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The Structural Features of Entrepreneurial Capitalism

on September 08, 2010 Source: Policy Dialogue on Entrepreneurship

The extraordinary contribution of jobs from new and young firms often is treated as something unique to these firms. A new Kauffman Foundation study, Neutralism and Entrepreneurship: The Structural Dynamics of Startups, Young Firms and Job Creation, reveals an important structural context in which firm formation and job creation occur that helps explain why new and young companies dominate net job creation.

In any given year in the U.S. economy, new and young companies make up the largest bloc of firms by age category, meaning their considerable job creation record is partly structural, according to the study. “This does not mitigate the contribution of these companies to job creation, but that contribution must be seen in the proper structural context,” reads the report.

Research into a Business Dynamics Statistics (BDS) dataset shows that, once the economy reaches a point at which it includes firms older than age six, new and young companies account for between 30 percent and 40 percent of all firms in the economy. Over time, as these companies age, they decrease in number. But, for about the past 20 years, net job creation from those that survive has been greater than that from businesses that open and close. Thus, the large amount of net job creation from continuing companies also appears to reflect the structural dynamics of firm accumulation.

“While startups and young companies’ status as the largest demographic category accounts, at least in part, for the fact that they add more net new jobs to the economy each year than older companies do, a study of various datasets from the past several decades seems to show that U.S. firm formation has been remarkably consistent for the last 100 years,” said Dane Stangler, research manager at the Kauffman Foundation and author of the study. “What this indicates is that the level of firm formation is largely neutral – that is, rather than being a process of constant turmoil, as often is assumed, it follows a natural structural order.”

There are forces that create this structure and they are subject to change. In fact, recent shifts – including the declining cost of company creation in information technology and other sectors, and lower investment thresholds for seed-centric acceleration programs – suggest that we could see an increase in new company creation in certain sectors of the economy.

The study also found:

  • The fact that so many companies on today’s Fortune list were not there, say, 30 years ago, seems to evidence economic upheaval. However, churn cannot be analyzed apart from the structural perspective revealed by the BDS data. As long as older firms continue to decrease in number over time while new firms continue entering, the economy cannot help but experience constant turnover.
  • Substantial turnover is to be expected as a function of firm formation and accumulation. If, conversely, the pace of firm formation dwindled but survival expectations remained unchanged, older companies eventually would dominate the economic landscape. Such an economy might quickly lose any semblance of vitality.
  • Raising survival rates might or might not boost economic growth. From a policy standpoint, if barriers to firm entry were lowered, and new business creation increased as a result, lower survival rates might be required for the selection process to function commensurately and enhance productivity. In addition, a higher volume of new business entry might automatically lead to lower survival rates as a function of the “easy-to-start, easy-to-close” phenomenon identified by some studies.

“We need to understand the structural features of entrepreneurial capitalism—the why of firm formation and job creation—so we can take steps that support and encourage those features and not unknowingly undermine them,” stated Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation.

Category:  Growth & Poverty  General  Tags:  economy, jobs

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