Innovation
Business dynamism/ employer firm startups in US secular decline
By Michael Hennigan, Finfacts founder and editor
Jun 5, 2015 - 7:38 AM

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Last week the key 2015 Kauffman Index of US startup activity showed a rise in 2015 but nevertheless, business dynamism as reflected in employer firm startups has been in a secular decline in the United States since the 1970s.

It's even worse in Europe and Japan and in 2013 we reported that according to the Joint Research Centre (JRC) of the European Commission, over 50% of all US firms in the Top 1,000 global R&D spenders in 2009, were founded after 1975;  in Europe the figure was 18% and in Japan just 2%.

Long-term US data show that young firms up to five years old are responsible for most net new job creation in a year and this is why the startup activity of firms with employees is crucial for the economy.

On entrepreneurship in general, the Financial Times reported this week that the latest US Bureau of Labor Statistics data on self employment shows that the number of incorporated self-employed fell from a high of 5.88m in November 2008 to 5.38m in April 2015. Activity has recovered from the trough of just below 5m in September 2011 but is struggling to regain former levels. The number of unincorporated self-employed Americans also fell from a high of 10.8m in June 2007 to 9.64m in April 2015. The FT said: "Rather than representing a new dawn in individuals taking charge of their own destiny, the US is back to levels of self-employment last seen in 1986."

The Kauffman Foundation is America's leading entrepreneurship think-tank and its latest index of startup activity — mainly individuals without employees — shows that 310 out of 100,000 adults, or 0.31%, started new businesses each month, on average in the past year compared with last year's average of 0.28% of the adult population; 28.5% of all new entrepreneurs are immigrants in the 2015 Index, compared to 13.3% in the 1997 index and people who are in the age range 55-64 account for 25.8% of the total.

The startup activity rate was in the range of 0.27% to 0.32% in the period 1996-2015.

Employer firms

According to the Census Bureau’s Business Dynamics Statistics 410,000 new employer firms were created in 2012 — 8.1% of total employer firms and 27% lower than the peak in 2006, when 561,721 new employer firms were formed.

The ratio of new firms in 1977 as a total of all firms with employees, was over 16% and until 2008 startups outpaced business failures by about 100,000 per year but there was a net gain in 2012.

In addition the number of jobs per startup has fallen from 11 in the 1980s to 8 in recent times.

Last year a Brookings study showed a secular increase in the share of economic activity occurring in older firms — a trend that has occurred in every state and metropolitan area, in every firm size category, and in each broad industrial sector.

The share of firms aged 16 years or more was 23% in 1992, but jumped to 34% by 2011 — an increase of 50% in two decades. The share of private-sector workers employed in these mature firms increased from 60% to 72% during the same period. "Perhaps most startling, we find that employment and firm shares declined for every other firm age group during this period."

Incumbent, entrenched firms in all sectors of the economy and throughout all areas of the United States represent a larger share of all firms than at any time in the past 2 decades — developing more of an advantage in the current economy than younger, entrepreneurial firms — which could have negative consequences such as lower productivity, less innovation, and fewer new jobs created, according to Robert Litan and economist Ian Hathaway.

“Like the ageing that is well-known among the population, the business sector of United States also appears to be getting ‘old and fat,’” they write. “However, it appears that it is getting fat because it is getting old — not the other way around. This is an important point for public policy.”

Exploring the potential contributing factors of this “other ageing” phenomenon, Litan and Hathaway find that the major driver of the ageing of the firm structure is a decline in the rate of new firm formations, which fuels a path-dependent process of fewer young and medium-aged firms maturing through the pipeline from the start, compounded by an increase in business failures at each firm age category except for the most mature firms.

The uptick in business failures has been the most pronounced for the very youngest of businesses, and may be a contributor to the decline in new firm formations after 1990 as well — the failure rates for year-old firms have increased since the early 1990s, from 16% to 27%. However, contrary to conventional wisdom, they did not find strong evidence of a direct link between business consolidation and an ageing firm structure; although they did find a clear rise in consolidation, it doesn’t appear to be a major contributor to business ageing specifically.

Whatever the reason, they find that it has become increasingly advantageous to be an incumbent, particularly an entrenched one, and less advantageous to be a new entrant. “The trends described here raise some cause for concern in our view,” Litan and Hathaway write. “Holding all factors constant, we’d expect an economy with greater concentration in older firms and less in younger firms to exhibit lower productivity, potentially less innovation, and possibly fewer new jobs created than would otherwise be the case."


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