New Business Creation in the United States Suffering Sharp Decline

Paul Reynolds

The largest study to date that measures entrepreneurial activity in the United States has found that roughly four million fewer persons created businesses —more than 20 percent decrease—from 2003 to 2004.

Prof. Paul D. Reynolds, director of the Entrepreneurship Research Institute at the Eugenio Pino and Family Global Entrepreneurship Center (GEC) and the study’s principal investigator, said the drop is significant to the U.S. economy because new businesses account for about half of all new job creation. Also, entrepreneurship is one of the factors that make the American economy adaptable and innovative. The drop, however, might not be of immediate concern, he said. It could just be a correction from the very high levels found in 2000 at the peak of the dot-com craze.

“If the decline continues in 2005 there may be a justification for policy intervention,” said Reynolds.

The study, titled Entrepreneurship in the U.S.: The 2004 Assessment, utilizes the world’s most widely used measure of entrepreneurial activity. The study looks at those active in firm start-ups or new firm management and gathers details on entrepreneur demographics such as age, ethnicity, gender and education. More than 12,000 interviews were conducted, which shed light on who is starting businesses, what types of businesses, and under what social conditions.

“Some of the findings in this study could be interpreted as a cause for concern, but the only way to address problems is to identify them first,” said FIU President Modesto A. Maidique. “Dr. Reynolds does just that, and his thoroughness helps pinpoint where those potential problems may be, which is critical if we are to take corrective action.”

Among other findings in the study is the large volume of entrepreneurial activity—more than 20 million U.S residents were starting a business or managing a new one. This level of activity was not expected when Reynolds and other social scientists started looking at the field a decade ago. New start-ups range from one-person landscaping companies, to snazzy computer animation studios, to regional airlines.

“To say that business creation and management is a popular U.S. pastime would seem to be an understatement,” said Reynolds, who holds degrees in engineering, business, psychology, and a doctorate in sociology from Stanford University.

Few countries in the developed world have the United States’ entrepreneurial level of activity. Reynolds said the bulk of remaining entrepreneurial activity in the world takes place in developing nations. India and China combined have more than 200 million people engaged in entrepreneurial activity.

If the drop in American entrepreneurial activity continues, he said, the U.S economy will be threatened more by the developing world than by Japan or Western Europe. In developed countries starting a business is not encouraged or as socially accepted a career path, as it is in the United States.

Alan L. Carsrud, the Pino Entrepreneurship Center’s executive director, said other findings in the study, which could become an annual index to help track the economy’s health much like the unemployment rate, hold information policymakers will need to address the drop in entrepreneurship should it continue. Among those findings are:

• Blacks and Hispanics are more likely than Whites to be involved in a start-up effort but less likely than Whites to end up with a new firm.
• Social support is crucial in creating entrepreneurial culture. Those who know entrepreneurs are more likely to become entrepreneurs themselves.
• Most entrepreneurship funding comes from informal family and friends networks that offer about $100 billion a year in financing. Formal sources such as venture capitalists provide $20 billion and the Small Business Administration (SBA) $200 million.

“One of the keys in the study is that it not only points to weaknesses, in the economy” Carsrud said. “But it gives guidance on how to tackle these problems.”

The study will be presented in a telephone press conference
at 11:00 a.m. EDT
Thursday, June 2, 2005
Call (866) 556-1782 to attend the presentation.

For more information please call Lourdes Balepogi at the GEC at 305-348-7526. For media inquiries call Jose D. Parra at 305-348-2716. The study can be viewed by logging onto http://www.entrepreneurship.fiu.edu