There’s more discouraging news about American business — specifically about entrepreneurship.
We confidently assume that we have the world’s most entrepreneurial nation, and the proof seems overwhelming. Google, Facebook and Twitter are but three (relatively) recent start-ups that have become corporate titans. Before them, there were others, including Microsoft, Intel and FedEx. We seem to excel at nurturing new firms.
Or do we?
Previous studies have shown that, despite the success of firms such as Facebook, the number of start-ups has dropped sharply, from about 13 percent of all firms in the late 1980s to about 8 percent in 2011. Now, a new study from the National Bureau of Economic Research reports that the expansion of the remaining start-ups — which traditionally has been much faster than the growth of existing companies — has slowed considerably. By some measures, it now barely exceeds the average of older companies.
So there’s a double whammy: fewer start-ups and slower growth at the survivors. This could be one reason the recovery from the Great Recession has been so sluggish, with the economy’s growth averaging about 2 percent annually from 2010 to 2014, much slower than in earlier post-World War II recoveries.
Using Census Bureau data, the study examined business births (the creation of new firms), deaths (companies going out of business) and growth from 1976 to 2011. It confirmed earlier studies: Though most new firms fail in their first five years, the growth of the survivors is so strong that it both offsets the losses of other firms and creates much of the economy’s overall increase in jobs. But that began to change after 2000, when start-ups’ high growth faded.
The upshot: “Startups and high-growth young firms [under five years] contribute less to U.S. job creation in the post-2000 period” than in earlier periods, the report says.
The start-up slump may also help explain the slowdown in productivity — a measure of efficiency that ultimately raises living standards. From 2010 to 2014, productivity grew a meager 0.3 percent annually, also well below the post-World War II average of about 2 percent, according to the Bureau of Labor Statistics. “Evidence suggests that young firms devote disproportionately more resources to innovation,” the researchers write . The start-up slump suggests either that their innovation is lagging or that it’s diluted by slower economic growth.
Just what has caused the start-up slump isn’t clear, the study admits. One obvious theory is the legacy of the Great Recession, which has made many businesses more cautious and risk-averse. Still, that’s at most a partial explanation, because it can’t account for the slowdown that preceded the recession’s onset in 2007. What’s clear is that the start-up slump is consistent with other business behavior, specifically weak investment spending on new plants and machinery. Compared with the past, companies seem more reluctant to invest in the future.
“There is now robust evidence, from multiple data sources . . . of a pervasive decline in U.S. business dynamism over the last several decades,” said the study, which was released this month. It is NBER working paper 21776, written by economists Ryan A. Decker of the Federal Reserve, John Haltiwanger of the University of Maryland, and Ron Jarmin and Javier Miranda of the Census Bureau.
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