Review of the highlights from a Brookings Institution study about the long term secular decline in the vitality of new American small and medium enterprises.

1. +
American SMBs facing a
long term decline
Review of highlights from a Brookings Institution
study completed in May 2013

2. The Brookings Institution released a study of small business
dynamism in May 2014 that has gotten a lot of press.
Punchline: Rate of new firm formation among
American SMBs is in long term decline.
New firm formation
among SMBs in
long term decline
Troubling 30 year secular decline across
multiple business cycles and political
administrations
No industry (not even high tech) has
withstood the decline except financial
services
Geographically
pervasive
Trend is prevalent across all 50 states and
all but a few of 360+ metros
Decline across
industries
FindingsIssue
1
2
3
2

3. The Problem
3
Brookings Institution just released a study that originated from Census Bureau data*:
• Rate of new firms forming & entering the market has steadily declined over the last 30 years.
• Net churn has been growing (see figure).
• For the first time in 3 decades, firm deaths exceed firm births.
*Census Bureau data source here
• The reasons for this decline are unclear, though there is a lot of
speculation.
• However, the decline predates the current recession (though it
seems to have accelerated post-2008 financial crisis).
• The trend is alarming, and has implications for job growth (new
businesses drive 15% of new jobs created nationally).
• Given that the vast majority of job creation globally happens
overseas (as much as 75% of new jobs) by American multinationals
(larger companies that nevertheless got their start in the US), the
decline in new US firms has implications not just for the US but for
the rest of the world.
New firm formation among small businesses in long term decline1

4. Scope of the problem: why are people worried? (1 of 3)
Decline prevalent across:
• all 50 states
• all but a handful of 360+ metro
regions studied
• NOT isolated to a few regions, despite
popular belief
o “The broad decline in business
dynamism occurring during the last few
decades nationally is not isolated to a
few regions. In fact, the data show that
it is a pervasive force evident in nearly
all corners of the country.”
Geographically pervasive Considerations
Data
2
*Job reallocation = a specific measure of labor market churning resulting from the underlying business dynamism of firm expansions, contractions, births, and closures
4

5. 5Scope of the problem: why are people worried? (2 of 3)
Geographically pervasive2
5

6. Scope of the problem: why are people worried? (3 of 3)
Decline prevalent
across broad range
of industry verticals
• % change in business dynamism high in construction,
manufacturing
• % change in job reallocation* > 30% in most industries over
33 years
• Surprisingly this is even true in high-tech starting around 2002,
according to a Kauffman Foundation study (see appendix).
Decline across industries Considerations
Data
3
*Job reallocation = a specific measure of labor market churning resulting from the underlying business dynamism of firm expansions, contractions, births, and closures
6

7. What are people saying about this study?
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Authors
Media
• Authors demonstrate that the decline is pervasive across regions and sectors; they do not
speculate on the underlying factors.
• However, they do state that “whatever the reason, older and larger businesses are doing
better relative to younger and smaller ones.”
• “Eat or be eaten”: Deep structural changes stemming from large, vertically integrated
suppliers and competitors work against small companies and in favor of consolidation
• Systemic costs: Health care costs, cost/complexity of regulation, labor costs (e.g. proposed
minimum wage hikes etc.) are increasing risk aversion in the US, that stems from fear of
litigation, penalties and long-term costs
• Long-term decline in US labor market skills/competitiveness vs. rest of world
• Opportunities to join larger businesses more attractive than starting up
• Demographics & risk tolerance:
• Aging baby boom generation too risk averse to start new firms
• Despite millennials saying they aspire to be entrepreneurs, they are not taking the
leap
• Immigrant entrepreneurs are our best hope (suggesting need for immigration
reform)

8. Selected readings/viewing
8
Interviews /
Discussions
Readings
Brookings study (May 2014):http://www.brookings.edu/research/papers/2014/05/declining-business-
dynamism-litan
The Atlantic: “The Mysterious Death of Entrepreneurship in America” (5/12/2014)
http://www.theatlantic.com/business/archive/2014/05/entrepreneurship-in-america-is-dying-wait-what-does-that-
actually-mean/362097/
Kauffman Foundation index of entrepreneurial activity: (4/9/2014)
http://www.kauffman.org/multimedia/infographics/2014/infographic-kauffman-index-of-entrepreneurial-activity-1996-
2013
Kauffman Foundation study focused on high tech sector (Feb 2014):
http://www.kauffman.org/~/media/kauffman_org/research%20reports%20and%20covers/2014/02/declining_business_d
ynamism_in_us_high_tech_sector.pdf
“On Point with Tom Ashbrooke” (5/15/2014)
-- Discussants: Nancy Koehn (historian,
author of book on Ernest Shackleton), Lina
Khan at New America Foundation, Ray
Hennessey at Entrepreneur.com, Danielle
Kurtzlebean at Vox.com
http://onpoint.wbur.org/2014/05/15/small-business-jobs-
regulation-entrepreneurship http://www.cnbc.com/id/101669761

9. 9
Additional data from Brookings study 9