By James Pethokoukis

The United States has about 4 percent of the global population and accounts for nearly a quarter of global GDP. Yet the US is home to half of the world’s unicorns, or privately held startup companies valued at $1 billion or more. As of this last August, according to CB Insights, there were 801 unicorns around the world, with a cumulative valuation of some $2.6 trillion. The US has the highest number of unicorns at 402, followed distantly by China (158), India (40), and the UK (31). Pretty impressive for being a “failed state” as some domestic critics contend.

So what’s America’s secret? One obvious answer is that a lot of ambitious and talented people come here from elsewhere. But let’s dig deeper on that. Consider the following: The US doesn’t look particularly remarkable if you judge it by various global rankings in areas such as innovation and education. Yet Annamaria Conti (HEC Lausanne) and Jorge A. Guzman (Columbia Business School) note in their 2019 paper “What is the US Comparative Advantage in Entrepreneurship? Evidence from Israeli Migration to the United States,” America’s “entrepreneurial ecosystem is considered to be relatively more successful. Indeed, every year a substantial number of startups from highly-innovative economies relocate their headquarters to the US, raising the question of what advantages the US entrepreneurial ecosystem offers relative to these economies.” (Thanks to Ethan Mollick on Twitter for the pointer.)

As the title suggests, Conti and Guzman attempt to answer this question by looking at what benefits Israeli startups derive from migrating to the US. It’s an interesting approach because there’s a natural control group comprised of Israeli startups operating in the defense sector and that conduct stem cell research. Conti and Guzman: “The defense sector is characterized by strict regulations that prevent Israeli startups operating in this sector from migrating to the US market. Similarly, there are considerable restrictions on embryonic stem cell research in the US as compared to Israel, reducing the profitability of migrating to the US for startups developing technologies in this field.”

From the paper’s conclusion (bold by me):

We show that migrants are significantly more likely than non-migrants to have a trademark registered in the US. They are also more likely to raise VC funds and to be acquired. Moreover, conditional on experiencing an acquisition, migrant startups are sold at a higher price than non-migrant startups. These effects are not only statistically significant but also economically relevant. We do not find significant migration effects on the number of patents startups produce, suggesting that Israeli startups do not move to the US in order to improve their innovation output. The totality of these results lead us to conclude that, compared to other innovative economies, the US entrepreneurial ecosystem offers a multiplicity of advantages which generate sizeable gains for startups. The advantages we highlight are a large consumer market, high investor availability, and a developed market for acquisitions.

The policy lesson here is that high-impact entrepreneurship isn’t just about obvious inputs such as education and science research spending. America’s deep financial markets and well-developed venture capital industry are super important. Again, from the paper:

For instance, countries like France, Germany, Italy, and Switzerland have a highly educated labor force that has generated salient innovations. Notwithstanding the domestic availability of innovation inputs, the most promising European startups do migrate to the US. In fact, widespread opinion holds that European countries lack both a network of investors, which provide funding opportunities as well as mentoring, and firms interested in acquiring new ventures. Moreover, despite the Single Market, the European consumers’ market remains highly fragmented. The implication of our findings for these countries is that the creation of a startup ecosystem requires a comprehensive effort to enhance the marginal contribution of domestic innovation inputs by expanding complementary upstream and downstream markets of investors, acquirers, and consumers.

By the way, the paper also has a lot of neat info about Israel’s startup sector.

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