Wednesday, April 22, 2009

Entrepreneurship Drives Job Growth

The health of America’s big corporations dominates daily business and economic news. But as market watchers contemplate whether the latest corporate earnings statements signal that the current economic crisis has hit bottom, policymakers can ill-afford to overlook the role new and small companies can play in reviving the economy.

A series of papers from the Kauffman Foundation helps to refocus attention on entrepreneurs and start-up companies. The research uses Business Dynamics Statistics (BDS), a new data tool developed by the U.S. Census Bureau that tracks the life-cycle of businesses with data on openings, closings, start-ups, job creation, and destruction by firm size, age, industrial sector and state. The Kauffman analysis reveals some striking findings about young firms.

  • Economic churning, defined as the number of jobs created versus the jobs destroyed through business contraction or closure, is a by-product of a dynamic marketplace, notes one report. While job loss and business closures are disconcerting for many, the churning of young businesses positively contributes to economic productivity as inefficient firms leave the marketplace and more efficient firms enter or expand their capacity.
  • As expected, young firms experience a high rate of failure, but those companies that make it create jobs at higher rates than more established firms. “Very young firms (1 year) have a net employment growth rate of about 15%.” In comparison more established firms (29+ years) grow jobs at a rate of about 4%.
  • Young companies are an important source for job growth. Private sector start-ups accounted for 3% of employment between 1980 and 2005, surpassing the average annual net employment growth rate for all firms of 1.8%.
  • The Midwest and East lag the West and Southwest in new business development as measured by the percent of employment created by firms younger than 3 years old. Wisconsin ranks near the bottom at just over 6% of employment attributable to young firms. Nevada topped the list with almost more than 11% of jobs created by new companies.
The Kauffman analysis just scratches the surface in explaining early stage companies’ contributions to overall productivity and job growth. Policymakers, though, can benefit from this research and future research using BDS, which helps shed light on business dynamics. It will be particularly useful as policymakers develop strategies to spur economic recovery, especially ones that seek to advance entrepreneurship.

Locally, there seems to be recognition that entrepreneurial activity presents an opportunity - one that must be strategically fostered. Biz Starts Milwaukee, which was launched in 2008, is encouraging new business development, specifically promoting development in high growth industries. Its most recent initiative is Venture Track, which combines Fast Track business planning classes with a mentor program to increase a start-up’s success. Measuring Biz Starts' effect on increasing Milwaukee’s culture of entrepreneurship and the subsequent creation of successful businesses will take time, requiring local entrepreneurs and their supporters to persevere through many economic ups and downs, including the most recent retrenchment. Ultimately, though, active cultivation and support of business innovation and entrepreneurship could show results, translating into much needed jobs for the Milwaukee region.

No comments: