SBA Data Show a Declining Rate of Entrepreneurship in the U.S.

Yes, Virginia, we really are starting fewer businesses.

Scott Shane
Scott Shane

In her Feb. 13, 2009, post "What's so entrepreneurial about the United States?" Dawn Rivers Baker took issue with the statistics I presented from the Bureau of Labor Statistics on downward trends in entrepreneurship in the United States.

She said, "It is often possible to find numbers to support any argument you care to make and even to find one set of 'official' numbers that can contradict what another set of 'official' numbers seems to say."

I have no doubt that the general principle of her argument is right; statistics are often contradictory. But the data from the Small Business Administration that she quoted don't contradict the numbers from the BLS that I presented. She wrote, "According to data from the SBA's Office of Advocacy, the population of U.S. firms increased at a much faster rate than the growth in the population of U.S. humans in the decade from 1997 through 2006."

Unfortunately, the population of U.S. firms is not a measure of new business creation. It is a measure of the stock of businesses in existence at any point in time. The population of businesses goes up if the number of new businesses started each year exceeds the number of existing businesses that fail each year. So we need to look at a different set of SBA numbers to figure out what happened to entrepreneurial activity over the 1997-to-2006 period.

The SBA's primary number for estimating business formation is the count of new employer firms founded in a year. The SBA reports that in 1997, 590,644 new employer businesses were started. In 2006, the agency estimates, 640,800 new employer businesses were created. That's a 7.9 percent increase over the decade.

The Census Bureau reports that in 1997, there were 272,912,000 Americans. In 2006, it estimated that the population had increased to 298,363,000 people. That's a 9.3 percent increase. Over the 10 years, the U.S. population increased faster than the rate of new employer firm formation.

Below is a graph I created of the per capita rate of employer firm formation in the United States since 1990. The trend is not good for entrepreneurship in America. Although the rate bounces around from 1990 to 2007, the per capita rate of new employer firm formation was 10 percent lower in 2007 than it was in 1990.

Per Capita Rate of New Employer Firm Formation, 1990-2007

Sources: Data collected from Office of Advocacy, Small Business Administration, and Census Bureau

I think that it is important to pay attention to these statistics. While it feels good to claim that America is still doing very well at spawning new businesses, the data suggest that there's a problem in our entrepreneurial system. We should figure out what that problem is rather than put our heads in the sand. After all, the ostrich approach didn't work too well for us with home mortgages.

Scott Shane is A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. He is the author of The Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live By, among other books.

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