E.J. Reedy and Bob Litan at Kauffman Foundation have written a new report on start-ups and job creation -- Starting Smaller; Staying Smaller: America's Slow Leak in Job Creation. The report highlights the fact that the job creation slowdown predates the beginning of the Great Recession.
Interestingly, the problem has not been a lack of start ups. In fact, the report notes that the 2010 Kauffman Index of Entrepreneurial Activity was at an all time high. The reason for the job slow down has been a decrease in the average number of jobs being created by new firms:
BLS data show that new establishments opened their doors with about 7.5 jobs on average for much of the 1990s, a figure that has since declined to 4.9 jobs per new
. . .
the most recent year of data shows a cohort of new business that was smaller in number and in jobs created than in any cohort since 1994 and, in most cases, than any previously measured cohort in data dating back to 1977.
And the problem is not just that new companies start out small. They also have stayed smaller.
The average rate of employment growth from birth to age two and then age two to age five has been decreasing in all the data series, with only moderate yearly variation. So, while the levels might vary slightly in the different data series, the trends appear similar: Businesses that survive their early years of existence have been adding jobs at a slower pace than the historic norm in recent years. (emphasis in original)
So the problem is not start-up, but scale-up.
To me, this calls for a different approach to public policy. The recent focus has been on the start-up process, for example the President's Startup America (see this posting on the Kauffman blog for an update of the program). This new look at the data tells me we need to focus more attention on the growth phase. There are a number of things we could be doing to help established business grow faster. For example, we could expand the Manufacturing Extension Partnership (MEP) programs to encompasses a broader range of business assistance services (including management of intangible assets) to a broader range of companies. We could also increase funding for high-growth intangible-rich companies by allowing intangible assets (such as patents and other IP) to be used as collateral for loans. Creating a pilot program on IP backing lending at SBA would be the first step.
Bottom line: entrepreneurship is good; scaling up from start-up to high growth is better. Time we start paying more attention to the latter part of the process.