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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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 1 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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 2 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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 3 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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 4 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 5/23/2017 2:21:03 AM PSED FSF_WashDC_30Oct09 5 Cross National Analysis • Consider dramatic case: Argentina • Consider general patterns 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 6 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 5/23/2017 2:21:03 AM 2001 2002 2003 2004 FSF_WashDC_30Oct09 2005 2006 2007 2008 7 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 5/23/2017 2:21:03 AM 2001 2002 2003 2004 FSF_WashDC_30Oct09 2005 2006 2007 2008 8 Bsiness Creation Prevalence 3.0 R = 0.11, n= 179 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 9 2005 GDP per Capita greater than $31,000/yr R = 0.38, n= 77 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 10 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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 11 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] 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 12 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] 5/23/2017 2:21:03 AM 97 FSF_WashDC_30Oct09 13 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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 14 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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 15 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! 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 16 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] 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 17 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 5/23/2017 2:21:03 AM 2006 2007 FSF_WashDC_30Oct09 2008 2009(Aug) 18 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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 19 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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 20 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 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 21 References • • • • • • • • • • ‘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). 5/23/2017 2:21:03 AM FSF_WashDC_30Oct09 22