Declining Entrepreneurship and Business Dynamism in the United States

Declining Entrepreneurship and Business
Dynamism in the United States (1978-2012)
Ian Hathaway
Presented at the OECD
16 September 2015

2 Frontier Economics
●  Preliminaries
●  Overall Trends
●  High-Growth & High-Tech
●  Summary and Discussion

Introduction – Business Dynamism
●  Business dynamism is the process of continual business churning—
some firms are born while others close their doors; some existing
firms expand while others contract; some workers move into new
roles, while others come in to replace them
●  This constant process of business volatility has important benefits:
□  Productivity: more productive firms replace less productive ones
(entering firms are more productive than existing ones); labor and capital
are reallocated to more productive uses
□  Job creation: while older firms account for most of employment levels, it
is new and young firms that are a vital source of new jobs (net job
creation); important to note that small ≠ young – in fact, outside of young
firms, small businesses as a group are net job destroyers
□  Innovation: entrepreneurs are a critical vehicle for disruptive innovation
●  A key source of business dynamism—what will be most of the talk
today—is the process of firm entry, or what I’ll call entrepreneurship

Introduction – Data
●  These data come from the Census Bureau’s Business Dynamics
Statistics (BDS), and its underlying series the Longitudinal Business
Database (LBD), and cover the entire universe of business
establishments and firms with employees on payrolls in the US
●  The data begin in 1977, are current through, and are publicly
available by firm age, firm size, broad sector, state, and metropolitan
area, and at more detailed levels in the restricted use data files
●  Data are collected annually at the establishment level and are tied
back to the parent firm—most notably here, this allows us to capture
firm age (and therefore firm entry), amongst other things
●  The distinction between firms and establishments is critical in the
study of business dynamics and entrepreneurship, and as this
analysis shows, it has become increasingly important over time
●  This research stands on many shoulders—including researchers and
funders at the Census Bureau, Kauffman Foundation, among others

Summary
●  Business dynamism has experienced a steady secular decline for
three decades, reaching firms all of sizes, in every geography, and
across broad sector groups—including high-tech and high-growth
●  The single biggest factor causing the decline in business dynamism
is the secular decline in the rate of firm entry, which in recent years
has been surpassed by the rate of firm exit (ie, closures > births)
●  Compounding this is an uptick in early-stage firm failure rates
●  As a result, the business structure is aging, business consolidation
has increased, and existing firms are increasingly the source of new
economic activity (ie, new business establishments)
●  Despite the importance of a small number of high growth firms to
employment growth, their share and might has declined (post 2000)
●  Similarly, the there has been a convergence in growth rates among
the high, medium, and low ends of the distribution—a reduction in
skewness—and a reduction in the overall rate of net job creation

●  Overall Trends

24%
26%
28%
30%
32%
34%
36%
38%
1978 1982 1986 1990 1994 1998 2002 2006 2010
Business Dynamism Been on a Steady, Three-Decade Decline
Job Reallocation Rate and Trend Rate (1978-2012)
Source: Census Bureau
Note: Trend rate is calculated with a Hodrick-Prescott filter
Broken
Scale

A Range of Measures of Dynamism All Point Down
Alternative Measures of Business Dynamism (1978-2011)Figure 1: Alternative Measures of Business Dynamism
Figure 2: 90-10 Gap in Firm Growth Rates (Employment-Weighted Distribution)
0.1
0.2
0.3
0.4
0.5
0.6
0.7
19791981198319851987198919911993199519971999200120032005200720092011
Std Deviation (Firms) Within Firm Volatility
Within Estab Volatility Std Deviation (Estabs)
Job Reallocation (Firms) Job Reallocation (Estabs)
0.7
0.75
All
Source: Decker, Haltiwanger, Jarmin, and Miranda (2014), “The Secular Decline in
Business Dynamism in the U.S.,” working paper, June.

Figure 4: Percent of Decline in Job Flows Accounted for by Composition Effects, Private
Sector, 1987-89 to 2004-06
Startup rate Firm Exit Rate
-30
-20
-10
0
10
20
30
40
Detailed
Industry
Codes
Age
Controls
Size
Controls
Industry,
Age, Size,
MU, Chain
Industry,
Age, Size,
MU, Chain,
State
Job creation Job destruction Reallocation
Accounting for Long-Term Decline by Observable Source
% Decline in Job Flows from Composition Effects (1987-89 to 2004-06)
Source: Decker, Haltiwanger, Jarmin, and Miranda (2014), “The Secular Decline in
Business Dynamism in the U.S.,” working paper, June.

6%
8%
10%
12%
14%
16%
1978 1982 1986 1990 1994 1998 2002 2006 2010
The U.S. Economy Has Become Less Entrepreneurial Over Time
Firm Entry and Exit Rates (1978-2012)
Entry
Exit

0%
5%
10%
15%
20%
25%
30%
1978 1982 1986 1990 1994 1998 2002 2006 2010
Early-Stage Failure Rates Have Increased Since Early-1990s
Firm Exit Probability by Firm Age—Trend Rates (1978-2012)
1
2
3
4
5
6-10
11-15
16-20 21-25
26+
Note: Trend rates are calculated with a Hodrick-Prescott filter

42%
19%
23%
16%
33%
19%
22%
26%
0%
15%
30%
45%
0-5 6-10 11-20 21+
1997 2012
As a Result, the Business Structure Is Aging
Distribution of Firms by Firm Age (1997 v 2012)
Firm Age
ShareofTotalFirms

15%
11%
20%
54%
11%
9%
14%
66%
0%
15%
30%
45%
60%
75%
0-5 6-10 11-20 21+
1997 2012
And Economic Activity is Concentrating in Older Firms
Distribution of Employment by Firm Age (1997 v 2012)
Firm Age
ShareofTotalPrivateEmployment

1.16
1.22
1.28
1.34
15
18
21
24
1978 1982 1986 1990 1994 1998 2002 2006 2010
Business Consolidation is on the Rise
Average Firm and Establishment Sizes, and Ratio (1978 v 2012)
EmployeesperFirm/Establishment
Ratio
Employees per Firm
Ratio
Employees per Establishment

87%
68%
13%
32%
0%
20%
40%
60%
80%
100%
1978 1982 1986 1990 1994 1998 2002 2006 2010
Existing Firms Are Increasingly a Source of New Establishments
Share of New Establishments by Ownership Type (1978 v 2012)
ShareofAllNewBusinessEstablishments
New Firms
Existing Firms

•  Decker, et al (2014), “The Role of Entrepreneurship
in U.S. Job Creation and Economic Dynamism,”
Journal of Economic Perspectives
•  Decker, et al (2014), “The Secular Decline in
Business Dynamism in the U.S.,” Working Paper
•  Hathaway and Litan (2014), “Declining Business
Dynamism in the United States: A Look at States
and Metros,” Brookings Institution
•  Hathaway and Litan (2014), “The Other Aging of
America: The Increasing Dominance of Older
Firms,” Brookings Institution
•  Hathaway, et al (2014), “The Shifting Source of
New Business Establishments and New Jobs,”
Federal Reserve Bank of Cleveland
•  Criscuolo, et al (2014), “The dynamics of
employment growth: new evidence from 18
countries,” OECD
Broad Application of These Trends
●  The decline has
reached every state
and nearly every
metropolitan area,
firms of all sizes, and
each broad sector.
There has also been
a slowdown in
entrepreneurship and
dynamism—over a
shorter time horizon
—across the OECD

Notes: Annual averages of statistics computed from Longitudinal Business Database, from 1992–2011.
The 90th, 10th, and median are all based on the employment-weighed firm level growth rate distribution
for each firm age cell. The mean is the aggregate net growth rate of the firm age cell which is equivalent
to the employment-weighted average of the firm level net growth rate in each cell.
B: Mean and Median Net Employment Growth Rates for Surviving Firms
−60
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16+
Firm age
0
2
4
6
8
10
12
14
16
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16+
Firm age
Growthrate(percent)
Median Mean
Young Firms Grow Most; Typical Firm Doesn’t Grow Much
Mean and Median Net Employment Growth Rates for Surviving Firms
Source: Decker, Haltiwanger, Jarmin, and Miranda (2014), “The Role of Entrepreneurship in
US Job Creation and Economic Dynamism,” Journal of Economic Perspectives

Figure 2
Net Employment Growth and Growth Rates for Surviving Firms
B: Mean and Median Net Employment Growth Rates for Surviving Firms
−60
−40
−20
0
20
40
60
80
100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16+
Firm age
12
14
16
t)
A: 90th, Median, and 10th Percentiles of Net Employment Growth for Surviving Firms
Median 90th percentile 10 percentile
Median Mean
Growthrate(percent)
Employment Growth is Highly Skewed
90th, Median, and 10th Percentiles of Net Employment Growth for Surviving Firms
Source: Decker, Haltiwanger, Jarmin, and Miranda (2014), “The Role of Entrepreneurship in
US Job Creation and Economic Dynamism,” Journal of Economic Perspectives

●  Total Private Sector

0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
1994 1997 2000 2003 2006 2009
“High-Growth” Firms on the Decline
High-Growth Firms as a Share of Total Firms (1994/97 to 2009/12)
Source: Bureau of Labor Statistics
Note: High-growth indicates at least 72.8% growth in employment over a three-year period
First Year of Three-Year Growth Period
“High Growth” Firms

Figure 7: High-Growth Firms (90th
Percentile from Employment-weighted Distribution)
Note: The 90th percentile is based on the employment-weighted distribution of firm employment
growth rates. Data are HP trends using parameter set to 100. Author calculations from the
Longitudinal Business Database.
0
5
10
15
20
25
30
35
40 All firms
Continuers
High Growth Firms Achieve Lower Rates; Especially post-2000
Employment Weighted Distribution of Firm Growth Rates at 90th Percentile
Source: Decker, Haltiwanger, Jarmin, and Miranda (2015), “Where has all the skewness
gone? The decline in high- growth (young) firms in the U.S.,” working paper, March.

Figure 6: 90-50 and 50-10 Gaps, All Firms and Continuers
Note: The 90-50 gap and the 50-10 gap are the difference between the 90th and the 50th
percentile and the 50th and 10th percentile, respectively, of the employment-weighted
distribution of firm employment growth rates. Data are HP trends using parameter set to 100.
Author calculations from the Longitudinal Business Database.
0
5
10
15
20
25
30
35
40 90-50 All firms
50-10 All firms
90-50 Continuers
50-10 Continuers
Growth Convergence at High and Low Ends of the Distribution
Gaps Between Employment Weighted Firm Growth Rate Percentiles

0%
3%
6%
9%
12%
15%
18%
21%
24%
1978 1982 1986 1990 1994 1998 2002 2006 2010
High-Tech Entrepreneurship is Down Sharply After 2000
Firm Entry Rates by Sector (1978-2012)
ICT
Total
Life Science

Figure 13: High-Growth Firms (90th Percentile of Employment-weighted Distribution), High
Tech and Publicly Traded
Note: The 90th percentile is based on the employment-weighted distribution of firm employment
growth rates. Data are HP trends using parameter set to 100. High tech is defined as in Hecker
(2005) (see Appendix Table A.1). Data include all firms (new entrants, continuers, and exiters).
Author calculations from Compustat and the Longitudinal Business Database.
0
5
10
15
20
25
30
35
40 High Tech
Publicly Traded
High-Growth, High-Tech and Public Firms Slow Down after 2000
Employment Weighted Distribution of Firm Growth Rates at 90th Percentile

Figure 11: 90-50 and 50-10 Gaps, High Tech
Note: Solid lines indicate 90-50 gap; dashed lines indicate 50-10 gap. The 90-50 gap and the 50-
10 gap are the difference between the 90th and the 50th percentile and the 50th and 10th
percentile, respectively, of the employment-weighted distribution of firm employment growth
rates. Data are HP trends using parameter set to 100. High tech is defined as in Hecker (2005)
(see Appendix Table A.1). Author calculations from the Longitudinal Business Database.
0
5
10
15
20
25
30
35
90-50 Tech
50-10 Tech
90-50 Tech Continuers
50-10 Tech Continuers
High- and Low-End Convergence Also Occurring in High Tech
Gaps Between Employment Weighted Firm Growth Rate Percentiles

●  Total Private Sector

Top Signs of Declining Business Dynamism and
Entrepreneurship in the U.S. (Haltiwanger, 2015)
1.  The decline in dynamism accelerated after 2000
2.  Industries and firm types in decline shifted after 2000 too
3.  Overall industry composition pushed dynamism in other direction
4.  Decline in startup rate is single biggest factor in dynamism decline
5.  Workers more likely to work at large, mature, national(global) firms
6.  Worker reallocation and worker churn have declined
7.  Decline in labor market fluidity has driven down employment levels
8.  Job recovery driven by slowdown in job destruction, not creation
9.  Decline due to change in responsiveness to shocks
10.  Contribution of reallocation to productivity growth has declined
Source: Haltiwanger (2015), “Top Ten Signs of Declining Business Dynamism and Entrepreneurship
in the U.S.,” Kauffman Foundation, August.

Discussion
●  Potential causes (work in progress—nobody really knows yet)
□  Slowing population/labor force growth
□  Competition/business consolidation (U-shaped relationship w/ firm entry)
□  IT/globalization (beneficial in retail; what effect in other sectors?)
□  Regulatory barriers (difficult to start? difficult exit?)
□  Other factors? (risk aversion; higher opp. cost; media depiction)
●  Much left unexplained
□  What has been the impact of the decline on productivity, job creation,
innovation? Do past relationships hold?
□  Dispersion of TFP among firms would suggest more dynamism, not less;
has reallocation become less important? Why aren’t more firms failing?
●  Measurement
□  Measuring growth through employment—should it be revenue? TFP?
□  OECD research suggests yes; upcoming work from Haltiwanger, et al too

Questions?
ian.hathaway@frontier-economics.com
@IanHathaway

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