September 1, 2014

Is America in the Midst of a High Tech Entrepreneurship Boom?

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If you read the business press, you probably think the answer is yes. The popular media is full of stories about start-ups like Facebook, Groupon, Instagram, Linkedin, Snapchat, Twitter, WhatsApp, Yelp, and Zinga. American entrepreneurs are starting high tech companies at a feverish pace, the media experts say.

Perhaps you shouldn’t believe everything you read in the popular press. Careful analysis of Census data outlined in new report by the Ewing Marion Kauffman Foundation shows that entrepreneurial activity in the high tech sector has declined substantially over the past decade.

John Haltiwanger of the University of Maryland, Ian Hathaway of the policy organization Engine, and Javier Miranda of the U.S. Census Bureau, examined business dynamics in the high tech sector from 1978 to 2011, using data from the Census Bureau. Classifying industries as “high tech” or not according to a method developed by the Bureau of Labor Statistics (BLS), the authors identified 14 high tech industries – ten information technology and computer-based lines of business plus architectural, engineering and scientific R&D services, aerospace manufacturing, and pharmaceuticals – and aggregated them to measure the “high tech” sector.

The authors looked at the fraction of firms under the age of six in the high tech sector every year since the late 1970s and compared it to the share of young companies in the economy overall. They found that the percentage of high tech firms aged five-and-under has declined considerably since 2000. They concluded that “in the post-2000 period, the high-tech sector is experiencing a process of economic activity consolidation, away from young firms and into more mature firms.”

The decline in the fraction of young high tech firms since 2000 is similar to the decline in the share of young firms in the economy overall. For both high tech businesses and companies overall, the U.S. has experienced a decline in entrepreneurial dynamism. In both high and low tech sectors, the fraction of companies under the age of six was considerably lower in 2011 than it was in 1982.

In high tech, the post-2000 pattern differs from pattern that prevailed over the 1994-2000 period. In the late 1990s, young firms accounted for a declining share of overall businesses, but an increasing share of high tech companies.

The authors don’t explain why high tech deviated from the long term trend towards less entrepreneurial dynamism between 1994 and 2000. Perhaps the opportunities generated by the initial rise of the Internet offset the general downward trend.

While the report raises a number of interesting unanswered questions, it also makes clear that the media’s slant on high tech entrepreneurship in America is wrong. Rather than booming, start-up activity in high tech has been in a long-term decline in this country.

Perhaps someone should tweet that message or Facebook some reporters about it.

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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

4 Reactions

  1. There is no doubt to the fact that current string of Entrepreneurs have made a good usage of internet & high tech technologies, but believe that any business needs to be founded on a strong ground of trust & loyalty, which if lost once will be difficult to retain back.

    • True. The Internet and social media are just tools. It is still up to the business owner on how he will harness these tools to win his customer’s trust and loyalty.

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