Insights for Growing the Economy: the State of Entrepreneurship

In the early 1980s, buffeted by a severe recession and nearly 11 percent unemployment, the economic future of the United States appeared gloomy. Yet America did not collapse; instead, the economy surged. The late 1970s and early 1980s turned out to mark an inflection point as technological advances building for two decades were catalyzed by new entrepreneurial firms in the seventies, eighties, and nineties.

This pattern of innovation and job creation in new firms has characterized the last 30 years, with firms less than five years old accounting for nearly all net job creation since 1980. Yet the recession of 2007-09—as severe if not worse than the 1981-82 recession—has once again called into question U.S. economic prospects and, in particular, the fate of entrepreneurs. As the world celebrates Global Entrepreneurship Weekthis week, what is the state of entrepreneurship?

Statistical indicators paint a mixed picture.

The Kauffman Index of Entrepreneurial Activityshowed a slight uptick in 2008. Numbers from the Bureau of Labor Statistics(BLS), by contrast, chart a steady decline in new establishment creation. (An establishment includes both an entirely new company and a new location opened by an existing company.)

Today, the Organisation for Economic Cooperation and Development(OECD) is releasing a new round of Timely Entrepreneurship Indicatorsthat appear to convey a dreary message: entrepreneurship is falling. For most of the 10 developed countries included in the report, firm creation has fallen since 2007—worryingly for the United States, the OECD data show steadily falling firm formation in every year since 2005, including the first half of 2009.

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Given the importance of new companies to job creation, this is not a heartening sign.

Job data from the BLS show that the most recent expansion from 2002 to 2007 was marked by relatively sluggish job creation compared to prior expansions. Young firms (one to five years old) created two-thirds of all new jobs in 2005 and 2007, despite falling entrepreneurship. So entrepreneurs continued to start new companies and create millions of new jobs, albeit at a slowing pace, which contributed to suboptimal job creation in the economy as a whole.

This bodes ill for the future: Were the U.S. to experience job creation rates of the 2002-07 expansion, it would take nearly a decade to recover from this recession, particularly if firm formation remains low. Entrepreneurs cannot singlehandedly save the American economy, but recovery won’t come without them. What can be done to reverse slowing new firm creation?

At its core, entrepreneurship represents the marriage of ideas and money. This recession won’t diminish the creative spark in individuals. But, access to capital, the oxygen supply of entrepreneurs, is in grave danger right now. Despite the talk of “green shoots” over the last few months, credit remains extremely tight for young companies—lending to this sector of the economy has plummeted for nearly a year, with no recent increases. The Obama administration’s recent increaseof the cap on certain SBA-guaranteed bank loans was a laudable step in unclogging this monetary pipeline.

Likewise, entrepreneurs require confidence to get a new venture going, but lack of portable health care currently acts as a drag on such confidence. Job-lock, whereby a potential entrepreneur is locked into his or her job for fear of losing health coverage, is a very real phenomenon. The present debate over health reform has largely bypassed entrepreneurs, even though some sort of entrepreneur-friendly policy, emphasizing portability and bare-bones coverage, would do wonders for the economy.

Finally, a fertile source for new companies and innovations is immigration. Nativist sentiment tends to run understandably high during recessions, yet if the United States closes its doors to immigrants, we will shoot ourselves in the foot. Over the last decade or so, immigrants founded one quarter of advanced technology companies in this country, accounting for nearly 10 percent of new job creation. Our colleagues Robert Litan and Paul Kedrosky have suggested a “startup visa” for immigrants who come here to found new companies—this is a simple way to continue attracting people who will make— not take— jobs.

The United States remains a nation of entrepreneurs, notwithstanding the recession. A handful of policies, aimed at new companies, can help spark short-term growth and build a stronger foundation for the future.

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Carl J. Schramm is president and CEO of the Ewing Marion Kauffman Foundation; Dane Stangler is a senior analyst at the Kauffman Foundation.