The U.S. is falling behind in creating entrepreneurs thanks to government policies and red tape that stifle innovation.

The results of a new report confirm that the wealth creation of entrepreneurs in America lags behind developing nations. In part it’s driven by government policies that discourage the cupcake baker or website designer from starting her business in the U.S.

The economists behind the report explain:

 “…the biggest shift of all is taking place in emerging markets. In the space of a little more than two decades, deregulation, globalization and technology have, for the first time, created a new generation of wealthy individuals who owe their fortunes to entrepreneurship and business opportunities.”

Couple this trend with data from the E. M. Kauffman Foundation indicating that the number of new American business owners was down almost 30,000 last year from 2011, despite an improving economy, and that for the fifth consecutive year, the U.S. registered a loss of economic freedom, and we should be worried. 

These findings are disturbing to people who see overregulation as a threat to prosperity. Please don’t read this as an argument for no regulation. Some oversight and regulation are necessary to ensure that consumers are protected against unscrupulous practices, workers are protected from unsafe conditions, and producers can compete in the marketplace fairly. But reducing red tape and lowering the barriers to setting up a new business are essential for entrepreneurs who want to start new enterprises.

(By the way, check out this must-see and must-share look at American distaste of alarmism thanks to overregulation of our everyday lives and the manufactured fears by government bureaucrats.)

Entrepreneurs drive the economic development of nations. These risk takers are willing and able to transform an idea or invention into a successful endeavor.

Behind the American Dream is an enterprising person who takes her ideas, passion and skills to the marketplace. The entrepreneurial spirit of our nation finds its origins in the Declaration of Independence as the Founders sought to secure our right to “life, liberty and the pursuit of happiness.” Nations that remove the restraints that hamper risk-taking provide a breeding ground for innovators.

And entrepreneurship can lead to impressive wealth creation. A quarter century ago, a large proportion of the world’s wealthiest owed their fortunes to inheritance. Today, the data indicate that entrepreneurship and business ownership drive wealth. Among traditional industry magnates are the innovators of Spanx undergarments, Tory Birch shoes, social networks and Formula One racing.

According to Forbes the world has reached an all-time high in the number and wealth of billionaires. All of the billionaires (both here and abroad) are self-made or derived their wealth from the success of business pursuits. They range in age, educational background, gender, industry, and ethnicity. They demonstrate that success is possible and drive both development and the spread of democracy. Go globalization!

But that doesn’t mean as a nation we should settle for falling behind of our developing nation friends. The U.S. has more billionaires than any other country including half of the top ten. However, the top spot is and has been held by someone from outside of the United States for the past few years.

When we permit policies that slow growth, discourage entrepreneurship, replace private industry with government expansion, and permit the erosion of rule of law, we are setting ourselves on a backward track. #2 or #10 are just not good enough.