Startups account for a much smaller share of U.S. businesses than they used to. Recently released data from the Census Bureau shows that back in 1977, 16 percent of U.S. companies were new. By 2009, that share had fallen to 8 percent.
As the figure below shows, the overall trend in the proportion of startups has been downward, but the new company share had increased for several years prior to the Great Recession. The downturn reversed the increase and was a period of rapid decline in the proportion of start-ups.
Chart: Startups as a Percentage of all Businesses, 1977 to 2009
Scott, this is troubling news that a fewer percentage of U.S. businesses are startups. I work with the Campaign for Free Enterprise, a project of the U.S. Chamber of Commerce, and we know that new companies are critical to job creation. According to the Small Business Administration, small businesses have accounted for 64% of net new jobs in the past 15 years and startups are a significant part of that. This chart makes it clear that more should be done to encourage entrepreneurship. That was our motivation in starting the Center for Entrepreneurship to advocate for the needs of startups here in Washington, D.C. (freeenterprise.com/center)
On a very high level, I believe that many cultural institutions (including public education and many universities) have reduced the entrepreneurial drive in the US. People are trained to be good workers and to value the security of “benefits” and a steady paycheck. My guess is that the uptick prior to the Great Recession was an aberration from the pattern that we’ll continue to see.
Scott, why do you think that is? Counterintuitive to normal recession behavior
I think there are two reasons. First, there is a long term trend away from starting businesses that has to do with the advantages of scale and use of technology in many industries (think about WalMart replacing lots of small businesses here). It’s become harder for small and new businesses to compete with larger and older ones and that has lowered the rate at which people start companies.
Second, counter to the popular belief that recessions lead to more people starting businesses, deep recessions like the most recent one have a strong negative effect on entrepreneurial activity. I wrote about this in more depth in a Federal Reserve Bank of Cleveland commentary called “The Great Recession’s Effect on Entrepreneurship” http://www.clevelandfed.org/research/commentary/2011/2011-04.cfm
I refer people to that paper – it’s short and not at all technical – to see more about what really happens to entrepreneurship during recessions.
Scott – in your paper, you talk about the reduction of the self employed and the reduction of the wage employed. When someone drops off the self employed number, are they then wage employed or, based on the data source, could they also have become “unemployed” (from themselves)?
Steve, in the Bureau of Labor Statistics data a person who was self-employed could leave self-employment and take a job, in which case they would become wage employed. But they could also become unemployed or could exit the labor force entirely. It depends on what happens to them employment wise after they end their business.
Thanks for the info, Scott.
Please don’t think that I’m being my usual sarcastic self here, but for me, this isn’t really a news flash.
I’ve felt the slowdown, on an all too personal basis. The last 2 years have been my most difficult since I’ve been in business for myself.
I’m the guy on the ground. I’m the guy that folks who want to start a business come to. I’m the guy that’s seen less and less of those types of people.
However…I have seen a slight uptick in interest, lately, and have had a couple of good consults with would-be franchise owners.
Maybe good things are just around the bend.
The Franchise King®
I guess there a number of factors leading to this downfall, firstly I think there are very few people that have the resources to start their own businesses and the chances of these entrepreneurs obtaining loans is declining. Secondly, due to the fall in jobs, a lot of graduates start applying quiet a long time before they even graduate just to make sure they end up with a decent job by the time they finish their studies. Therefore, the new generation ends up working rather than risking starting their own business. I hope we see a positive change in this graph in the coming years. Thanks for sharing!
Wow, this is incredible news. With all the small business incubators, and an almost universal push for startups, I am amazed this is happening. I guess we all have to work harder to encourage and inspire people to start businesses.
Thanks for the update. Good information.