Ian Hathaway and Robert E. Litan write,
the firm entry rate—or firms less than one year old as a share of all firms—fell by nearly half in the thirty-plus years between 1978 and 2011. The precipitous drop since 2006 is both noteworthy and disturbing. For context, the rate of firm failures held relatively steady—aside from the uptick during the Great Recession. In other words, the level of business deaths kept growing along with the overall level of businesses in the economy, but the level of business births did not—it held relatively steady before dropping significantly in the recent downturn. In fact, business deaths now exceed business births for the first time in the thirty-plus-year history of our data.
…—whatever the reason, older and larger businesses are doing better relative to younger and smaller ones. Firms and individuals appear to be more risk averse too—businesses are hanging on to cash, fewer people are launching firms, and workers are less likely to switch jobs or move.
Some possibilities:
1. Galbraith was right. Large, established firms have the advantage, due to advertising and technocratic management. Consider what Wal-mart has done to the small-town pharmacy or grocer. There is dynamism in the market, but it is not coming from the mom-and-pops.
2. Population aging. Older workers are less mobile, and older consumers are less willing to change.
3. Consider the sectors in the economy that have expanded: health care, where there is consolidation (fewer small practices, lots of mergers); finance, where our system has become much more concentrated; education, where new entry faces regulatory barriers. As the share in the economy of more-dynamic sectors (manufacturing, retail) shrinks, and the share of less-dynamic sectors rises, the average dynamism falls.
4. Perhaps incumbent firms have become better at using regulation to deter entry. I think of automobiles, where I am guessing it takes more lawyers than engineers to bring a new car into the market.
I wonder about trends in occupational licensing.
I think there’s a useful distinction between industries that are heavily regulated and have high barriers to entry and those that don’t.
I’m guessing industries with high barriers to entry are much more easily measured and comprise the majority of these statistics.
Meanwhile, scores of people are starting their own “micro-enterprises” that probably fall below the threshold of detectability for these types of statistics.
I recently started my own company (link above), and know of two others that are participating in their own startups. I’m guessing I’m part of the larger trend, but I doubt what they’re doing shows up in measures like these.
#3 isn’t quite right; actually it is the opposite: http://updatedpriors.blogspot.com/2013/02/job-flows-industry-composition-and.html
When measured by job or worker flows, firm age, entry/ext, etc, manufacturing is the least dynamic sector. So the changing industry composition of the US economy actually makes the declining dynamism puzzle more puzzling. We do some accounting in our paper (on which the Brookings note is based) to compare the role of firm age, firm size, industry, region, etc, here: http://econweb.umd.edu/~haltiwan/DHJM_JEP_5_17_2013.pdf (actually it’s not clear to me what the Brookings paper does that hasn’t been done already on this subject)
Firm size might reduce lawyers as a component of transaction costs. So, you get commodity firms selling to vertically integrated value-added firms selling to final customers and distributors.
What about plain old saturation of market?
Isn’t the discussion of Sweden or Europe, that they have less entrepreneurs and more large established firms?
Thus, as we approach or exceed their taxation and regulatory state, we should expect the same.
I like explanation 1 – large companies can completely internalize creative destruction, which results in innovation without any official “business births” or “business deaths”. Microsoft entering the video game hardware market would be a good example of this. I think it is reasonable to think of some firms like Google and Amazon really as “meta-firms”, that really just provide cost-saving environments where open-ended innovation can happen
Back in 1978 was when the retail landscape was just starting to be impacted by the trend towards franchising, enabling easier and safer small business creation. Franchises and meat and potatoes types of businesses provided a relatively simple, straightforward path for entrepreneurs. Today, the market for such businesses is often saturated. If there are 5 Dunkin’ Donuts in town, you may not want to open a 6th one.
Student debt. It’s hard to be a young entrepreneur when you’ve got a six-figure ball-and-chain to drag behind you.