The United States prides itself on its strong entrepreneurial spirit, but that spirit isn't so strong anymore, at least according to a new study.
The Brookings Institution’s Robert Litan used census business formation data to determine the entrepreneurial “churn rate”—the number of new businesses being established versus those exiting the market. Since 1978, the number of firms that are less than one year old has fallen considerably, from nearly 15 percent in 1978 to 8 percent by 2011. The firm exit rate, on the other hand, has remained relatively steady since 1978, bouncing between 8 percent and 10 percent. The data shows that this downward trend of business formation occurred in all industries—including technology—and across all 50 states and nearly every metropolitan area. The new business formation rate took a particularly large nosedive starting in 2006 and throughout the Great Recession.
Litan notes that the “persistent decline” in business formation rates is troubling, because the creation of new businesses—even if they ultimately fail—is what keeps the U.S. economy vital and productive:
"Research has established that this process of ‘creative destruction’ is essential to productivity gains by which more productive firms drive out less productive ones, new entrants disrupt incumbents and workers are better matched with firms. In other words, a dynamic economy constantly forces labor and capital to be put to better uses."
The study stops short of analyzing why entrepreneurship seems to be waning. But Litan says that his research points to the need for “entrepreneurship-enhancing” policies that significantly expands the number of high-skilled immigrants to the United States who intend to forge careers in science, technology, engineering and math (STEM). Immigrants, he notes, have historically been twice as likely to start businesses as native-born Americans.
Other studies on U.S. entrepreneurship haven’t been so bleak. The Kauffman Foundation’s Index of Entrepreneurial Activity—which looks at entrepreneurial rates in the U.S. population—finds that entrepreneurship has stayed rather steady since 1996 with about 0.30 percent of U.S. adults creating a new business each month. It shows that entrepreneurial activity actually increased during the Great Recession due to the high unemployment rate. And the latest Global Entrepreneurship Monitor released by Babson College showed that entrepreneurship among the U.S. population hit its highest level in 2012 since the GEM survey was first conducted in 1999.
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