America Has a Serious Start-Up Slump

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There's more discouraging news about American business - specifically about entrepreneurship.

We confidently assume that we have the world's most entrepreneurial nation, and the proof seems overwhelming. Google, Facebook and Twitter are but three (relatively) recent startups that have become corporate titans.

Before them, there were others: Microsoft, Intel and FedEx. We seem to excel at nurturing new firms.
Or do we?

Previous studies have shown that, despite the success of firms like Facebook, the number of startups has dropped sharply, from about 13% of all firms in the late 1980s to about 8% in 2011.

Now a new study from the National Bureau of Economic Research reports that the expansion of the remaining startups - which traditionally has been much faster than the growth of existing companies - has slowed considerably.

By some measures, it now barely exceeds the average of older companies.

So there's a double whammy: fewer startups and slower growth at the survivors.

This could be one reason the recovery from the Great Recession has been so sluggish, with the economy's growth averaging about 2% annually from 2010 to 2014, much slower than earlier post-World War II recoveries.

Using Census Bureau data, the study examined business births (the creation of new firms), deaths (companies going out of business) and growth from 1976 to 2011. It confirmed earlier studies: Though most new firms fail in their first five years, the growth of the survivors is so strong that it offsets the losses of other firms and creates much of the economy's overall increase in jobs. But that began to change after 2000, when startups' high growth faded.

The upshot: "Startups and high-growth young firms (under five years) contributed less to U.S. job creation in the post-2000 period than in earlier periods," said the report.

The startup slump may also help explain the slowdown in productivity - a measure of efficiency that ultimately raises living standards.

From 2010 to 2014, productivity grew a meager 0.3% annually, also well below the post-World War II average of about 2%, according to the Bureau of Labor Statistics.

"Evidence suggests that young firms devote disproportionately more resources to innovation," the study said. The startup slump suggests that their innovation is lagging or that it's diluted by slower economic growth.

Just what has caused the startup slump isn't clear, the study admits. One obvious theory is the legacy of the Great Recession, which has made many businesses more cautious and risk-averse. Still, that's at most a partial explanation, because it can't account for the slowdown that preceded the recession's onset in 2007.

What's clear is the startup slump is consistent with other business behavior, specifically weak investment spending on new plants and machinery.

Compared with the past, companies seem more reluctant to invest in the future.

"There is now robust evidence, from multiple data sources ... of a pervasive decline in U.S. business dynamism over the last several decades," says the study, which was released earlier this month.



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