SOURCE: Ewing Marion Kauffman Foundation

Ewing Marion Kauffman Foundation

May 02, 2012 08:00 ET

Number of New Firms Continues to Slide, According to New Census Bureau Data in Kauffman Report

Slowdown in Number of New Companies and Job Creation From Startups and Young Firms Makes a Robust Recovery Harder to Achieve and Sustain

KANSAS CITY, MO--(Marketwire - May 2, 2012) - Building on a long-term trend, the nation's business startup rate fell below 8 percent for the first time in 2010, marking the lowest point on record for new firm births. New firms as a percentage of all firms continued a steady downward trend in 2010 -- going from a high of 13 percent (as a percentage of all firms) in the 1980s to just under 11 percent in 2006 before making a steep decline to the 8 percent in 2010 -- the most current year of data available.

This and other findings based on newly released data on U.S. firms and establishments with paid employees is included in the Census Bureau's Business Dynamics Statistics (BDS) briefing, released today. Partially funded by the Ewing Marion Kauffman Foundation, the BDS provides annual business data from 1976 to 2010.

Reduced numbers of new firms negatively affect the U.S. economy, which relies on startups as critical contributors to job creation. From March 2009 to March 2010, U.S. private-sector firms created a net -1.8 million jobs. The 394,000 companies that began operations in 2010, however, created 2.3 million jobs, in spite of the anemic economy.

"Without the new jobs created by business startups, the Great Recession would have been even deeper, with many more jobs lost," said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. "Unfortunately, new firm formation has waned since the 1980s, and the recession accelerated the decline. If we are to achieve and sustain a hearty recovery, policymakers, educators and organizations that help entrepreneurs commercialize their technologies must be willing to address every obstacle that stands in the way of new business formation."

Young firms -- those five years old or younger -- now comprise fewer than 35 percent of all firms, down from nearly 50 percent in the early 1980s. This decrease is accompanied by a decline in the share of employment accounted for by entrepreneurial firms from 20 percent in the 1980s to 12 percent in 2010. The share of job creation also has fallen, from more than 40 percent in the 1980s to about 30 percent in recent years.

The national decline is seen in all states, although some states have fared better than others. While the report does not analyze causes for individual state activity, it shows that state-level drops ranged from 2 percent to 14 percent when changes from the 1987-1989 and 2004-2006 business cycle peaks were compared. Further, states that experienced the largest declines also were, for the most part, those in which young businesses had the highest initial shares of business activity in the 1980s. These states typically were in the West, Southwest and South -- the regions hit hardest by the recession.

In a study released last month that measures annual employer and non-employer business creation in the United States, the Kauffman Index of Entrepreneurial Activity also showed a decline in the number of startups nationally and in all regions except the Northeast. In this study, founders were more likely to be sole proprietors than they were to create jobs.

This report is the sixth BDS Brief. The BDS includes measures of business startups, establishment openings and closings, and establishment expansions and contractions in both the number of establishments and the number of jobs. The BDS data provide these new statistics annually for 1976-2010, with classifications for the total U.S. private sector by broad industrial sector, firm size, firm age and state. The BDS is the result of a collaboration between the U.S. Census Bureau's Center for Economic Studies and the Ewing Marion Kauffman Foundation, with additional support from the U.S. Small Business Administration. Further information about the BDS can be found at http://www.census.gov/ces/dataproducts/bds/index.html.

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. In addition, the Foundation focuses on initiatives in the Kansas City region to advance students' math and science skills, and improve the educational achievement of urban students, including the Ewing Marion Kauffman School, a college preparatory charter school for middle and high school students. 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 the Foundation on www.twitter.com/kauffmanfdn and www.facebook.com/kauffmanfdn.

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