Small-business slowdown holds back global recovery

Small business
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The small-business slowdown afflicting the U.S. is apparently a global phenomenon.

American economists recently have pointed to the fading fortunes of U.S. small businesses—once the "engine" of job growth—as a key reason the economic recovery has been longer and deeper than in any post-war recession.

But small businesses throughout the developed world are also struggling, according to research published this week by the Organization for Economic Cooperation and Development. The slowdown in new company formation helps explain why the economies of the developed world are growing slowly or, in the case of much of Europe, mired in recession.

In the 18 countries covered by the study, new and young companies (those less than 2 years old) still create 42 percent of new jobs, even though they account for just 17 percent of total employment. But that pace of job creation is falling as start-ups make up a smaller share of all companies.

The decline in the formation of new businesses is a troubling sign for the economic health of the developed world.

The churn of jobs—as they're destroyed by older companies and created by new ones—may be disruptive to the workers involved. But that churn—economists call it business dynamism—is essential to the long-term health of a growing economy.

"A lot of the new ideas and business models come from (new companies)," said Dirk Pilat, deputy director of the OECD's Science, Technology & Industry Directorate and a co-author of the study. "This dynamism is a source of new job creation, but it's also really important in a dynamic economy where you need to constantly refresh your economy and move into new areas and new markets."

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The decline of business dynamism is unfolding unevenly from one country to another, according to the study.

In Belgium, Italy, Japan and Finland, more than half of all small and medium enterprises are at least 10 years old, while in Spain and Hungary less than a third are. The growth patterns of start-ups also differ widely. In the U.S., old manufacturing firms employ seven times more workers than start-ups. In Italy or Norway the ratio drops to just above two and in France, Finland or the Netherlands it is below two.

And for all the challenges facing U.S. start-ups and small businesses, they seem to be better off than their counterparts elsewhere in the developed world.

"In the U.S. it's much easier to start a companyif it doesn't work you can fail, you can wind it down and you can try again," Pilat said. "In some European countries, it's a lot harder to fall and try again because bankruptcy laws are very tough. And in some cases the culture isn't there for people to fail and try again. That's a really important issue."

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Like the growth of the global economy overall, the pace of job creation and destruction has ebbed and flowed over the last two decades. In the U.S. for example, entrepreneurship surged in the late 1990s during the dot-com boom, when the pace of job creation hit 8.8 million new jobs in the first quarter of 2000—offset by the loss of roughly 8 million that were destroyed.

Even in the depths of the Great Recession, the economy continued to produce millions of jobs a month—though the pace of job destruction was much greater. Since then, the level of both job gains and losses hasn't recovered. And the slowdown has hit small businesses hardest.

The decline in small-business job creation has multiple causes and has been underway for years, but economists are divided on the most powerful forces behind the drop.

Some economists suspect the lingering memories of the Great Recession and ongoing weak recovery have dampened the overall appetite for risk-taking.

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Tight credit conditions get some of the blame. Gone are the days when an aspiring entrepreneur could self-finance a garage-stage business overnight with a credit card or a home equity loan.

"Access to finance has become a really big issue in many countries," Pilat said. "It's very hard for people who want to take risk to get the capital they need to take it."

Small-business advocacy groups cite an expanding thicket of government regulation, from permitting paperwork to the mandate to provide health insurance for workers.

But those regulations may not be all bad, according to a separate study released Thursday by Brookings Institution economists.

The Affordable Health Care Act, for example, "could loosen job lock that can inhibit employees with ideas for new businesses from leaving more established firms to take the entrepreneurial plunge," according to the study.

By CNBC's John Schoen. Follow him on Twitter @johnwschoen or email him.