify variables that predict the other sort of businesses--those that seek to conquer the world--would seem to inevitably run into the problem of induction and the survivorship bias. The correlations identified in the new research seem interesting, but methods of causal inference can only go so far. I'm extremely skeptical that they represent anything more than the contingent result of historic institutional, sociological and technological factors. These are sure to change in the future.

Over-interpreting these research results leads to some policy recommendations that seem totally wrong to me, such as subsidizing businesses that share the identified 'high po' qualities. Does anyone really believe that encouraging businesses to shorten their names might result in more innovation?

The article briefly mentions rent-seeking as a negative force in the economy, something I believe is a massively underrated concept in the public discourse. One of the hallmarks of rent-seeking is institutional decay, whereby rigid institutions don't keep pace with the changing contextual factors of society. A surefire way to exacerbate institutional decay is to craft policy that crystallizes transient drivers of success.

Who knows what changes might occur in the future that will make the current moment of big, far-reaching businesses less competitive. Platform technologies like DIY-bio could return us to a garage-workshop-style economy. Political changes or scandal might retroactively make Delaware a terrible place to incorporate. Global warming or energy innovations might drastically localize economies. Maybe cultural fads will make long company names really gnarly. Why not!

The project of chipping away at the 'shots on goal' understanding of business innovation is a worthy one. But the application of these findings is more suited to business strategy itself than to innovation policy. Epistemic humility is not desirable for individual businesses (quite the opposite), because on the whole the evolutionary process of market discipline channels the constant testing of new theories into something like a socially useful result. Public policy is different, and locking-in the hot new research based on historic correlations is in the long-run more likely to further the regulatory kludge than to improve economic dynamism.

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