Innovation
Young US firms in high tech down from 60% ratio in 1982 to 38%
By Michael Hennigan, Finfacts founder and editor
Feb 23, 2014 - 11:22 AM

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There has been a big drop in recent decades in the rate of US startup business creation (firms with at least one employee) while the number of young (up to five years old) firms in the high tech sector has fallen from a 60% ratio in 1982 to 38% in 2011.

In 2011, the number of new US startup businesses was 131 per 100,000 individuals, down 29% from 186 in 1991, according to the Kauffman Foundation, a leading entrepreneurship think-tank and Census Bureau.

High tech firms represented just 4.1% of total US private-sector firms in 2011 while Apple, Amazon, Facebook and Google with a combined 190,000 employees in the United States, compared with General Motors' US payroll of 618,000 in 1979.

Enrico Moretti, an economics professor at the University of California, Berkeley, has said that the average tech position creates five additional jobs in various support industries, from doctors to hairdressers to dog walkers. However, the "multiplier effect" for manufacturing jobs is much lower: 1.6 instead of 5. Much of that, he added, was simply the result of the higher wages generally paid by tech jobs.

The big tech firms generally report net income as a ratio of sales of at least 20% and they are in the most aggressive sector for tax avoidance - - which is part of the Moretti multiplier that filters down to dog walkers and maids from Latin America.

The cash hoards accumulated by the giants -- last year we reported that the top 5 had cash troves of $515bn in June 2013 - - enables them to insource innovation by hoovering up young startups.

"The share of young firms in the high-tech sector has exhibited a more pronounced secular decline in the post-2002 period than in the rest of the economy," according to the Kauffman research.

Young firms are either acquired or grow fast to scale up.

In other words, a grow fast or get acquired landscape has emerged. "That's different than it was 20 years ago, when organic growth was prevalent," said Dane Stangler, vice president of research at the Kauffman Foundation.

The average employment level at new high-tech and ICT firms has been on a steady decline during the last three decades, peaking between six and nine employees in the early 1980s to reach about 4.5 employees on average in 2011. In other words, high-tech and ICT firms are starting smaller. The entire private sector, on the other hand, has held steady with about six employees on average at new firms.

However, the surviving young high-tech businesses add jobs at a rate twice that of all surviving young firms, and the rate of job creation is so robust that it offsets losses from early-stage failures - - something that is not true for young firms as a whole

The research shows that the number of young high-tech firms more than doubled between 1982 and 2007, to 97,836 from 45,959. For the private sector as a whole, young firms held steady throughout much of this period, even though the overall number of firms was growing substantially at the same time.

"The 1990s saw a particularly sharp rise in high-tech entrepreneurship coinciding with wide adoption of the Web and speculation around Internet-based companies (the dot-coms). This period of growth ends with the collapse of the dot-com bubble and instigates a steep decline in high-tech entrepreneurship in the late 1990s and early 2000s.

From about 2002, the number of high-tech young firms continues to decline, while there is a modest increase in the number of young firms overall. The impact of the Great Recession on entrepreneurship is evident after 2007, with sharp declines in the number of young businesses both in the high-tech sector and in the economy as a whole. The number of young high-tech firms fell to 79,034 in 2011, marking a 19.2% drop from 2007. By contrast, the number of young firms for the entire private sector fell by 18.3% during the same period."

Several Irish governments have banked on high tech as a potential jobs engine but any young firm in the sector with international potential is likely to be snapped up before the taxpayer gets any return for investment in the sector.

According to a US Bureau of Labor Statistics study, a high-tech industry is defined by the presence of four factors: a high proportion of scientists, engineers, and technicians; a high proportion of R&D employment; production of high-tech products, as specified on a Census Bureau list of advanced-technology products; and the use of high-tech production methods, including intense use of high-tech capital goods and services in the production process.

Howwever in Ireland, in for example the units  of Apple, Google and Facebook, most of the staff work in sales and general administration.

Kauffman Foundation

Toward America’s New Entrepreneurial Growth Agenda [pdf]

Declining Business Dynamism in the US High-Technology Sector [pdf]

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