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How America can create jobs

The nation's entrepreneurial prowess may be the best hope to stem 9.7 percent unemployment. Companies from a laser-tech firm to a baby-sitting network are harnessing new ideas – and helping reinvent the economy.

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Like many entrepreneurs, he stumbled on the idea for a business while trying to solve a problem – figuring out how to store his graduate-school notes. But what defines an entrepreneur is turning an epiphany into a viable product. In this case it took some nimble software, developed by a Pixily cofounder, that offers a no-fuss way to process all the documents that clients mail in monthly.

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These kinds of employers represent the spearhead of job creation, even if many of them fail. "There's no question that they [high-growth firms] are critical to recovery," says Rob Atkinson, head of the Information Technology and Innovation Foundation, a think tank in Washington. "Their role in job creation is just so great."

The American fascination with entrepreneurs and inventors goes back at least to the days of Benjamin Franklin, the creator of bifocals and a wood stove. A confluence of forces contributed to the rise of a start-up culture. The young society blended egalitarian openness with acquisitive ambition. People had faith that they could achieve new things, but also a willingness to borrow ideas from an innovative Europe. The efforts fed on themselves as the nation developed a world-leading education system.

Despite its importance in American culture, the link between entrepreneurs and job creation is still only partially understood. Some analysts attribute the vast bulk of America's net job creation to start-up firms. But as vital as they are, it would be misleading to view them as the predominant source.

Modern economies are vast webs, where firms of all ages and sizes play important roles. Large firms, for example, often have the labs and know-how to be leaders in their fields. They usually provide better pay and benefits than smaller firms.

Still, firms in their first year account for about 3 in every 100 jobs at any given moment, according to recent research by the Census Bureau and the Kauffman Foundation. That's an enormous number – higher than the economy's net job creation in a typical year. Meanwhile, some of the start-ups that survive become big job creators as they aspire to be the next Facebook or FedEx.

Newer companies matter for another reason. Although plenty of innovations emerge from research labs at übercorporations like IBM, entrepreneurial firms tend to be founts of creativity. Miles Flamenbaum, for example, is helping truck fleets do more with less on vehicle maintenance. He heads a company, SOMS Technologies, that sells "microGreen" oil filters that allow cars and trucks to go up to 30,000 miles without an oil change. It's a product that's environment-friendly and can appeal during tough economic times.

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