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News : Innovation Last Updated: Aug 27, 2010 - 5:15:42 AM

New start-ups in 2009 fell 10% in 20 of the world's richest nations according to the annual Global Entrepreneurship Monitor
By Finfacts Team
Jan 14, 2010 - 3:55:03 AM

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New start-ups fell 10per cent in 2009, in 20 of the world's richest nations, according to the latest edition of the annual Global Entrepreneurship Monitor (GEM).

It found that the decline was the most severe in the US, where it fell 24 per cent. By contrast, the UK only saw a 6 per cent fall while the United Arab Emirates saw the most start-up activity in 2009, up 38 per cent.

However, another new study from the US Ewing Marion Kauffman Foundation contradicts the common belief that recessions lead to fewer new start-ups while economic booms encourage them. In fact, according to the study, the number of newly created start-ups remains steady throughout an economic cycle.

The Ewing Marion Kauffman Foundation report's authors analysed data from the US Census Bureau which tracked the annual number of new businesses from 1977 to 2005. The annual totals remain rather consistent, fluctuating by just 3% to 6% each year. Within a year, the number of people starting new businesses each quarter remains even steadier.

“Throughout the world, would-be entrepreneurs reported greater difficulty in obtaining financial backing for their start-up activities, especially from informal investors-- families, friends, and strangers,” Professor Bill Bygrave of the American Babson College, one of the founders of GEM.  “This pool of money declined from $400 billion to $350 billion, a 12.5 per cent drop.” This comparison is for 33 countries that participated in both the 2008 and the 2009 GEM surveys.

In 2009, even as the number of people starting businesses in wealthy countries declined, a quarter of new entrepreneurs felt the prospects for their businesses are rosier than a year earlier. New entrepreneurs tended to be more optimistic than established business owners.

“Clearly, the slowdown has led to changes in the environment for entrepreneurs with investors holding back financing and consumers buying less,” says Kristie Seawright, Executive Director of GEM. What is needed is for entrepreneurs to feel comfortable venturing out again, because they are the real engine for creating new jobs. Unfortunately, there is not a silver bullet for entrepreneurs. Each country needs to develop the right formula to encourage business startups.”

In the wealthiest nations, GEM found huge country variations with declines in new startup activity in nine countries and increases in four nations and no change in 5 countries.

When comparing estimates on pre-recession results of 2006-2007 with 2008-2009, individuals starting new businesses dropped 24 per cent in the United States, 17 per cent in Denmark, 12 per cent in Spain and Belgium, 9 per cent in Germany and Norway, 7 per cent in Italy and 6 per cent in the UK.

France, Iceland, Japan, Netherlands, Slovenia showed no change.

Based on more than 180,000 interviews conducted between May and October in 54 countries.

Ireland did not provide data for the 2009 survey.

In the period 2004-2009, focusing on innovation-driven countries, the United Arab Emirates, and Iceland followed by the United States, Canada, Hong Kong, Signapore, Ireland, Israel, and Australia had the highest levels of HEA (High-Growth Expectation Early-Stage Entrepreneurship) over this period. The HEA rate for these countries is 1 per cent or more. The lowest levels of HEA, at under 0.5 per cent, occur in Finland, Spain, Belgium and Japan. HEA rates can vary even among broadly similar high income countries. Among the large E.U. economies, the United Kingdom clearly exhibits higher levels of HEA than France, Italy, and Spain.

Venture capital investment amounted to 0.054 per cent of Europe’s GDP in 2008 with Sweden in the lead at 0.15 per cent of GDP followed by the United Kingdom (0.090 per cent), and Ireland (0.084 per cent).

The report is available on the GEM site.

Comparing 2006-2007 results to those in 2008-2009 in 16 middle-income nations, GEM finds declines in new startup activity attempts in five countries and increases in four nations. Individuals starting up businesses declined in Serbia by 40 per cent; Croatia, 25 per cent; Peru, 19 per cent and Russia, 18 per cent.

They increased 59 per cent in Latvia, 50 per cent in Colombia, 31 per cent in Chile and 30 per cent on Hungary.

China and South Africa showed no change.

In the world’s least developed, or “factor driven,” countries, new businesses typically are extractive - - farming, fishing, forestry, mining—with many started as a way to earn a living with little prospect for growth.

The GEM report shows that the recession has changed the mix of reasons for starting a business in many countries. “We saw a rise in necessity-driven entrepreneurship in 2009 in many countries because people were losing jobs, but for some it may turn out to be a blessing in disguise,” said Niels Bosma, GEM’s director of research and a researcher at Utrecht University, the Netherlands.  “Sometimes it drives people who are creative and visionary to pursue their dream; sometimes it inspires people who have thought about starting a business, but for some reason have not done anything about it - - possibly because they felt more secure working for someone else.”

In 2009, necessity-driven entrepreneurship as a proportion of all early-stage entrepreneurship in the wealthiest countries increased by about twenty-five per cent in comparison to 2008. In the US, that rate jumped from an estimated 12 per cent to 23 per cent in 2009. Iceland and Latvia, two other countries hit hard by the recession, saw similar increases in necessity-driven entrepreneurship.

“Of course, the finding that entrepreneurial activity declined in many countries was not a surprise,” says Dr. Bosma. “What surprised me was that as much as one in four new entrepreneurs in wealthy countries believed that the global slowdown had created more opportunities for their business, not less. 

“This is a significant and interesting group. They are more likely to be young, well-educated and expect to create a lot of jobs for others. They represent a sign that we can emerge from recession by creating new businesses, products, and services.”

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