Where does American Entrepreneurial Exceptionalism Come From?

August 26, 2019

Economists have said that U.S. investments in Human Capital, or formal schooling, have led to American exceptionalism. This article does not try and refute this, but introduces a question mark. What about American entrepreneurial exceptionalism? It seems that, along with earning returns to Human Capital, entrepreneurs rely on a mix of Social Capital, acquiring knowledge through friends, family, and others in the community, and what I call iCapital, which is self-study–either through the internet or through books.

Facebook, along with the World Bank, published a Future of Business Survey which asked entrepreneurs (owners or partners) where they learned about their industry or sector. Survey respondents had to choose between Human Capital–“In school/university,” Social Capital–“From a family member doing this type of work” or “From a member of my community who is not in my family,” and iCapital–“I learned about it by studying books” or “I learned about it by searching online.” Each respondent could pick up to two categories as sources for knowledge.

Take the United States, the second richest country in GDP per capita next to Ireland in the sample, for example. 25.84% reported they learned about their business through Human Capital–in school or university. 40.16% reported they learned through Social Capital–friends, family, and members of the community. 44.92% said they learned through iCapital–self-study.

On the other end, Pakistan is the poorest country in the sample. 22.66% of Pakistanis reported they relied on Human Capital for knowledge of their industry. 55.65% reported they relied on Social Capital. And, 64.44% reported they relied on iCapital.

Comparing the United States and Pakistan in this way puts the differences in sources of knowledge in bold relief. Pakistan relies on Human Capital almost as much as the United States, but they are much more likely to get their information from Social Capital and iCapital, too.

If differences in education are responsible for American entrepreneurial exceptionalism, it is hard to see in this data set of entrepreneurs. As I will show, the United States ranks 20th in respondents who said they rely on schools and universities for their knowledge. It ranks 20th in respondents who said they rely on Social Capital. And, it ranks 33rd in respondents who said they rely on iCapital. With this mix of sources of knowledge, it is hard to see how any one of them, or all of them, are responsible for the success of American entrepreneurs.

This article cannot get at the returns to Human Capital, Social Capital, and iCapital in explaining the difference in the wealth of nations, but it documents that poorer countries rely more on Social Capital and iCapital than richer countries and richer countries rely more on Human Capital than poorer countries. Furthermore, even in richer countries, the entrepreneurs reported they relied more on Social Capital and iCapital than Human Capital.

35 out of 42 countries reported greater reliance on Social Capital than Human Capital. 40 out of 42 countries reported greater reliance on iCapital than Human Capital. The question remains as to whether Human Capital alone can explain the differences in exceptionalism between countries if most entrepreneurs predominantly get their knowledge from Social Capital and iCapital relative to Human Capital. For the United States, the question remains how returns to Human Capital can explain exceptionalism if it ranks in the middle of the pack.

Turning to the data, first to what percentage of entrepreneurs relied on Human Capital, the United States ranks twentieth out of 42 countries. Figure 1, below, shows that the top 5 include Colombia, Israel, Belgium, Netherlands, and France.

Figure 1.  Countries Most Reliant on Human Capital for Acquiring Knowledge
RankCountry% Rely on Human Capital
20United States25.85%

Figure 2, below, plots reliance on human capital and GDP per capita. The fitted line shows that the the wealthier the country, the more they rely on human capital. However, some of the wealthiest nations–United States, Australia, Canada, United Kingdom, Sweden, and Germany–all lie below the trend line and have below average reliance on Human Capital.

Figure 2. Reliance on Human Capital and GDP

Turning next to Social Capital, Figure 3 shows the top 5 countries that rely on Social Capital the most. The top 5 include Hungary, Taiwan, Pakistan, Bangladesh, and India. The United States comes in at twentieth place, which puts it in the middle of the pack.

Figure 3.  Countries Most Reliant on Social Capital for Acquiring Knowledge
RankCountry% Rely on Social Capital
20United States40.16%

Figure 4, below, shows that poorer countries rely more on social capital for their knowledge.

Figure 4. Reliance on Social Capital by GDP per Capita

Finally, the top 5 countries that rely on iCapital are shown in Figure 5, below. The top 5 include Thailand, Indonesia, Vietnam, Nigeria, and Malaysia. The United States ranks 33.

Figure 5.  Countries Most Reliant on iCapital for Acquiring Knowledge
RankCountry% Rely on iCapital
33United States44.93%

The plot of iCapital versus GDP per capita can be found in Figure 6. The trend line shows that the poorer the nation, the more they rely on iCapital.

Figure 6. Reliance on iCapital and GDP per capita

Something does not add up for explaining American entrepreneurial exceptionalism with investments in Human Capital. First, American entrepreneurs rely more on Social and iCapital relative to Human Capital. Second, the United States ranks in the middle to lower end of the distribution among the countries in the sample in Human, Social and iCapital. The question remains as to what is driving American entrepreneurial exceptionalism.

Source: https://datacatalog.worldbank.org/dataset/future-business-survey-aggregated-data , http://statisticstimes.com/economy/countries-by-gdp-capita.php

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