Small businesses and startups are traditionally the backbone and driver of the American economy.
They are the primary creator of new jobs. They are the primary source of innovation. They are important.
But the number of startups being created in the USA seems to be declining. In 1985, 13% of all companies in the USA were less than two years old. In 2014, they were only about 8%. The number of people working in companies less than two years old declined from 9% of the workforce to below 5%.
This is happening in every industry, not just technology. It is happening across the country, not just in one geographic location.
If the trend continues long term, there will undoubtedly be negative implications for the USA economy at large.
Why is this happening?
One reason could be industry-market concentration by a smaller number of large companies making it harder for startups to compete. In the past decades more of the sales in an industry – most industries – are going to the largest companies. There is some research that the states that have a smaller number of companies dominating, there are fewer startups.
Another way to describe this is contestability, that is, how easy it is for smaller companies to compete with the market leader. This appears to have declined.
So reduced competition may be playing a role here.
I will discuss the reasons for the trends in concentration among many other industries later.
It is also possible that entrepreneurship is no longer as attractive to individuals. Higher salaries at large companies, those being offered to the most qualified, are increasing. Why beat yourself silly competing against a behemoth when you can make a ton working for them?
But the USA needs its entrepreneurs!
Dynamism and competition is the mother of innovation. It is the basis of a market economy. It forces businesses to innovate to maintain their market lead, reduces prices for customers, and allows a good wage to be paid to workers (so they don’t leave to join the competition).
In other words, dynamism allows the more efficient allocation of resources. Without this efficiency, there will be distortions in the market that harm the broader public and economy. Entrenched legacy companies hire fewer workers, are less innovative, less efficient, and have higher earnings than would otherwise be the case. Economists call this Acquired Market Power.
A prime example of this is Amazon in retailing. This is so obvious that no explanation is needed here.
The entire healthcare industry is another example of inefficiencies and uncompetitive practices. Again, this is so obvious that no explanation is needed.
There are so many ways entrepreneurs help the economy. Here are a few specific examples of how efficient allocation of resources helps everyone:
The overall increase in innovation. This word does not just refer to technology. and does not only include the number and type of new products and services introduced but also new business models, pricing structures, distribution channels (think internet), and so on. Legacy companies are not good at changing things like these.
More and better employment. New and growing businesses are the primary sources of job creation in an economy. This is a critically important factor for a vibrant local and national economy. It results in rising living standards for everyone. Just note the lack of job growth in the state of Illinois and the resulting negative impact that has on everyone that lives in the state.
Products and services people need are provided faster and more efficiently. Ever wonder why large firms cannot innovate in their industries as well as smaller competitors? Bureaucracy is one reason. Inability and unwillingness to “cannibalize: existing products that are producing that company’s cash flows is another major reason. Startups are not constrained by these issues.
Faster technology development. When I worked for Kraft, one of my jobs was developing the Research & Development strategy. This was an involved and detailed process that required many approvals by the higher-ups. All the way to the Board level. It took a long time and every project had to be financially justified. Startups can make decisions faster with fewer hurdles.
Entrepreneurs tend to be more involved in community development. They focus on local community projects and provide support to local charities. The same traits that make a successful entrepreneur are the same ones that drive that individual to become involved in local causes. And that effort also is good for the business.
All of the above good things happen when there is more competition between firms, and the business environment fosters dynamism. When startups, small businesses and entrepreneurs flourish. A long-term reduction in the American startup scene should be a concern for everyone.
