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Cultivating High-Impact Firms: A Key Prescription for RecoveryBy Zoltan Acs, Chief EconomistJockeying for position on whom to assist in creating jobs is heating up. While small businesses are recognized as longstanding contributors to job creation, there are different types of small businesses. The Global Entrepreneurship Monitor (GEM) survey shows that what increased in 2009 was the necessity entrepreneurship rate, that is, businesses started by people who have lost their jobs and cannot find employment. In fact, this has been increasing steadily since 2005. The rate of nascent entrepreneurship—which measures individuals deliberately planning a business launch—has been heading down over the same time period. In fact, the GEM survey shows that entrepreneurial attitudes in the United States have worsened since 2006, with people perceiving less opportunity, more fear of failure, and fewer startup intentions. Consequently, entrepreneurial activity has declined by most measures, including the nascent entrepreneurship rate, new business ownership rate, and early stage entrepreneurial activity. The Kauffman Foundation has just released the Kauffman index of entrepreneurial activity showing that the number of U.S. business startups launched in 2009, the third year of the current recession, reached record highs—exceeding the number of startups during the peak 1999-2000 technology boom. African Americans and older Americans experienced the greatest increases in business-creation rates from 2008 to 2009. Unfortunately, much of this is necessity entrepreneurship. The bulk of these self-employed do not and will not hire workers. Recent research shows that people who are solo entrepreneurs as measured by the Kauffman Survey are motivated more by desperation than business opportunities. However, what is most disturbing is that entrepreneurial aspiration— the next new “big idea”—has also declined in the population. Aspirations reflect the qualitative nature of entrepreneurial activity. For example, entrepreneurs differ in their aspirations to introduce new products and production processes, and to export. The number of entrepreneurs reporting that their product is new on the market, has few competitors, has an international orientation, or will create jobs in the future all declined from around 2005. In other words, high-impact entrepreneurship—the kind of firms that create most of the jobs, most of the innovations, and most of the competitiveness of our great economy—appear to be on a long-term decline. While most nonemployer firms can be started with little or no money, high-impact firms are a different story. They need real money—debt plus equity. In other words, they need access to the capital markets. The cyclical downturn in entrepreneurial aspirations in the United States can be traced not so much to the recession as to the financial crisis. While financial innovation played a crucial role in innovative entrepreneurship in the past, the current crisis gives us pause. The financial situation has been poisoned by years of neglect, dozens of bad decisions, and ineffectual federal regulation. Without addressing the financial crisis, finance will not flow to new firms to create the innovations needed to fuel growth. Creative finance can be the lifeblood of entrepreneurship, but today it is more like a parasite, with entrepreneurs increasingly in service to finance rather than the other way around. Unless we change the incentive structure, the “best and the brightest” will continue to practice unproductive or even destructive entrepreneurship. Office of Advocacy research confirms that most jobs are created by high-impact firms (gazelles); unless Americans are willing and able to become high-impact entrepreneurs we cannot compete in the global economy, innovate to create growth, or reduce unemployment. While a million new self-employed are helping lower unemployment and keep their own heads above water, it will also take a few hundred thousand high-impact firms to renew our economy’s momentum. For More Information Learn more about the trends cited in this article at the following sites: The Global Entrepreneurship Monitor (GEM) survey: www.gemconsortium.org. Kauffman Index of Entrepreneurial Activity: www.kauffman.org/uploadedfiles/kiea_2010_report.pdf. Source: The Small Business Advocate Discuss it on SBE Forum >> |
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