Entrepreneurship In The United States: Future is Now

ENTREPRENEURSHIP IN THE UNITED STATES The Future is Now

INTERNATIONAL STUDIES IN ENTREPRENEURSHIP Series Editors: Zoltan J. Acs University of Baltimore Baltimore, Maryland USA David B. Audretsch Max-Planck-Institute for Research into Economic Systems Jena, Germany Books in the series: Black, G. The Geography of Small Firm Innovation Tubke, A. Success Factors of Corporate Spin-Offs Corbetta, G., Huse, M., Ravasi, D. Crossroads of Entrepreneurship Hansen, T., Solgaard, H.S. New Perspectives in Retailing and Store Patronage Behavior Davidsson, P. Researching Entrepreneurship Fornahl, D., Audretsch D., Zellner, C. The Role of Labour Mobility and Informal Networks for Knowledge Transfer Audretsch D., Grimm, H., Wessner, C. Local Heroes in the Global Village Landström, H. Pioneers in Entrepreneurship and Small Business Research Lundström, A., Stevenson, L. Entrepreneurship Policy: Theory and Practice Elfring, T. Corporate Entrepreneurship van Stel, A. Empirical Analysis of Entrepreneurship and Economic Growth Fritsch, M., Schmude, J. Entrepreneurship in the Region Reynolds, P. D. Entrepreneurship in the United States

ENTREPRENEURSHIP IN THE UNITED STATES The Future is Now

Paul Davidson Reynolds Florida International University

Paul Davidson Reynolds Florida International University Ryder Building SW 8th Street Miami, FL 33199 Series Editors: Zoltan J. Acs George Mason University School of Public Policy 4400 University Drive Fairfax, VA 22030

David B. Audretsch Indiana University School of Public Policy & Environmental Affairs 1315 East 10th Street Bloomington, IN 47405

ISBN-13: 978-0-387-45667-6

e-ISBN-13: 978-0-387-45671-3

Library of Congress Control Number: 2007928374 © 2007 Springer Science+Business Media, LLC All rights reserved. This work may not be translated or copied in whole or in part without the written permission of the publisher (Springer Science+Business Media, Inc., 233 Spring Street, New York, NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use in connection with any form of information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now knon or hereafter developed is forbidden. The use in this publication of trade names, trademarks, service marks and similar terms, even if they are not identified as such, is not to be taken as an expression of opinion as to whether or not they are subject to proprietary rights. Printed on acid-free paper. 9 8 7 6 5 4 3 2 1 springer.com

The following assessment would not have been possible without the contributions of scholars participating in the Wisconsin Entrepreneurial Climate Study, the Entrepreneurial Research Consortium, and the national teams of the Global Entrepreneurship Monitor initiative. This work is dedicated to these fine individuals, good colleagues all.

Contents

List of Figures...................................................................................................xi List of Tables . ................................................................................................. xv Preface............................................................................................................xvii Acknowledgments...........................................................................................xix 1.  Why Care?.................................................................................................. 1 New Sectors............................................................................................ 2 Job Growth.............................................................................................. 3 Productivity............................................................................................. 5 Innovation............................................................................................... 6 Economic Growth................................................................................... 8 Participation in Business Start-ups....................................................... 11 Start-up Participation over the Work Career......................................... 12 Social Integration, Mobility.................................................................. 13 Overview............................................................................................... 15 Notes..................................................................................................... 16 2.  What Is Entrepreneurship and How Do You Find It?............................... 17 Population Surveys: U.S. Entrepreneurial Assessment......................... 20 Population Surveys: U.S. Current Population Surveys [CPS].............. 22 New Entries in Official Registries: U.S. Census and BLS................... 24 Correspondence between Procedures.................................................... 26 Overview............................................................................................... 28 Notes..................................................................................................... 28 3.  How Much and When?............................................................................. 31 Single Item Index: 1993–2006.............................................................. 31 Total Entrepreneurial Activity Index: 1998–2006................................ 32 Prevalence of Participation and Employer Firm, Establishment Registrations.................................................................. 35 Are Different Groups Changing Participation Over Time?.................. 36 Personal Context................................................................................... 40 Overview............................................................................................... 41 Notes .................................................................................................... 42

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Contents

4.  Comparisons across Space........................................................................ 45 Firm Births: Spatial Diversity............................................................... 45 Firm Births: Regional Factors Associated with Variations................... 48 Firm Births: Stability and Change in Firm Birth Rates........................ 53 Firm Births: Factors Associated with Change...................................... 57 Survey Reports of Entrepreneurial Activity: Census Division Comparisons......................................................................................... 59 Survey Reports of Entrepreneurial Activity: Compared to Firm Birth Rates.................................................................................... 60 Survey Reports of Entrepreneurial Activity: Regional Factors and Variation......................................................................................... 62 Overview............................................................................................... 63 Notes..................................................................................................... 65 5.  Individuals: Participation in the Business Life Course............................. 67 Who Becomes a Business Owner?....................................................... 68 What Are Business Owners Like?........................................................ 72 How Do People Get Involved?............................................................. 77 Overview............................................................................................... 82 Notes..................................................................................................... 83 6.  What Happens in the Start-up Process?.................................................... 85 What Is the Outcome Once the Start-up Process Is Initiated?.............. 85 How Long Does It Take?...................................................................... 86 What Kinds of Individuals or Situations Affect the Presence of a New Firm?..................................................................................... 88 What Happens in the Start-up Process?................................................ 95 Interactions: Who They Are and What They Are Doing..................... 101 Overview............................................................................................. 106 Notes................................................................................................... 108 7.  Comparisons across the Firm Life Course.............................................. 109 Business Firms in the Life Course...................................................... 110 Firm Characteristics and Firm Life Course Stage............................... 118 Overview............................................................................................. 123 Notes................................................................................................... 124 8.  Start-up Funding: Expectations, Informal Support, and       Accredited Investors............................................................................... 125 Money Expectations: Investments and Returns.................................. 125 Annual Funding for All Start-ups....................................................... 129 Informal Investors............................................................................... 131

Contents

ix

Who Are the Informal Investors?........................................................ 133 Investor and the “Informal Deal”........................................................ 136 The Start-up and the Informal Deal.................................................... 139 Accredited Investors........................................................................... 142 Overview............................................................................................. 148 Notes................................................................................................... 150 9.  Comparisons across Space: United States and the World....................... 151 Global Comparisons: Selected Features of Entrepreneurial Activity............................................................................................... 153 Total Amount of Activity: Global Estimates....................................... 157 National Factors Associated with Entrepreneurial Activity................ 160 Global Regions and High Potential Entrepreneurship........................ 169 Overview............................................................................................. 170 Commentary........................................................................................ 171 Notes................................................................................................... 172 10.  Overview and Commentary.................................................................. 173 Implications for Public Policy............................................................ 176 Implications for New Firm Creation................................................... 178 Implications for Research................................................................... 179 Note..................................................................................................... 183 Appendix A:  Measuring Entrepreneurial Activity...................................... 183 Note..................................................................................................... 188 Appendix B:  Firm Birth Rates by U.S. Labor Market Areas:                     1976–1996............................................................................. 189 Appendix C:  Sample Compared to Population on Household Income,                     Wealth.................................................................................... 205 References...................................................................................................... 207 Index.............................................................................................................. 211

List of Figures

Figure 1.1 U.S. Semiconductor Firms and Industry Development: 1946–1985..................................................................................... 3 Figure 1.2 Establishment Age and 1995 Job Counts...................................... 4 Figure 1.3 Establishment Age and Job Creation: 1996................................... 4 Figure 1.4 Sources of Sector Productivity: 10-Year Period............................ 6 Figure 1.5 Market Innovation by Firm Size: United States 1982................... 7 Figure 1.6 U.S. Labor Market Areas 1990...................................................... 9 Figure 1.7 New Firm Births and Regional Job Growth: U.S. Labor Market Areas 1976–1986.......................................... 10 Figure 1.8 New Firm Births and Regional Job Growth: U.S. Labor Market Areas 1990–2001.......................................... 10 Figure 1.9 National Levels of Entrepreneurial Activity and Subsequent Economic Growth.................................................... 11 Figure 1.10 Participation in Life Activities among U.S. Adults: 2002........... 12 Figure 1.11 Prevalence and Duration of Self-Employment over the Work Career: U.S. Men......................................................... 13 Figure 1.12 Probability of Self-Employment: By Ethnic Background and Immigration Status: United States 1980............................... 14 Figure 2.1 The Entrepreneurial Process and the Total Entrepreneurial Activity Index.............................................................................. 19 Figure 2.2 Participation in the Entrepreneurial Process [TEA Index] 1998–2006.............................................................. 21 Figure 2.3 Persons Increasing Business Ownership Emphasis [CPS] 1996–2005........................................................................ 23 Figure 2.4 New Employer Firms: Annual Counts and Prevalence [U.S. Census] 1990–2004............................................................ 25 Figure 2.5 New Employer Establishments: Annual Counts and Prevalence [BLS] 1992–2003...................................................... 26 Figure 2.6 New Employer Firms: Survey Estimates and Administrative Record Counts.................................................... 27 Figure 3.1 Entrepreneurial Activity, Single Item Index: United States 1993–2006............................................................. 32 Figure 3.2 Total Entrepreneurially Activity Prevalence Rate: 1998–2006..... 33

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List of Figures

Figure 3.3 Total Entrepreneurially Active Persons: 1998–2006................... 34 Figure 3.4 TEA Persons Active in Start-ups and New Firms: 1998–2006................................................................................... 34 Figure 3.5 Four Measures of U.S. Business Creation: 1990–2005............... 36 Figure 3.6 Active Nascent Entrepreneurs, Men by Age: United States 1998–2006............................................................. 37 Figure 3.7 Active Nascent Entrepreneurs, Women by Age: United States 1998–2006............................................................. 37 Figure 3.8 Active Nascent Entrepreneurs, by Ethnicity: United States 1998–2006............................................................. 38 Figure 3.9 Active Nascent Entrepreneurs, by Household Income: United States 1998–2006............................................................. 39 Figure 3.10 Personal Entrepreneurial Context Index: Men by Age 2001–2004.............................................................. 40 Figure 3.11 Personal Entrepreneurial Context Index: Women by Age 2001–2004......................................................... 41 Figure 4.1 Firm Birth Prevalence by U.S. LMA: 1976–1978...................... 46 Figure 4.2 Firm Birth Prevalence by U.S. LMA: 1996–1997...................... 46 Figure 4.3 Frequency Distribution of Annual Regional Firm Birth Rates: 1976–1978 and 1996–1997......................................................... 48 Figure 4.4 Change in Firm Birth Rates by U.S. LMA: 1976–78 to 1996–97.................................................................... 56 Figure 4.5 Volatility in Firm Birth Rate Changes: 1976–78 to 1996–97................................................................................... 57 Figure 4.6 TEA Prevalence Rates for Nine U.S. Census Regions: Overall and by Motivation........................................................... 60 Figure 4.7 New Employer firms and TEA Active Adults: U.S. LMAs......... 61 Figure 5.1 Three Business Life Course Stages............................................. 67 Figure 5.2 Participation in the Business Life Course: Prevalence by Age and Gender.................................................... 69 Figure 5.3 Participation in the Business Life Course: Prevalence by Ethnicity and Gender........................................... 69 Figure 5.4 Participation in the Business Life Course: Prevalence of Men by Ethnicity and Educational Attainment..... 70 Figure 5.5 Participation in the Business Life Course: Prevalence of Women by Ethnicity and Educational Attainment.................. 70 Figure 5.6 Participation in the Business Life Course: Prevalence by Household Income and Gender............................ 71 Figure 5.7 Participation in the Business Life Course: Total Counts by Age and Gender................................................. 73 Figure 5.8 Participation in the Business Life Course: Total Counts by Ethnic Background and Gender........................ 74

List of Figures

xiii

Figure 5.9 Participation in Business Life Course: Total Counts by Education and Gender....................................... 76 Figure 5.10 Participation in Business Life Course: Total Counts by HH Income and Gender.................................... 76 Figure 5.11 Entry into Entrepreneurship: Two-Stage Model.......................... 77 Figure 5.12 Personal Entrepreneurial Context Index and Participation in the Business Life Course................................... 78 Figure 6.1 Changes in Start-up Status over Time: 1 Month to 10 Years....... 86 Figure 6.2 Gestation Time to New Firm Birth or Disengagement................ 87 Figure 6.3 New Firm Prevalence by Gender and Age at Start-up Conception..................................................................... 89 Figure 6.4 New Firm Prevalence by Ethnic Background............................. 89 Figure 6.5 Cumulative Start-up Activities by Six-Year Outcome............... 100 Figure 7.1 Business Life Course Stages in the United States..................... 110 Figure 7.2 Businesses by Life Course Stage: Jobs Now and Five-Year Projections................................................................ 112 Figure 7.3 Businesses by Life Course Stage and Expected Market Impact........................................................................... 113 Figure 7.4 Businesses by Life Course Stage and Technological Emphasis............................................................ 115 Figure 7.5 Businesses by Life Course Stage: Technological Emphasis and Expected Market Impact..................................................... 117 Figure 8.1 Informal Investor Prevalence Rates: United States 2000–2004........................................................... 131 Figure 8.2 Informal Investors Total Counts: United States 2000–2004........................................................... 132 Figure 8.3 Total Informal Funding Provided to New Firms: United States 2000–2004........................................................... 133 Figure 8.4 U.S. Accredited Investors by Basis for Qualification: 2004........................................................................................... 145 Figure 91 Global Comparisons in Level of Entrepreneurial Activity...................................................................................... 152 Figure 9.2 European Comparisons in Level of Entrepreneurial Activity...................................................................................... 152 Figure 9.3 TEA Overall Prevalence: Global Comparisons, 2000–2004................................................................................. 153 Figure 9.4 TEA Opportunity Prevalence: Global Comparisons, 2001–2004................................................................................. 155 Figure 9.5 TEA Necessity Prevalence: Global Comparisons, 2001–2004................................................................................. 155

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List of Figures

Figure 9.6 TEA Overall, High Market Impact Prevalence: Global Comparisons, 2002–2003.............................................. 156 Figure 9.7 TEA Overall, High Job Growth Prevalence: Global Comparisons, 2002–2003.............................................. 157 Figure 9.8 TEA Overall Total Active Persons, by Motivation: Global Comparisons.................................................................. 158 Figure 9.9 TEA Overall Total Active Persons, by Motivation: By Global Types........................................................................ 160 Figure 9.10 TEA Overall Total Active Persons, by Market Impact and Growth Expectations: By Global Types............................. 161 Figure 9.11 Entrepreneurial Activity and Motivations: By Global Type.......................................................................... 162 Figure 9.12 Selected Measures of National Economic Competitiveness: By Global Type.......................................................................... 162 Figure 9.13 Political, Government System Characteristics: By Global Type.......................................................................... 164 Figure 9.14 Government Role in National Economy: By Global Type.......................................................................... 164 Figure 9.15 Business Registration Costs: By Global Type........................... 166 Figure 9.16 Start-up Financing, Informal and Venture Capital: By Global Type.......................................................................... 166 Figure 9.17 National Educational System Features: By Global Type.......... 168 Figure 9.18 Household Economics and Values: By Global Type................. 168 Figure 9.19 Presence of High Potential Entrepreneurship: By Global Type.......................................................................... 170

List of Tables

Table 4.1 Table 4.2 Table 4.3 Table 4.4 Table 4.5 Table 4.6 Table 4.7 Table 5.1 Table 5.2 Table 6.1 Table 6.2 Table 6.3 Table 6.4 Table 6.5 Table 6.6 Table 6.7 Table 6.8 Table 6.9 Table 6.10 Table 6.11 Table 6.12 Table 6.13

Regional Factors Affecting Firm Birth Rates............................... 50 Correlations in Firm Birth by U.S. LMA: Sequential to 18-Year Time Lags....................................................................... 53 LMA Changers in Firm Birth Rates: 1976–78 to 1996–97.......... 54 LMAs with Major Increases in Firm Birth Rates: 1976–78 to 1996–97..................................................................... 55 LMAs with Major Decreases in Firm Birth Rates: 1976–78 to 1996–97..................................................................... 55 Regional Factors Affecting Change and Stability of Firm Birth Rates........................................................................... 58 Regional Factors Affecting Total Entrepreneurial Activity Index............................................................................... 62 Socioeconomic Groups and Participation in the Business Life Course.................................................................... 80 Socioeconomic Groups, Prevalence in Business Life Course, and Proportion of Business Life Course Participants................... 80 Firm Creation and Socio-Demographic Factors........................... 90 Firm Creation and Current Social, Work Life Context................ 90 Firm Creation and Personal Traits, Orientations and Attitudes...... 91 Firm Creation and Business Background, Experience................. 92 Firm Creation and Perceived Business, Economic Context......... 92 Firm Creation and Business Activity, Context, Start-up Investments..................................................................... 93 Firm Creation and Ambient Community...................................... 94 Business Creation Activities......................................................... 96 Start-up Indices and Outcomes in the Sixth Year, by Time since Conception................................................................. 98 Start-up Domains and Time to Completion and Disengagement.....99 Factors Selected as Important in Predicting New Firm Presence............................................................................. 102 Start-ups Grouped by Second-Year Activity and Seven-Year Outcome Status....................................................... 103 Start-up Groups by Socio-Demographic Emphasis................... 103

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Table 7.1 Table 7.2 Table 7.3 Table 7.4 Table 7.5 Table 7.6 Table 8.1 Table 8.2 Table 8.3 Table 8.4 Table 8.5 Table 8.6 Table 8.7 Table 8.8 Table 8.9 Table 8.10 Table 8.11 Table 8.12 Table 8.13 Table 8.14 Table 8.15 Table 9.1 Table A.1 Table A.2 Table B.1 Table C.1 Table C.2

List of Tables

Business Economic Sectors by Life Course Stage..................... 111 Types of High-Technology Businesses by Life Course Stage............................................................................... 116 Types of High-Tech, High Market Impact Businesses by Life Course Stage.................................................................. 118 Legal Form, Locations, and Nature of Business Units by Firm Life Course Stage.............................................................. 119 Relationship to Family by Firm Life Course Stage.................... 120 Known Incorporation into Business Registries by Firm Life Course Stage.............................................................. 121 Start-up Funding Requirement and Nascent Entrepreneurs’ Contributions.............................................................................. 126 Total Funding Required by Start-up Characteristics.................. 126 Nascent Entrepreneurs: Expected Financial Investment by Start-up Characteristics......................................................... 127 Nascent Entrepreneur: Expected Start-up Payback and Return on Investment................................................................. 128 Annual Estimates of Aggregate Start-up Requirements and Sources................................................................................ 130 Informal Investors: Personal Background and Level of Investment.............................................................................. 134 Informal Investors: Contextual Factors and Level of Investment.............................................................................. 135 Informal Deals: Investor Personal Characteristics (1/2)............ 137 Informal Deals: Investor Personal Characteristics (2/2)............ 138 Informal Deals: Character of the Deal (1/3)............................... 140 Informal Deals: Character of the Deal (2/3)............................... 141 Informal Deals: Character of the Deal (3/3)............................... 142 Informal Deals: Expected Payback............................................ 143 Accredited Investors Compared to All Others: Basic Background...................................................................... 147 Accredited Investors Compared to All Others: Contextual Factors...................................................................... 148 Countries Classified by Region Type and Proportion of Entrepreneurs......................................................................... 159 Annual Surveys: Firm, Field Period, and Sample Sizes............ 185 U.S. Nascent Screening Samples and Item Wordings................ 187 Firm Birth Rates by U.S. Labor Market Areas: 1976–1996....... 189 Distribution of Household Annual Income: Sample and U.S. Census................................................................................ 205 Distribution of Household Net Worth: Sample and Survey of Consumer Finances.................................................... 206

Preface

The purpose of this monograph is to provide a description of the current state of entrepreneurial activity in the United States, combining data from several research programs. It is designed to give a general overview of the basic features, most of which have substantial empirical support. As an introduction, it has been developed to avoid lengthy treatment of many technical details and data consolidation issues. Selected technical procedures are reviewed in footnotes, endnotes, and appendices; many details are available in the references. As most of the data used for this assessment are, or will be, in the public domain, this treatment serves as an invitation to others to develop more precise and detailed assessments or explanations of specific issues. A unique feature of this overview is a presentation of the high level of participation by typical adults in U.S. entrepreneurship. An effort is made to clarify the extent to which this is a critical feature of economic adaptation and change—both for the present and the future. The techniques to locate individuals in the process of creating a new business, before the initiative is an operating business, were first developed in 1993, further refined in 1998–1999, and received additional enhancements in 2000–2006. Two types of research programs have made extensive use of this procedure. The initial program—the Panel Study of Entrepreneurial Dynamics [PSED]—focused on locating individuals in the start-up processes, referred to as nascent entrepreneurs, and tracking their progress over time. The first project in this program, PSED I, was based on screening completed in 1998–2000 with follow-up interviews in 2001, 2002, and 2003. The second project, PSED II, completed the initial screening in fall of 2005, with follow-ups to be completed in 2006 and 2007. The second research program—the Global Entrepreneurship Monitor [GEM]—emphasized comparing the level of entrepreneurial activity in different countries or regions. This led to the development of the Total Entrepreneurial Activity [TEA] index, an index that reflects the prevalence of individuals involved in two stages of the start-up process. The first assessment in this

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Preface

program was completed with ten countries in 1999; the annual assessments have since expanded to include over forty-five countries. The major thrust of these research programs has been to provide precise descriptions of both the level of entrepreneurial activity, as well as the actual business creation process. The first of two major findings, both surprises, has been the high levels of human involvement in business creation: as many as half a billion persons may be involved worldwide. The second surprise has been the diversity and complexity inherent in the business creation process— regardless of the national context or economic sector. This has complicated efforts to provide summaries of the basic features of entrepreneurship and critical elements in any country, including the United States. It also thwarts efforts to provide a small set of simple policy recommendations. There are a wide range of interesting and important theoretical and practical issues that remain to be explored. It is hoped that this overview will inspire others to give more detailed attention to these issues. Paul Reynolds Miami, Florida 30 April 2007

Acknowledgments

The initial project, locating representative samples of adults who were engaged in new firm creation, was conducted in Wisconsin with financial support from the Wisconsin Housing and Economic Development Authority. The data collection procedures were developed by the University of Wisconsin Survey Research Laboratory; Associate Director Dr. Charles Palit playing a major role in the design. The initial national study, the first Panel Study of Entrepreneurial Dynamics [PSED], was organized and implemented by the Entrepreneurial Research Consortium [ERC], a voluntary association of 34 member units with over 120 members; the ERC was able to support the implementation of the project as well as the first follow-up. The Ewing Marion Kauffman Foundation provided support for the second and third follow-up interviews and the cost of shifting the operational base of the program from the University of Wisconsin to the University of Michigan Institute for Social Research. This move was necessary when the University of Wisconsin elected to close the Survey Research Laboratory. Additional support was provided by the National Science Foundation for two enhancements: an over sample of women [Dr. Nancy Carter, principal investigator, Grant SBR-9809841] and an over sample of minorities [Dr. Patricia Green, principal investigator, Grant SBR-9905255]. Richard Curtin bears a major responsibility for integration of the PSED I data sets into a useful research resource. The major sponsor of the second Panel Study of Entrepreneurial Dynamics, the Ewing Marion Kauffman Foundation has provided contracts to the University of Michigan Institute for Social Research [Dr. Richard Curtin, Principal Investigator] for all data collection and maintenance of the data sets and Web site. A parallel contract to Florida International University [Dr. Paul Reynolds, Principal Investigator] sponsors the development of the interview schedules and management of the project advisory committee. The screening of the U.S. population to locate nascent entrepreneurs was the basis for the 2005 assessment of the national level of entrepreneurial activity. The Global Entrepreneurship Monitor [GEM] research program was developed by a team assembled by London Business School and Babson College; the Ewing Marion Kauffman Foundation was a major sponsor of the

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Acknowledgments

coordination team from inception through 2004; they were also the sole sponsor of the U.S. national assessments during this same period. Additional funding for the coordination efforts was provided through the London Business School and by the thirty-six national teams that represented over 150 scholars. This research program is the source of annual assessments of the level of activity in the United States from 1999 through 2003. The 2004 U.S. assessment was an independent effort using the same procedures; the sponsor has chosen to remain anonymous. Data from the screening phase of the PSED II project was used for estimates of entrepreneurial activity in 2005 and 2006. After the final manuscript was completed, Per Davidsson suggested that more attention might be given to the impact of screening item wording on the prevalence rates of nascent entrepreneurs and the TEA active individuals. Attention to these changes made clear this was a major issue and reanalysis suggested that once the impact of item wording was taken into account, there was virtually no change in prevalence rates in the US over the 1998-2006 period. All assessments related to changes over time and the relevant sections of the book were completely revised. A major debt is owed to Per Davidsson for preventing this oversight from incorporation into this assessment. Major elements of this research adventure were completed while the author was a faculty member at Marquette University, Babson College, London Business School, and Florida International University; the support of these institutions was critical for the development of this research program. Substantial contributions in the production of this monograph were provided by Diana Hechavarria (the FIU graduate research assistant that created the maps), Shellie Hurrle of A-1 Editing Services, Deborah Whitford of Publishing Support Associates (design and typesetting), and Ilona Kingsley (index preparation). This work is based on a collective effort that involved many research institutions, dozens of funding sponsors, and hundreds of scholarly colleagues; the following is one effort to present an overview of the knowledge gained from this journey into the unknown.

1

Why Care?

Entrepreneurship is about doing something different—creating a business that did not exist, producing a new product, modifying an existing activity. Some differences are, of course, greater than others. Many people who practice entrepreneurship find it an exciting challenge and a source of considerable attention, and they sometimes make a lot of money, so why should anyone else, particularly policy makers, care about the amount of activity? The most basic entrepreneurial activity—creating new firms―has a major role in the economy. First, the creation of new sectors or new industries is the history of new firm creation. Virtually every new industry or market sector reflects the impact of someone or some team creating a new firm. While those individuals who are first to launch new businesses are often seen as heroic pioneers, those who follow often provide important contributions and reduce costs for the customers. Second, it is now clear that most new jobs in the United States are provided by new business entities. About half of new job growth comes from independent start-ups and the other half by the expansion of existing businesses as they create new branches and subsidiaries. Third, recent studies indicate that major sources of sector productivity growth—industry-wide productivity gains―are provided by more efficient new firms replacing less efficient, established firms. Fourth, much, though not all, economic innovation can be traced to independent smaller firms, many of which are new. Another major source of innovation is new ventures sponsored by existing firms. Fifth, efforts to understand the mechanisms that lead to economic growth of an industry, region, or country increasingly indicate that new-firm creation is a central feature of the process. Growth without entrepreneurship is rare. Further, new-firm creation is a major career activity for many people. About 10-12% of U.S. adults may be involved in business creation at any given time. In 2005, about fifteen million persons in the United States were involved in trying to organize and launch about seven million new firms and another five million were managing two and half million businesses up to forty-two months old. In addition, up to half of those in the work force will have a period of new or small firm management at some point in their careers. So not only does a lot of business creation exist at any time, but tens of millions will have tried their



Entrepreneurship in the United States

hands at business creation or small business management at some point. Some of these people will create firms that become substantial operations. Entrepreneurship is also a major route for social mobility, particularly in market economies.1 In all societies, some people or groups have more influence, wealth, and prestige than others do. Those occupying these roles constantly change—the circulation of the elites. Some change occurs over generations as individuals move up and down the social hierarchy in relation to their parents. Other change occurs as recent immigrants develop new careers and social positions within the system. Large numbers of individuals find that firm creation is a major route for participating in the economy. For many this leads to improvements in their overall influence, wealth, and prestige. Evidence regarding each of these issues is reviewed below.

New Sectors Are new firms critical for the creation of new industries? Absolutely. It would seem obvious that somebody had to create the first business of each type: the first car company, the first pizza restaurant, the first personal computer firm, and so on. What is less obvious is how many new firms may be required to create an entirely new industry and what proportion survive to become an established part of the new sector. A number of efforts to track the development of new industries have been completed. A typical assessment documented the emergence of U.S. semiconductor firms from 1946 through 1985. The results are presented in Figure 1.1.2 The bars represent the number of new firms, which varies from 3 to 78, that entered the industry in each year. The line in the chart reflects the number of firms active in the industry for each year, rising from 3 to 4 for 1946 to over 300 in 1970. The count of active firms stabilized at around 300 hundred per year for the next 15 years (until 1985). The total number of firms active in 1985―about 308―is one-fourth of the total number of new entries over the history of the industry: 1,246. The size of the sector, however, in terms of total annual sales, grew over sevenfold from 1970 to 1985, from 2 billion dollars to over 14 billion dollars. This dramatic growth in sales was associated with a relatively constant number of active firms―about 300―although firm births and deaths continued throughout the period.

Why Care?

 Annual Births

Total Active 400

90

80

350

300

60 250 50 200 40 150

Total Active Firms

Annual Firm Births (Entry)

70

30 100

20

50

10

0 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985

0

Figure 1.1. U.S. Semiconductor Firms and Industry Development: 1946–1985

Job Growth While it is clear that new industries reflect the creation of new firms, it is not so clear as to why there is a continuing turnover or churning among firms in existing industries. One of the major findings about the economy was the discovery of the importance of new firm creation to job growth. Until this was discovered in the 1970s, it was assumed that most job growth occurred in large, established corporations.3 The initial analysis has been replicated a number of times across many developed countries, requiring their national business registries to be restructured to complete the analysis. A recent assessment presented in Figure 1.2 shows the distribution of over 100 million U.S. jobs in employee establishments (business units that have employees) by the age of the establishment for 1995.4 Note that the majority― over 61%―are in establishments that had existed in excess of 10 years. Less than half of the jobs―43%―are in single-site establishments where all activities are carried out at one physical location. Over half of the jobs―57%― are in branch or subsidiary establishments (a General Motors plant, a Wal-Mart store, a Kinko’s/FedEx branch, etc.) owned and managed by a larger multi-unit corporation. Less than 3% of all 100 million jobs are in establishments less than two years old. Figure 1.3 shows the sources of new jobs, again by age of the establishment. The chart shows the origin of 1.9 million new jobs by the age and type of



Entrepreneurship in the United States 35%

30%

Proportion of All 1995 Employment

25%

20%

15%

10%

5%

0%

0-1 Years

2-3 Years

4-6 Years

7-9 Years

10-13 Years

14-18 Years

19 Up Years

Multi-unit Location

2%

5%

8%

6%

7%

10%

19%

Single-unit

1%

6%

7%

6%

6%

5%

13%

Unit Age in 1996

Figure 1.2. Establishment Age and 1995 Job Counts

300%

250%

Net Job Gain (additions less losses)

200%

150%

100%

50%

0%

-50%

-100%

0-1 Years

2-3 Years

4-6 Years

7-9 Years

10-13 Years

14-18 Years

19 Up Years

Multi-unit Location

143%

-7%

-19%

-14%

-15%

-20%

-36%

Single-unit

150%

-15%

-15%

-12%

-12%

-10%

-18%

Unit Age in 1996

Figure 1.3. Establishment Age and Job Creation: 1996

Why Care?



establishment. The net gain consists of the creation of 22.8 million jobs by new establishments; 11.7 million by autonomous start-ups; and 11.1 million by new branches and subsidiaries. This gain is reduced by the loss of 15 million jobs by older establishments; 6.4 million by independent businesses, and 8.6 million by multi-establishment firms. At every age beyond one year, there is a net job loss—the number of jobs gained through expansion is less than the number lost from contraction or terminations. In the first year the jobs gained from firm births and expansion far exceed those lost from contraction and terminations; business terminations are almost nonexistent in the first year.

Productivity There are now longitudinal data sets providing establishment (plant) level details on the input costs and output revenue of U.S. businesses.5 Carefully managed to avoid disclosure of details about specific plants, data can be used to determine the cost structure of each establishment and, in turn, its relative efficiency at specific points in time. That is to say, the labor costs per unit of output can be determined over the life course of the establishments. Those with higher labor costs and low productivity can be compared to those with lower labor costs and higher productivity. Information on the ages of the establishments allows the labor costs of new entrants to be compared with continuing establishes and recent “exits,” establishments that are no longer producing the products. New establishments are found to be more productive—having lower labor costs— than existing establishments and are much more productive than establishments that have just “exited,” or recently shut down. This can then be translated into the relative contribution of firms of different ages to overall productivity in a specific sector (or industry). It turns out that there are some differences among industries. A summary is provided in Figure 1.4.6 This indicates that almost all growth in labor productivity in retail over a ten-year period is due to “net entry.” There is a clear difference in productivity between the more productive new retail establishments and the recently discontinued establishments; recent terminations in retail had higher labor costs. There is little growth in productivity among continuing retail establishments. For comparison, the contribution in manufacturing from net entry (new entrants less those terminating activity) was about 30%; productivity improvement among continuing (ongoing) manufacturing establishments was 70% of the overall productivity gains. Within the retail sector, continuing department store establishments (Sears, J.C. Penny, etc.) provided some improvement—40% of the total—in labor productivity growth, while 60% of the improvement was the difference between new establishments (which would include new Wal-Mart outlets)



Entrepreneurship in the United States Continuing Estab

New Estab

160.0% 140.0%

Relative Share Productivity Increase

120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% -20.0% -40.0% -60.0%

Retail, All

Department Stores

General Merchandise

Manufacturing, All

Continuing Estab

5.0%

40.0%

-40.0%

70.0%

New Estab

95.0%

60.0%

140.0%

30.0%

Figure 1.4. Sources of Sector Productivity: 10-Year Period

and establishments that had shut down. Among the more specialized general merchandising establishments (selling shoes, liquor, hardware, etc.), there was a decline in labor productivity among continuing firms and all increases provided by new establishments replacing establishments that shut down. In other industries (sectors) improvements in productivity may come from different types of sector adjustments. An analysis among automobile repair shops (not shown in Figure 1.4) found that the major source of sector productivity improvement was the discontinuation of the less productive establishments, those with higher labor costs.7 While little effort is made in these analysis to separate the impact of independent start-ups from that of new branches or subsidiaries implemented by existing firms (which may be considered expansions rather than new firm creation), it seems appropriate to assume that half of the productivity increases occur from independent start-ups.

Innovation Few topics are more difficult to study than innovations, particularly those that may be developed by a business. Businesses promote any change as innovative, different, and of great value to the customer—some may represent only modest adjustments. To overcome the challenge of sorting public relations fantasies

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from reality, a major effort to identify significant innovations through a search of the scientific and technical literature was completed in the early 1980s. To qualify as a unique and distinctive product it had to be sold in the marketplace, which suggests that somebody considered the “new thing” to be so valuable that they would pay for it. The impact of the innovation was considered to fall into one of four categories: creating a new market or sector, first of a type in an existing market, significant innovation to an existing product, or a modest improvement to an existing product. None qualified as creating a new market, but 2% were the first of their type, 13% had significant innovations, and 85% had modest improvements. The next step was to consider the origin of these innovations by determining whether the firm was small or large. Using the Small Business Administration (SBA) criteria, these were sorted based on having more or less than five hundred employees in all establishments in the firm. The proportions of the innovations developed in small and large firms are presented in the first four bars of Figure 1.5. For comparison, the proportion of all firms considered large and small are shown in the fifth bar; less than 1% are considered large firms. The proportion of all jobs—a measure of market presence—is provided in the far right bar; large and small firms each provide about half of all jobs. This analysis illustrates several points. First, neither small nor large firms were the source of any significant innovations—none were identified during this time period. Second, small firms are responsible for a significant proportion Small Firms [