Transcript No Slide Title

The Economic Downturn and New Firm Creation
Paul D. Reynolds
George Mason University
[[email protected]]
Friday, 30 October 2009
Beyond the Crisis –
Implications for SMEs and Entrepreneurs
Swedish Entrepreneurship Forum
House of Sweden
2900 K Street
Washington, DC 20007
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Two arguments
• Business creation as a career option for those that
are loosing their jobs
– Image of desperate unemployed rushing into business
creation
– Lots of media coverage of people pursing new career
options
– Lack of social safety net may lead to more start-ups
• Business creation as a source of jobs to reduce
unemployment
– Well established that new firms are a major source of
job creation, would contribute to an economic recovery
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On the other hand--• Majority of nascent entrepreneurs are
pursuing promising business
opportunities
– The are “pulled” into this career path by
perception of business opportunities
– Small proportion are “pushed” into
business creation—necessity entrepreneurs
• 4 of 5 nascent entrepreneurs have a job
or are managing a going business
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Evidence of changes in Business
Creation reflecting Downturns
• Consider Global Patterns based on annual
surveys of the Global Entrepreneurship
Monitor Project
• Consider US patterns reflected in the Panel
Study of Entrepreneurial Dynamics
• Both programs use the same procedures for
locating nascent enterprises—firms in
gestation or start-up efforts
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CONCEPTUAL MODEL – The Start-up Process
Social, Political, Economic Context
Growth
Adult
Population
Start-up Processes
?
Firm
Birth
Persist
Quit
Business
Firm
Population
?
NE = NASCENT ENTREPRENEURS
?
NI = NASCENT INTRAPRENEURS
GEM
PSED
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PSED
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Cross National Analysis
• Consider dramatic case: Argentina
• Consider general patterns
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Argentina: Economic and Busienss Creation: 1998-2008
GDP_PerCapita
Business Creation
16,000
25.0
14,000
20.0
10,000
GDP Per Capita
15.0
8,000
10.0
6,000
4,000
5.0
2,000
0
0.0
1998
1999
2000
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2001
2002
2003
2004
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2005
2006
2007
2008
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Bsiness Creation Prevalence
12,000
Sweden: Economic and Busienss Creation: 1998-2008
GDP_PerCapita
Business Creation
40,000
4.5
4.0
35,000
3.5
30,000
GDP Per Capita
25,000
2.5
20,000
2.0
15,000
1.5
10,000
1.0
5,000
0.5
0
0.0
1998
1999
2000
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2001
2002
2003
2004
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2006
2007
2008
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Bsiness Creation Prevalence
3.0
R = 0.11, n= 179
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2005 GDP
per Capita
greater than
$31,000/yr
R = 0.38, n= 77
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Cross National Data
• Isolated examples of major impact when
dramatic changes occur in the economy
• As a general rule, prior economic growth
seems to have little effect
• In rich countries, growth in GDP per capita
has a statistically significant impact on
increase in business creation
• Prevalence of business creation activity is a
very stable feature of most countries
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U.S.: Consider Business Creation
Patterns in Previous Recessions
• US Data is limited, little useful data prior to
1990
• Four data series
– New entries in federal social security files
– New entries in state unemployment insurance files
– Reports in monthly Current Population Survey of
efforts to pursue self-employment
– Survey respondent reports of active involvement
in start-ups: nascent entrepreneurs
• Two “official” recessions since 1990 [NBEA]
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Prevalance Rates: Log10 #/100 Adults
U.S. Busines Creation - Four Measures: 1990-2008
Recessions
10.00
1.00
0.10
New Employer Firms: #/100 20-64 Yrs Old
[Census/SBA]
New Employer Establishments: #/100 20-64 Yrs
Old [BLS]
Enhanced Buss Management: #/100 20-64 Yrs Old
[CPS]
90
91
92
93
94
95
96
98
99
00
01
02
03
04
05
06
07
08
0.40 0.36 0.36 0.37 0.37 0.38 0.38 0.37 0.36 0.35 0.35 0.35 0.33 0.35 0.36 0.36 0.37 0.37 0.35
0.48 0.50 0.49 0.50 0.49 0.50 0.48 0.47 0.45 0.48 0.49 0.48 0.46
3.72 3.36 3.48 3.24 3.24 3.12 3.48 3.60 3.60 3.48 3.48 3.60 3.84
5.60 5.60 6.00 5.80 4.90 5.70 4.80 6.10 5.80 5.90
Nascent Entrepreneurs: #/100 Persons 18-74 Yrs
Old [Surveys]
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Two major inferences
• There is no clear impact of business downturn on
new firm creation
• There is a lot of attrition in the process
– 12 million of 190 million are nascent entrepreneurs
• 7 million identified in CPS data collection
– Create 864,000 new employee establishments (BLS)
– Create 648,000 new employee firms (US Census)
• Takes 13 active nascent entrepreneurs to create one
new employer establishment
– 17 to create a new employer firm
• Other nascents succeed as non-employer firms
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Consider character of US nascent
entrepreneurs in 2005
• These are individuals active in the
business creation process
• Consider their labor force status as they
work on new start-up
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US 2005 Nascent Entrepreneurs: Labor Force Status
Retired, 1%
Student, 1%
Disabled, 3%
Unemployed, 4%
Homemaker, 11%
Working, 49%
Own buss, SelfEmp, 31%
One in twenty are unemployed seeking work!
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Summary so far
• Only 4% of nascents in 2005 were
unemployed looking for work
• Another 20% were not working,
identified as homemakers, disabled,
retirees, or students
• Consider the changes in the number of
US workers since 2005 in work [BLS
data]
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US Population and Work Status: 2005-2009 [BLS]
Working
Not working
250,000
Number of persons: 18 yrs and older (1,000s)
200,000
150,000
100,000
50,000
0
2005
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2007
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2009(Aug)
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Comments
• The total number working has dropped in 2009, 6
million less than 2008
– This reduces the base from which most nascent
entrepreneurs emerge
• The number not working, including the unemployed,
has increase by 8 million from 2008 to 2009
– Participation rate in start-ups among this group is half that
of those in the working group
• Two processes have opposite effects
– Less workers will reduce the supply of experienced,
opportunity nascent entrepreneurs
– More unemployed may increase the supply of necessity
nascent entrepreneurs
• The net effect is difficult to predict without more
precise data on participation in business creation
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Assessment: Negative Effects
• Major impact may be on the perception
of business opportunities
– Reduction of consumer demand will reduce
the attractiveness of opportunities
– This may reduce the prevalence of nascent
entrepreneurs
• Changes in access to resources for the
new firm
– Harder to obtain financial support
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Assessment: Positive Effects
• Alternatives to firm creation may be less attractive:
– Wage work less stable, reduction in economic benefits
– May increase the attractiveness of business creation
• Lots of data that self-employed/business owners happier that
wage workers
– This may increase the prevalence of nascent entrepreneurs
• Changes in access to resources for the new firm
– Inputs more readily available
– Cost of inputs—supplies, components, rental of space,
wages—may be reduced
– This would increase potential for a profitable new firm
• In the US, expect substantial variation across
geographic regions and economic sectors
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References
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‘http://www.psed.isr.umich.edu’.
Gartner, W.B., K.G. Shaver, N. M. Carter, and P. D. Reynolds (Eds). (2004). Handbook of Entrepreneurial
Dynamics: The Process of Business Creation. Thousand Oaks, CA: Sage Publications.
Reynolds, Paul D. (2007). Entrepreneurship in the United States: The Future is Now. Boston, Kluwer
Academic.
Reynolds, Paul D. (2007). New Firm Creation in the U.S.: A PSED I Overview. Hanover, MA: now Publishers,
Inc.
Reynolds, Paul D. (2009) Screening Item Effects in Estimating the Prevalence of Nascent Entrepreneurs.
Small Business Economics 33(2):151-163.
Reynolds, Paul D. and Richard T. Curtin. (2008). Business Creation in the United States: Entry, Startup
Activities and the Launch of New Ventures. Chapter 8 in U.S. Small Business Administration. The small
Business Economy: A Report to the President. Washington, DC: U.S. Government Printing Office (in press).
Reynolds, Paul D. and Richard Curtin (2008). Business Creation in the United States: Panel Study of
Entrepreneurial Dynamics II Initial Assessment. Foundations and Trends in Entrepreneurship. V(3):155307.
Reynolds, P. D. and R. T. Curtin (Eds). (2009). New Firm Creation in the United States: Preliminary
Explorations with the PSED II Data Set. New York City, NY: Springer, Pp. 219-238.
Reynolds, Paul, Niels Bosma, Erkko Autio, Steve Hunt, Natalie De Bono, Isabel Servais, Paloma LopezGarcia, and Nancy Chin. (In 2005) Global Entrepreneurship Monitor: Data Collection Design and
Implementation: 1998-2003. Small Business Economics: 24: 205-231.
Reynolds, Paul D., William D. Bygrave, Erkko Autio, and others (2004). Global Entrepreneurship Monitor:
2003 Summary Report . Babson Park, MA; Babson College (140 pages).
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