SOURCE: Ewing Marion Kauffman Foundation

Ewing Marion Kauffman Foundation

January 13, 2010 08:00 ET

Number of New Companies Created Annually Remains Remarkably Constant Across Time, According to Kauffman Foundation Study

Economic Conditions, Population Growth and Other External Factors Have Little Impact on Firm Formation

KANSAS CITY, MO--(Marketwire - January 13, 2010) - Given the positive effects of new-business creation on the economy, policymakers and economists logically might seek to understand and establish the environment that best fosters entrepreneurship -- especially at a time when the nation is facing a record recession. It is reasonable, for instance, to expect that external factors such as the current economic slump would create large, and potentially volatile, fluctuations in firm formation from year to year.

According to a new study released today by the Ewing Marion Kauffman Foundation, however, new-business creation in the United States is remarkably constant over time. "Exploring Firm Formation: Why Is the Number of New Firms Constant?" reveals that none of the factors that might bear on prospective entrepreneurs' decisions to form new companies -- recessions, expansions, tax changes, population growth, scarce or abundant capital, technological advances or others -- has much impact on the pace of U.S. startups.

The study's authors, Dane Stangler, senior analyst, and Paul Kedrosky, senior fellow, both with the Kauffman Foundation, researched several firm formation datasets, including employer firms as tracked by the U.S. Census Bureau and the Small Business Administration, firm births in a dataset tabulated by the Census Bureau, and new establishments, including not only unique firms but also new locations established by existing firms, as tracked by both the Census Bureau and the Bureau of Labor Statistics. Regardless of the dataset examined, each year's total of new companies is consistent with other years, with annual numbers fluctuating only mildly.

Likewise, the study showed that entrepreneurship education and venture capital, two indicators that have received heightened attention in recent years, had no appreciable impact on entrepreneurial activity in the United States. However, the authors point out, it could very well be that entrepreneurship education, venture capital and similar entrepreneur-friendly measures have helped maintain a constant level of firm formation.

"The jobs and innovation that new firms bring reshape and accelerate the economy," said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. "Consistency of firm formation from year to year still means that hundreds of thousands of Americans are poised to become entrepreneurs at any given time. Policies and economic conditions will affect this number at the margins, but the most important thing we as a nation can do to encourage entrepreneurship is to provide a hospitable environment that helps more startups become fast-growing, job-creating companies."

The Business Dynamics Statistics series compiled by the U.S. Census Bureau tracks the annual number of new businesses (startups and new locations) from 1977 to 2005. Frequency distributions for new firms tend to fall into a normal curve, with annual totals changing only 3 percent to 6 percent each year. Most remarkably, the quarterly measure of new businesses is similar to the annual totals. The number of people starting new companies is stable even within a single year.

Using the Census Statistical Abstracts from 1951 and 1960, Stangler and Kedrosky also looked at new business formation for the latter half of the 1940s and most of the 1950s. Contrary to the possibility that periods prior to 1977 saw larger annual fluctuations, the 1940s and 1950s also experienced an extraordinary constant number of new firms formed each year, with annual change only around 7 percent.

Perhaps, the authors say, the volume of new firms is irrelevant. The impact of firms is what matters, and it doesn't necessarily require a certain number of startups to make a given impact. Google, for example, was one of dozens of search engines founded during the dotcom frenzy, but it has had more impact than all the others combined.

"It is possible that we'll only be able to perceive the fast-growing companies that emerged out of a particular year's class of new firms in retrospect," Litan said, "but we should enact policies, provide education and make available capital and technologies that will enhance the possibility of success for every new company."

About the Kauffman Foundation

The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that works to harness the power of entrepreneurship and innovation to grow economies and improve human welfare. Through its research and other initiatives, the Kauffman Foundation aims to open young people's eyes to the possibility of entrepreneurship, promote entrepreneurship education, raise awareness of entrepreneurship-friendly policies and find alternative pathways for the commercialization of new knowledge and technologies. It also works to prepare students to be innovators, entrepreneurs and skilled workers in the 21st century economy through initiatives designed to improve learning in math, engineering, science and technology. Founded by late entrepreneur and philanthropist Ewing Marion Kauffman, the Foundation is based in Kansas City, Mo., and has approximately $2 billion in assets. For more information, visit www.kauffman.org, and follow @kauffmanfdn on Twitter.

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