ICSB Executive Director Dr. Ayman El Tarabishy was recently quoted in an article by Singapore newspaper, The Straits Times, on the status of entrepreneurship in the United States. The article was written by US Correspondent, Melissa Sim and was published on May 17, 2015. Read the full article below or click here.
By Melissa Sim
Reports indicate that declining business dynamism could stunt economic growth
Since Mr Zac Gittens, 31, co-founded a menswear rental company called Tie Society in 2011, its client list has grown by five times. The firm even has a presence in Japan now, and Mr Gittens is talking about expanding further.
Across the United States, the buzz from new tech start-ups like Tie Society is incessant, jobs are being created at a steady tick and unemployment – 5.4 per cent – is close to pre-recession levels. But amid the good news, analysts say entrepreneurship in the US is not what it used to be.
Recent reports indicate that business creation in the US is trending downwards and that a drop in business dynamism – the process by which firms are born, fail, expand and contract, which forces labour to be put to better use – could stunt long-term economic growth.
The Ewing Marion Kauffman Foundation, a non-profit focused on education and entrepreneurship, in a report citing the US Census Bureau’s Business Dynamic Statistics, said that new business creation peaked in 2006 with more than 560,000 new start-ups, but in 2012, that number dropped 27 per cent to around 410,000 new start-ups.
The recession naturally played a large part in limiting resources and credit and influencing prospective business owners to hold on to their jobs instead of starting a business.
But apart from that, Dr Ayman El Tarabishy, associate teaching professor in management at the George Washington University (GWU), said that people are also more selective about the businesses they start up.
“Ten to 15 years ago, people just said ‘I’ll try this’ and had limited information on what was already out there. But now, entrepreneurs are more calculated in their decision-making because they can see what is already online.”
Policies, too, play a part in the decline of business creation.
Mr Jason Wiens, policy director in research policy at the Kauffman foundation, cited the “proliferation of laws and regulations that are skewed towards larger and older firms” as one problem.
For example, “military procurement, which played a key role in fostering start-ups in computers and semiconductors in the past, has shifted to favour large defence contractors”, suggested Mr James Bessen, a lecturer at the Boston University School of Law.
Another possible problem lies with immigration policy.
Dr Robert Litan, a non-resident senior fellow in the Economic Studies Programme at Brookings, who co-authored a report titled Declining Business Dynamism In The United States: A Look At States And Metros, said that “historically, the data shows that immigrants are more likely to launch businesses generally than native-born Americans”.
But many foreigners have found it difficult to stay in the US after graduation, possibly stunting new business formation.
“We need to give green cards (permanent work permits) to foreign students obtaining STEM (science, technology, engineering and mathematics) degrees from US universities, so they can work here after graduating,” said Mr Litan.
But things could be looking up, with venture funding jumping from about US$17 billion (S$22.5 billion) in 2013 to more than US$25 billion last year, according to research firm Mattermark.
Experts agree that one part of the US where there is more business creation than many other locations is Silicon Valley. “It’s incredibly vibrant in the Bay area,” said Tie Society’s Mr Gittens.
Ms Sara Thomas, a senior associate at venture capital firm Maven Ventures, said she is constantly meeting new entrepreneurs as part of her work. “Last year, 49 per cent of companies receiving venture financing were funded for the first time, so that leads me to believe that there are more new businesses than ever,” she said.
But she is quick to point out that it does not mean tech businesses are not dying. “In my field, it’s common that 75 to 90 per cent of companies will eventually fail,” said Ms Thomas.
The Brookings report on business dynamism states that in 2008, business deaths exceeded business entries in the US – the first time this has happened in 30 years.
As for whether the trend can be reversed, some believe the millennials, with their technological know-how and exposure to education on entrepreneurship, will lift business creation.
Mr Jim Chung, executive director of innovation and entrepreneurship at GWU, said: “Millennials may actually have an advantage over previous generations in some ways.”
These include the cheaper start-up cost of an Internet or software company and the advent of crowdfunding, which was not available before.
Yet, there are problems with this strategy of relying on the millennial generation.
“Potentially holding them back is the fact that they have lower household wealth, in part due to the effects of the Great Recession,” said Mr Wiens. “The weak job market has also hurt millennials as they have had fewer opportunities to develop skills that can translate into entrepreneurship.”