Last week the Brookings Institution released a much-talked-about-report reminding the world that Americans don’t start businesses at the same pace they used to. For more than 30 years, our startup rate—the share of all businesses younger than a year old—has been falling. In fact, around the time of the recession, businesses began dying at a faster rate than Americans could found new ones.
The big-picture data wasn’t new—I wrote about it back in 2012—but Brookings did add an interesting twist to it. The startup slowdown, it turns out, is happening in virtually every broad geographical region and every major metro area of the country. In the North and in the South, in high-tax New York and in low-tax Texas, Americans seem to have gotten a bit less entrepreneurial. Brookings calls this decline “troubling,” because young businesses tend to be innovative—without them, industry would become stodgy and slow.
But is this really so troubling? I’m not convinced. It seems strange to argue that that the recent high point of U.S. entrepreneurship was during the Carter era, when sluggish conglomerates dominated corporate America, and when venture capital—the engine of today’s high-tech economy—was but a tiny sliver of what it would eventually become.
There are also some good, not especially frightening reasons that might explain why businesses aren’t multiplying like they used to. Though it’s hard to say for sure, the startup rate has likely declined in large part thanks to the victory of giant, national chains over smaller, local businesses. When the Census Bureau tracks startup firms, it doesn’t just survey for the sorts of high-tech companies that give our economy the biggest jolt. Along with app-makers in San Francisco and biotech firms in Boston, it also includes your corner hardware stores and family-owned grocers. And those sorts of mom and pop businesses have been devoured by big-box stores and Internet retail.
Here’s one way to tell that this is partly a story about chains: Look at the speed of growth of completely new businesses compared with the growth of “establishments.” An “establishment” is just a place where a company conducts business. It could be a new McDonald’s, a new Lululemon, or the first office for a completely brand-new company. Beginning at least in the 1980s, the number of new establishments opening each year grew faster than the number of new firms, as shown in the graph below from the Ewing Marion Kauffman Foundation. In short, Walmart and its cohorts took over.
As much as we love our local pharmacies and diners, the rise of chains isn’t the end of the world from an innovation perspective. While newer businesses do, on the whole, tend to be more innovative, it’s fast-growing, well-funded corporations that really keep economies in fighting shape. Moreover, having too many mom and pop businesses can be unhealthy in its own way, since those firms usually aren’t big or organized enough to access the capital markets and scale their operations. This is a problem that’s long plagued Italy, for instance—all those charming family-owned pastry and coffee shops don’t do wonders for its GDP.
While the number of smaller new companies might be in decline, there hasn’t been a noticeable change in the number of startups transforming into large enterprises. In a report last year, the Kauffman Foundation’s Paul Kedrosky showed that almost every year since 1980, between 125 and 250 companies have been founded that went on to earn at least $100 million in annual revenue. These calculations are a bit rough—for instance, bankrupt companies may not show up in the records, which may lead to undercounting the number of successful firms that started in the 1980s. But Kedrosky’s numbers do suggest the economy is still producing big new companies at a healthy clip.
There may be other, darker reasons behind the decline of new business formation that aren’t entirely apparent yet. But at a time when many commentators are talking about a tech bubble and as venture investors are pouring money into industries like food, health, and transportation, it seems overwrought to worry that American entrepreneurship is shorting out.
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