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Fortunately, Americans are Becoming Less Likely to Start Businesses





The proportion of the U.S. population that is starting businesses is shrinking. Data from the Federal Reserve show that the proportion of America households that own a business declined from 14.2 percent in 1983 to 11.5 percent in 2004.

Data from the Small Business Administration shows that, on a per capita basis, the number of people starting companies that employ at least one person is lower today than it was in the early 1980s. And data from the Bureau of Labor Statistics shows that the proportion of the population outside agriculture that works for him or herself is only 58 percent of what it was in 1948.

The data make very clear that American’s are becoming less and less likely to start businesses every year. That’s a fact.

 

It’s also good news. Having fewer entrepreneurs means that we are experiencing economic growth. The more developed a country is, the fewer people work for themselves. And when the effect of the number of entrepreneurs is isolated from other factors, the evidence shows that increases in the number of people running their own businesses leads to reduced GDP growth.

Why? Much entrepreneurship is about necessity – not having a good job to take – so if we have a vibrant economy generating a lot of good jobs, we have fewer people starting companies.

Also, when companies grow in size, they usually get more efficient. They can buy in larger volume, and take advantage of economies of scale. Think of it as the Wal-Mart effect. One Wal-Mart replaces a lot of entrepreneurs – the independent grocery, jeweler, appliance store, garden shop etc… So if we are able to create more high growth companies like Wal-Mart than we used to, we don’t need as many independent entrepreneurs.

So, over time, a smaller and smaller portion of the U.S. population goes into business for themselves…and that’s a good thing.

Don’t believe the myths, know the reality.

* * * * *

About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of seven books, the latest of which is Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. He is also a member of the Northcoast Angel Fund in the Cleveland area and is always interested in hearing about great start-ups. Take the entrepreneurship quiz.

39 Comments ▼

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.

39 Reactions

  1. I couldn’t disagree more strongly with your argument — there’s nothing “fortunate” about this. If fewer people are entrepreneurs, that means fewer start-ups occur, which means more people work in often dead-in jobs for established companies — often, big, dumb woefully inefficient companies (despite your effective comment that “Big = effecicent,” much evidence suggests otherwise). Some entrepreneurship is about necessity, but much of it is about someone going off on their own to better their ex-employer and seek their own riches. I think this is a great thing and something we, as a culture, ought to encourage even more. Today’s big companies were once yesterday’s small companies — an entrepreneurs’ vision started most of them. The fewer entrepreneurs we have pushing innovation, the worse off we will be as an economy –plenty of entrepreneurs in up-and-coming countries are eager to launch their visions in the hopes of creating wealth and jobs. Despite some noted exceptions, I think you would be hard-pressed to convince people that innovation springs largely from big companies — occasionally it does, but more often than not, it comes from creative, young, small companies executing an entrepreneur’s dream… and then some larger companies buy them and try to adopt their innovations as their own. I work with entrepreneurs daily, and your conclusions are clearly not what I’ve witnessed. Do “increases in the number of entrepreneurs” really “lead to reduced GDP growth,” or have you extrapolated data that supports your argument in the short-term (during the occasional economic hiccup), but that actually leads to even further increases in long-term GDP growth? Isn’t this really about the creative destruction of capitalism? If so, then short-term periods that tend to suggest your conclusion, are only followed by longer-term periods of even more growth. Thank God entrepreneurs came along to replace the horse and buggy makers and later, to replace computers the size of my living room. Examine the members of the Dow Jones indexes every 10 years or so and compare it next to aggregate net worth growth as a nation — this exercise will disprove your conclusions. As a supposedly fellow angel investors, I’m not sure what your agenda is in promoting these “conclusions,” but I doubt it is the truth borne by experience or your “facts.”

  2. I can see both sides of the story here. Yes, its good that businesses are becoming more efficient, but I would tend to agree more with Chris Hurn on this. We are one lucky nation and those that don’t take advantage of the opportunity given to them are really missing out. Today its even easier to start a business so why wouldn’t you? I can take a laptop and create my own brand and sell to billions of people across the world. Creativity and innovation comes out of absence – rarely large corporations with many layers and processes.

  3. A good thing? For GDP? How about for the people involved? I’d say it’s a mixed bad myself.

  4. I’d bet that the numbers haven’t changed a ton. The difference is, its super easy to start a business on the internet these days. I’m sure many people figure, “Why bother with actually filling out paper work and creating an official business with the government, if I can throw up a website and start collecting cash now?”

    Also, I don’t think “much entrepreneurship is about necessity”. Entrepreneurship is about drive, passion, creativity, and many other things. Rarely necessity. Necessity is not enough to push entrepreneurs through the tough times of starting and growing a business. There has to be passion.

  5. Chris, you’re believing too many of the myths out there about entrepreneurship. The typical entrepreneur isn’t someone going off on their own to seek their own riches. It’s someone who doesn’t want to have a boss and is willing to earn less not to have a boss. By starting a business the person is happier, but the person’s contribution to the economy is less than his contribution by working for someone else.

    This isn’t a short term effect. The effect of the number of entrepreneurs on economic growth is not a short term effect. It’s a long term effect. There is a negative relationship over the past 50 years and across different countries.

    I agree with you that we need to have entrepreneurs who replaced the horse and buggy and the room sized computers. But that’s not what I’m talking about. Those entrepreneurs weren’t the typical entrepreneur. Even at the time those entrepreneurs first began, their businesses didn’t look anything like the typical busienss.

    So the point is: If we had fewer entrepreneurs and they were only the ones with high potential businesses, we’d be better off economically.

    People can, and should do what they want, and running their own business makes the typical person happier. But the typical entrepreneur is also worse off financially and his or her decision to start a business exerts a drag on economic growth.

  6. Anita Campbell

    Scott, I do not agree at all with your statement that “Much entrepreneurship is about necessity – not having a good job to take.”

    That is true in less developed countries and it may be true for a smaller proportion in the U.S. and other developed countries. But the majority in this country approach entrepreneurship for positive reasons. (The GEM reports show that.)

    I think that statement only reflects the belief system of those who prefer to be employees — which of course, is a majority of the population.

    It would be a mistake to assume that everyone shares the same value system.

    It assumes that the highest thing people value is a “good job.” Not that I’m knocking good jobs, but it simply misses the entire entrepreneurial mindset. It doesn’t begin to get inside the heads of that percentage of the population who prefer entrepreneurship.

    Trust me, I could have made a lot more money in my first 2 years of my entrepreneurial quest had I just gone back to a corporate job. If “necessity” had been driving me, necessity alone would have forced me to take a job, because I sure didn’t make much money in those first years.

    We’ve had a booming economy for the past 5 years, and jobs are plentiful, so it wasn’t a question of not having employment options.

    But then I would have missed the joys and satisfaction that come with growing my own business. 🙂

    Anita

  7. Anita, if much entrepreneurship is not about necessity, then why do the following patterns exit?

    1) The parts of the U.S. that have the highest rates of new business formation are places like Bozeman, Montana, and Anniston, Alabama, where there are few other jobs available. Places with booming economies and lots of job creation, like Silicon Valley, have pretty low rates of firm formation.

    2) Unemployed people are many times more likely than people with jobs to start their own businesses, and places with high unemployment rates have higher start-up rates than places with low unemployment rates.

  8. Scott,

    1) You may get less firm formation in places like Silicon Valley because the existing firms are more “entrepreneurial”. Many people want to leave “Corporate America” because they’re fed up with bureaucracy, not because of necessity. If they’re able to go to a firm (instead of starting their own business) that gives them the freedom to work as they please, they’re likely to do so.

    2) The answer to the second pattern you proposed is self-evident. Those unemployed people that start their own businesses are unemployed by choice, not necessity. They’d rather be unemployed that work in an oppressive environment. Also, entrepreneurs are often creative thinkers. Creative thinkers don’t fit well in established corporations because their creativity is stunted by rules & regulations.

    When looking at data, you can’t make assumptions as to why the data says what it says. The “why” is much harder to figure out than just assuming the obvious.

  9. Tyler, we have data about why people are unemployed and why the unemployed and why the unemployed start their own businesses. Most people who are unemployed are not unemployed by choice.

    Those that start their own businesses don’t report that they are starting businesses because they are creative thinkers. Also, all the carefully done surveys of representative samples of the population show that entrepreneurs are no more creative than the rest of the population.

    In terms of your response to my first point, people in places like Laramie, Wyoming are more likely than people in places like Silicon Valley to say that they are starting businesses because they don’t have a choice. That is, their other options aren’t very good.

    On a completely different note, I clearly got people interested in my posting. I’m happy to respond as people respond to me, but don’t want to do that if people don’t want to hear from me. So unless I see any future comments that ask me to respond, I’m going to remain silent and let others comment.

  10. Scott,

    Thanks for the reply. Don’t hold back. I like hearing your comments. You’ve obviously researched this stuff quite a bit and its extremely fascinating. The more data (or links to data) you can provide, the better.

    Thanks for a great post.

  11. While there are plenty of myths out there about entrepreneurship, I don’t believe them unless I can validate them first-hand. Scott, you’re blurring the distinction between what a small business owner is and what an entrepreneur is. What you’re describing and the research you’re citing is actually attributable to small business owners, NOT entrepreneurs. There is a fine line here that makes all the difference in the world – you admitted as much when you called them “atypical entrepreneurs.” An entrepreneur is one that is innovative, driven by a passion for the enterprise, not merely happy making the money he’s making right now and not happy until he makes his vision a reality. Excellence is the ideal that most entrepreneurs pursue – not just getting away from a boss or the monotony of corporate America. Entrepreneurs also usually create many businesses – they find synergy in other areas and enjoy the creative process (some would say it’s addictive) – so the description of someone sitting at home in their boxer shorts and fulfilling orders online doesn’t really fit that of a true entrepreneur. We need to create a culture (in academia and plenty of other places) where this distinction is understood, and we put more resources behind starting more gazelle-type companies run by true entrepreneurs. The e-myth exists, as cited by Michael Gerber and others, because more people don’t understand the difference – please don’t contribute to the misunderstanding. Lastly, someone cited many “far-off” places as hotbeds for modern-day job creation; there is a rather simple explanation for this: better hospitality. Places like Billings and Boise and others have much lower tax structures, lower cost of living, lower housing costs, lower worker costs (without sacrificing work ethic) and so forth than Silicon Valley and route 128 in Boston. I hate to use his name here, but Senator John Kerry got one thing right a few years ago on the campaign trail: it’s all about nuances.

    Chris

    Christopher G. Hurn,
    President/CEO/Cofounder
    Mercantile Commercial Capital, LLC

  12. Tyler, all of the data that I am referring to is assembled in my book, Illusions of Entrepreneurship. A lot of it is in raw form and not posted anywhere on the web, so I can’t just provide a link to much of it.

    I really enjoy this kind of debate and would like people to read the book and then challenge what I say.

    While the book’s not that expensive on Amazon, I understand that some people can’t afford to buy it. So, until I run out of free copies, I’ll make a deal with people. If you are interested in my postings and the data and sources behind them and can’t afford the book, send me an email and I’ll send you a copy.

    My email is scott “dot” shane “at” case “dot” edu. (Sorry, but I don’t want all the spammers out there searching for email addresses and coming up with mine).

  13. I have a hard time with this general statement mainly because this is based on data that is from 2004. As an entrepreneur, one who consults with them and also provides entrepreneurial training, I would challenge my clients and students to come up with more recent market data than that for a pitch to investors.

    The past few years seem to have seen a great growth in entrepreneurs, though I am not an academic and don’t have specific research to back that up – only anecdotal evidence. People coming to me to get help with starting their business.

    Could it be that entrepreneurs are being more resourceful by using more outside resources for the companies they build? They are then be able to build a company without employees. Moving to making money on the web and on e-bay makes that possible as well.

    Finally, the necessity factor I see for people starting their own business is for more control and flexibility. This is especially true among women. That elusive “work/life balance” idea. People in search of balance would not be inclined to hire a lot of people that would take time away from their other pursuits. Keeping it virtual, for them, would be the way to go. Just look at the rise in Virtual Assistants as a business. Why hire an assistant when you can contract with one more cost effectively?

  14. Martin Lindeskog

    Scott,

    Check your inbox! 😉 I want to read your book. As a poor capitalist I have added your book on my Amazon wish list.

  15. Who needs coffee on a Monday morning when I can read this post?

    Scott,

    First point: you need to differentiate between entrepreneurs and small business owners. Most small business owners are “income-substituters,” “mom-n-pop,” “Main Street USA” businesses. They serve an important role in our nation’s economy at a very local level.

    The fundamental difference between small business owners and entrepreneurs is one of aspiration. Entrepreneurs are all about growth. They see capital expenditures as investments and not strictly as luxury items or expenses. They create business plans which inlcude opening new locations, selling to the government, going global and more.

    So when you talk about having less “entrepreneurs,” I believe you are really talking about having less “income substituters.”

    Second point: I read your paragraphs below and one thought came to mind…

    Also, when companies grow in size, they usually get more efficient. They can buy in larger volume, and take advantage of economies of scale. Think of it as the Wal-Mart effect. One Wal-Mart replaces a lot of entrepreneurs – the independent grocery, jeweler, appliance store, garden shop etc So if we are able to create more high growth companies like Wal-Mart than we used to, we don’t need as many independent entrepreneurs.

    So, over time, a smaller and smaller portion of the U.S. population goes into business for themselvesand that’s a good thing.

    POTTERSVILLE!

    We need entrepreneurial companies driving our ecnomy, if for no other reason, than to keep large corporations in line. Otherwise, we are at the mercy of CEOs making $50 million/year whose sole focus and becnhmark of their success is their quarterly earnings.

    I believe that, in the next decade, we will see more “entrepreneurial” companies started and less small businesses–with technology being the great equalizer.

    Viva La Revolucion!

  16. Brian (and Chris too for much of this), I can’t really comment on the keeping the large corporations in line. That’s not about data, it’s about values. Personally, I tend to agree about the fact that large corporations need to be kept in line.

    But back to the facts. I define entrepreneurs as people who start their own businesses. If you change the definition, you change the data.

    If you want to define entrepreneurs as people that “create business plans which include opening new locations, selling to the government, going global and more” that’s fine, but then we dramatically reduce the number of entrepreneurs we have. For instance, half of all people who start businesses do not expect to have sales of more than $100,000 in their fifth year of operation, the majority of people who start businesses don’t write business plans, let alone have ones for opening additional locations.

    Estimates are that 2 million people started a business last year. Only 600,000 of them had employer businesses (filed unemployment insurance). You’re down to about 300,000 who want sales of more than $100,000 per year in their fifth year. We’re down to about 50,000 or so if we put in the criteria that you specified. If we add in everyone else’s criteria, the numbers shrink more. We can keep taking cuts on the numbers until we get down to the 3,000 businesses per year that VCs back and the couple hundred that go public every year.

    As we add more criteria, we get more subjective as to what we mean when we say “entrepreneur” and end up with fewer people. I’m guessing that if defined entrepreneurs as the people that take companies public or that VCs back, we end up with far fewer people than read this blog. So where do you put the definition between people who start companies and people who lead companies that go public?

  17. Scott-

    Just curious. You say “The proportion of the U.S. population that is starting businesses is shrinking.” How about in real numbers? I suspect that is still growing annually?

    On another note, I think there might be a significant problem you are overlooking in calculating some of your results. If you are basing results and earnings for small businesses on tax records and reported economic data to conclude that many small business owners don’t make as much money or aren’t as well off as they would be working for someone else, you aren’t counting all their money.

    In my experience, a good percentage of small business owners over deduct expenses and under declare revenues. If their actual results were calculated, the picture would be substantially different. Granted, there isn’t any good way to get this data, since by default it is intentionally not reported. And it certainly isn’t true of all small business owners. But the difference is big enough and the percentage of abusers is big enough that I think the real numbers, were they available, would considerably skew your findings.

    I agree with you that many small business owners run their businesses poorly, and that they don’t or can’t seem to grow them into anything noteworthy or make much in the way of profits from them. But I also think that there is a big swath of small business owners out there doing better than reported and making more than they are showing on the books.

    Did you take this into account in your analysis?

    Matt

  18. Sorry, I might not have been clear- I was mostly responding to this assertion you made: “even successful founders usually earn 35% less over 10 years than they would working for others” in your book but not in the article above.

    Matt

  19. Scott,

    You have generated a great conversation here!

    As a serial entrepreneur, I have to speak out for the experience itself. Self determination is an important aspect of American life – it is the primary reason my Grandfathers both made the arduous journey to this country. Doing this every day takes a set of skills that were underutilized when I was in the corporate and public sectors. I am proud to have the nerve and the opportunity to turn my nerve into a product that no one else was offering, and do it with the highest quality at the best value.

    Marit

  20. Matt, yes, the total number of people starting businesses is growing, it’s just that the number working for others is growing at a faster rate than the number working for themselves.

    The data on the earnings of entrepreneurs and employees comes from a study one of my colleagues published that did account for the capitalized value of businesses and the tendency of entrepreneurs to underreport income. Although we can’t really know for sure how accurate the data are, it’s not likely that this is just the effect of people underreporting income.

    The most likely explanation has to do with the skewness of entrepreneurial income. When I have more time later in the week or early next week, I will post something showing how this skewness accounts for the patterns I described. But now I have to prepare to teach my students tomorrow.

  21. Steve King

    Scott:

    I read your book and enjoyed it quite a bit. While I agree with most of your “myths”, I can’t say I agree with most of your conclusions:). Despite that, I am definitely adding it to my small business reference books.

    I find small business data often confusing and contradictory. How do you reconcile the Census data on personal businesses (see Anita’s post at: https://smallbiztrends.com/2007/07/single-person-businesses-booming.html) that says there were 19.5 million personal businesses alone in 2004, with the Fed data saying 11.5% of US households owned a small business?? Even if business owning households own more than one business (and the Fed says the medium was 1), the data doesn’t come close to adding up.

    Steve

  22. Steve (& Scott),

    If we’ve learned anything about numbers it’s that they can do whatever we tell them. If I want my research numbers to jump onto the table and sing happy birthday to me in Spanish, I can figure out a way to make that happen.

    Data is wet clay. You can mold it, shape it, bend it and manipulate it to conform with any statement you are making. Scott says it’s black; I say it’s white. We both have data to support our claims.

    In an earlier post, I said that a distinction needs to be made between entrepreneurs and small business owners. We are almost talking about two completely different groups of business owners. To compare a home based business with $55,000 in sales to a company with 65 employees and $38 million in sales is akin to taking the company with 65 employees and comparing it to a Fortune 1,000 corporation.

    Not in the same ball park.

    I also disagree with your statement that fewer people are starting businesses in the U.S. If you look at the future of entrepreneurship in this country, you will see unprecedented growth coming from many different segments, including: women, immigrants, young people (generation Y), and seniors (entre-boomers or un-retiring seniors).

    The notion of loyalty in corporate America is dead. No more gold watches (in fact, I’ll wager that half your students don’t even understand the meaning behind “gold watch”). Classes on entrepreneurship are the norm at many colleges and universities today.

    Moreover, technology has leveled the playing field. It’s becoming just as easy to sell your products in India as it is in Indiana.

    Entrepreneurship and Innovation will be the drivers of the 21st century economies in the world.

  23. Steve King

    Brian (and Scott):

    I absolutely agree about numbers. For example, Scott uses data from the Fed Survey of Consumer Finances from 1983 and 2004 to support his statement that the proportion of people starting a small business is shrinking. Given that 1983 was at the tail end of a deep recession and had a very high unemployment rate (over 10%) and 2004 was a strong economic year with a relatively low unemployment rate (under 6%), the choice of these 2 data points likely overstates his case.

    If you use the same data source and look from 1989 to 2001, you find the rate of small business ownership to be the same at 11.8%. This is a very different outcome than going from 14.2% to 11.5%.

    I also think there are problems with using data from these Fed surveys to draw strong conclusions about small business entrepreneurship rates over time. Neither was designed for this purpose, and I think both understate the growth of micro and single person businesses.

    But I don’t want this to be viewed as critical of Scott or his book. As I said in my previous post, small business data is often confusing and contradictory. Because of this we have to draw conclusions from spotty data. While I don’t agree with several of his conclusions, I respect his work – he clearly has deep expertise on small business and small business data.

    His book is a great reference source for small business data. I’ve already referred back to it several times. It also clearly prompts discussion and debate, which is good for all interested in small business.

    Steve

  24. Steve, I agree with you that the choice of the start and end year on these types of data is an important issue and you are right to bring it up.

    However, the evidence of the declining rate of entrepreneurship isn’t just shown by the Fed survey for those years. Census data on self-employment rates are also much lower today than they were in previous periods, and were substantially higher in 1948 or 1910 than they are now. SBA/Census data on the number of new employer businesses formed per year is lower now on a per capita basis than it was in the early 1980s (though it is up some from a couple of years ago). Together these sources are showing evidence of a declining rate of entrepreneurship that can’t be explained by just the start and end year for one source.

    Another point is that the Fed data never show us getting back up to the level of the early 1980s. While it could be that all the decline occurred during the 1980s and the change is flat since then, the number still is lower than it was.

    Statistics are like witnesses to a crime – all of them tell their story and then you figure out who did it. I think that several sources point to the same pattern here, declining rates of entrepreneurship over the long term.

    Thanks for reading and commenting.

  25. After reading through the post and the first dozen comments or so, I wanted to bring up a few points:

    a) The young generation’s views towards starting their own business is at 71% the highest ever measured. The 2004 data likely was too early to pick up this trend inspired by the wild success of web companies in the last few years. Also, have you looked at that data to see whether the drop in businesses owned continued all the way through 2004, or if it just all happened to average out over 20 years as a loss?

    b) Business owners today are different. They are not so hung up on owning their own business; rather they want to be a part of something tight-knit. What I’m seeing is many more 2-4 person businesses, since it’s VERY hard to success COMPLETELY on your own these days (have you tried doing your own taxes lately? :-p).

    c) You are right about organization and efficiency, I just would apply it to small biz owners: there is more and more buzz all the time about small biz, how to start one, how to run it, etc. and this has led to more organized and efficient entrepreneurs, who usually take on at least 1-2 others in some capacity to help them run the business (who may not be termed “biz owners”). The stats surely fail to take that into account.

  26. Steve King

    Scott:

    I agree that the trend is down over the very long run. What we’re trying to understand is whether or not we’ve hit an inflection point and if the trend line is now moving up. Our work leads us to believe the trend line is moving up.

    There are a bunch of interrelated trades driving our thinking – many are summarized in Brian Moran’s post.

    Any thoughts or opinions on this?? Do you think entrepreneurship rates will continue to decline or do you think they will stabilize or grow??

    Steve

  27. The reason why this conversation has become so muddled is because it has not been acknowledged that the distribution of entrepreneurial outcomes is skewed. There is a “long tail”, a small number of very successful outcomes, so the average outcome is higher than the median outcome.

    That’s why the aggregate statistics show small business formation as a very good thing for the economy “95% of all new jobs are created by small businesses” while the individual outcomes do not “average small business owner earns less than he/she would as an employee”. The “average small business owner” in this case is really being mistaken for the median small business owner (since you are not including John Menard in the average).

    When a very successful business is started (ex. Menards or Gap) the majority of the benefits actually accrue to the consumers and employees, not the founder and investors. When a business flops the pain is borne by the founder and investors. It’s a *good deal* for us when entrepreneurs take on that kind of risk and allow us to share in the upside, so we should encourage entrepreneurship.

  28. Nick, You make a VERY IMPORTANT point about the distribution of entrepreneurial outcomes. My references above are to the typical entrepreneur. Typical means median. I use the term typical deliberately because I what to refer to what happens to most people.

    You point out that the average entrepreneur could be very different from the typical entrepreneur because of the skewness in the distribution. In fact, I make precisely this point in chapter 6 of my book (where I have more space than a blog to point out nuances). The typical entrepreneur earns less money than they would have earned working for someone else, but the top ten percent earns significantly more. But there are nine times more people not in the top ten percent than in the top ten percent.

    As for “small business” I am not saying anything. Small business does not mean entrepreneur in my definition because a small business doesn’t have to be new. What I do show evidence of (in the book not the blog) is that new businesses employ very few people. New businesses also have lower productivity than existing businesses. Small businesses could create a lot of jobs and have very high productivity while new businesses could not. It all depends on how old the small businesses are that are creating the benefits. Because your second paragraph refers to “small business formation”, I can’t comment because it mixes what I am taking about with what I’m not talking about.

    As for your last paragraph, I agree that social benefits come from the entrepreneurial system and that’s good. And I’m in no way advocating that we get rid of entrepreneurship. What I am saying is that the typical (median) business isn’t generating these benefits. So if we had ways to increase the share of high potential businesses (by reducing the portion of low potential ones), we would be better off.

    Before you say that’s not possible because we can’t predict the winners, let me add that policy makers are currently doing just this. Most angel tax credit policies require investment in certain kinds of industries to get the credit. Those industries are ones in which start-ups have higher rates of growth and job creation than others. So policy makers are trying to increase the incentives for Schumpeterian kinds of entrepreneurship instead of incentives for all entrepreneurship.

    In terms of Steve’s question about my views of whether we’ve hit an inflection point, I don’t know. The short run is much harder to explain than the long run because the patterns are noisy. The data sources don’t point to the same inflection points in the same year and the long run pattern is down. Also, I don’t see the structural cause that would account for the inflection point. For the long run trend to be reversed we’d need something like that.

    Both of you, thanks for making me think.

  29. Steve King

    Scott:

    I think a related reason this has become muddled is a lot of people use “entrepreneurship” and “small business” interchangeably.

    As for structural changes, we see lots – demographic changes, social changes, industrial structure changes, and probably most importantly technology changes. We see these impacting not only individuals and small business, but also big businesses and society overall.

    We actually started seeing shifts towards the growth of micro (less than 5 employee and personal (single person) businesses several years ago while looking at work/life balance issues for a major corporation. We found that many people who left this corporation started their own small or micro business. As we broadened the research to other firms, we found a similar pattern.

    We then started looking more deeply at micro and personal businesses and realized there was a clear trend towards starting and/or working for these firms across multiple business segments and socio-demographic cohorts.

    In our work identifying and forecasting emerging trends we’ve learned that when mulitple groups start doing similar things, it is a strong indication that a trend is gaining momentum and may become mainstream. That is what we are seeing with micro and personal businesses.

    Having said that, our work has been much more focused on the small, micro and personal business sector than on entrepreneurship rates – and as you point out they are very different. I need to spend more time thinking about how the two are related and what it means in terms of the trends we are seeing.

    One quick thought on this relates to the relatively low rate of small business formation in Silicon Valley. There are multiple reasons for this, but one is starting a tech firm is a team sport. It takes many entrepreneurs to succeed. This means there are lots more entrepreneurs than new small businesses here.

    Steve

  30. Steve,

    I love how my anecdotal situations are verified by your research 🙂

    “We actually started seeing shifts towards the growth of micro (less than 5 employee and personal (single person) businesses several years ago while looking at work/life balance issues for a major corporation. We found that many people who left this corporation started their own small or micro business. As we broadened the research to other firms, we found a similar pattern.”

  31. Steve King

    Pinney:

    Glad you caught this. I meant to reference your post in my post since they overlap.

    Steve

  32. So, If the economy is good and there’s lots of opportunities, I stay at my job.

    But if the economy’s lousy, I’ll leave my job and take my chances to fill a void left by all the other failing businesses?

    Dude, Have you ever had to rely on a paycheck?

  33. Lou – All boats rise in a good economy. When the economy goes south, big companies lay off people to help meet quarterly earnings. Other big companies don’t hire you because they too are trying to do more with less.

    Frustrated, you say “I can do exactly what I did for that big corporation by starting my own company and having them outsource the work to me” (or have some other company hire you). You have 15-20-25 years experience in a certain specialty. Big companies are happy to hire you on a freelance basis (and pay you well) as long as they don’t also have to cover your overhead and benefits.

    You don’t leave your job. Your job leaves you. Just read the current headlines. Who would have thought that Yahoo would be laying off 1,000 people in 2008??

  34. Martin Lindeskog

    Scott Shane,

    Following this interesting and rather long thread, I had to check out Pricerunner.com and see if I could get hold of your book here in Sweden. I have now ordered it from Adlibris.

    All the Best,

    Martin Lindeskog – American in Spirit.
    Gothenburg, Sweden.

  35. Steve King

    Brian:

    Good point on the the growth of contracters at large corporations. Last week I was at a very large corporation. They told me the contract % of their work force had gone from roughly 10% to 25% over the last 5 years. In other words 75% of their total staff were full time regular employees and 25% were on some sort of contractor status and not full time regular employees.

    Interestingly, they referrred to the number of people working for them as “FTEs”. This stands for “full time equivalent workers”. Regular full time employees are a subset of this group, which includes contracters.

    In addition to often being cheaper, this approach makes “work force adjustments” much easier for the corporation.

    Almost all big firms are increasing their contract employee %. Good news for some (those that want to be independent) and bad news for others.

    Steve

  36. I think the decline has something to do with the rising rates and concern over having health care coverage. The only reason I was able to start my business is because I’m still covered under my wife. If we see a passing of universal health care in our country be prepared to see an entrepreneurship boom.

  37. I am an entrepreneur have been all my life. I have never had a job and never will. I find your analysis typical of the elite that are rising and controlling this country.

    FYI: My next business venture will be born in Ireland, not here.

    That might be one of the reasons you are seeing a decline in domestic startups. Another reason for the huge decline in new IPOs in the US is the Sarbanes-Oxley bill. Look it up.

    Not because everyone is happy working for Walmart.

    Please get you head out of your ‘you know what’.

    The surfer

  38. Scott Shane is speaking from an ivory tower and spending too much time thinking.

    He should get out in the real world.

    An increase in GDP actually includes all the negative costs of society and is therefore never to be taken as automatically good.

    Wal-Mart is questionably a good thing.

    But that’s why scott is a professor rather than a doer. It’s much easier to profess about entrepreneruship than to really do it.

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