Entitled “The Importance of Startups in Job Creation and Job Destruction”, the study bases its findings on the Business Dynamics Statistics data that tracks the annual number of new businesses (startups and new locations) from 1977 to 2005 in the USA. The study defines startups as firms younger than one year old.
The study reveals that, both on average (and for all but seven years between 1977 and 2005), existing firms are net job destroyers, losing 1 million jobs net combined per year.
By contrast, in their first year, new firms add an average of 3 million jobs.
Further, the graph above shows, whilst job growth patterns at both startups and existing firms are pro-cyclical, existing firms have much more cyclical variance. Most notably, job creation at startups remains stable during recessionary years, while net job losses at existing firms are highly sensitive to the business cycle.
According to the study’s authors,
“These findings imply that America should be thinking differently about the standard employment policy paradigm. Policymakers tend to focus on changes in the national or state unemployment rate, or on layoffs by existing companies. But the data from this report suggest that growth would be best boosted by supporting startup firms.”
“Because startups that develop organically are almost solely the drivers of job growth, job-creation policies aimed at luring larger, established employers will inevitably fail….such city and state policies are doomed not only because they are zero-sum, but because they are based in unrealistic employment growth models.”
Given that he is exceptionally busy during this week of all weeks, I am grateful that this entrepreneur, a man I admire enormously, took the time to send me the reference.
It will, along with other data collected, help with constructing an alternative to the current economic strategy.
More importantly, it demonstrates, yet again, the lack of analysis that has gone into the Economic Renewal Programme and the seemingly total reliance of senior civil servants in the Department for Economy and Transport on the CBI, and their penchant for "anchor companies", for any policy direction.
4 comments:
Very persuasive indeed - and a clear indicator, as you say, of where WAG should be placing it emphasis in economic development policy.
This is a very thought provoking article that invites further investigation of the data.
What are the population, and the geographic location of the study?
How does the population and location compare with Wales, or areas of Wales?
What are death statistics for small firm start-ups in the study?
Large firms seeking productivity improvements will tend towards job destruction; what is the value added per worker of a) large firms, b) small firms in the study?
I am very sympathetic to any finding in favour of the benefits of small firms to job creation and to the economy. I hope policymakers in Wales will examine policy choices in greater detail and come forward with a workable strategy for job creation and for increasing value added.
Iadmire him too!
Bern
To be fair, WAG start-up support (certainly in south-west Wales) is one aspect of business support that hasn’t suffered too greatly in recent years. Non-growth business starts are given a few hours of one-to-one advisor support, as well as being able to attend free business start-up training courses. In addition, growth (>£10k investment + projected 1st year t/o > £80k) starts also, usually, qualify for significant additional one-to-one advisor support and, in some areas, additional training courses related to growth issues; growth start support continues to the end of the first year of trading. There is also similar support for graduate ‘spin-out’ business starts.
If you look at some of my other comments, you can see that I am no WAG flunky, but I believe in giving credit where it’s due. The WAG ‘Start Up Service’ may not be perfect, but it’s one of the few services that does seem to be getting things, mostly, right (certainly in my area).
In addition, there is still a small grant (up to £5k @ 40% max eligible costs) available in most areas. Commonly referred to as LIF (Local Investment Fund), it’s ideal for smaller expansion projects and start-ups where eligible capital costs are between about £3k and £15k.
Personally, if I were looking to expand my business (especially thro’ diversification into new products/services/markets) and needed a bit of support, I’d think about doing it as a growth business start, whack-in an application for LIF (for the eligible costs), get started and, maybe, reverse the new business into the existing business in a couple of years, if it made sense to do so.
NEWS JUST IN: LIF Grant is being increased to £10k, so if your eligible project costs will be between about £3k and (now) £25k, it's well worth applying for.
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