Our Declining Small Business Base

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A recent study by the Economic Innovation Group, a think tank that follows new business creation reported that new business formation is at an all time low since 1977 when this metric began to be counted.  From 1983 to 1987, there were a net of nearly 500,000 new companies started (new companies minus failed enterprises).  By 2010-2014 that number had dropped to just over 100,000 and is expected to continue to decline.  Its detailed in their recent report,  "Dynamism in Retreat."

 

Lack of available capital, individuals having fewer financial resources to start businesses, and heavy competition from ever larger competitors were the prime factors of why new business formation is about a fifth of what it was 30+ years ago.  Moreover, new business formation is taking part more and more in limited city centers such as New York and San Francisco.  Between 1997 and 2012 66% of industries saw significant concentration while the number of companies that were at least 16 years or older rose from 23% to 36% of total corporations for 1992 to 2014, respectively.  Between 1992 and 2014 new start ups provided an average of 2.9 million new jobs each year while established firms, 16 years or older, shed and average of 300,000 jobs each year.

 

New business formation drives hiring and social mobility.  As companies grow in size they hire and promote workers.  Rising concentration of companies reduces employment as duplicate jobs are cut. Without new business formation those impacted workers have fewer opportunities to redeploy their skills and experience.  Moreover, smaller companies are less likely to use resume scanners and useless personality tests that exclude possible talented workers.  

 

If we want to get back to a growing job market we need new business formation to counteract the tendency for older companies to merge and downsize payrolls.  

 

The report estimated that the lack of new business formation caused 924,000 missing new jobs alone in 2014.  

Comments

Bill H. Added Feb 7, 2017 - 11:43am
 
What it seems is that many of the large companies simply buy-out the little guys to stifle the competition. This is increasingly happening with contractors in the communications industry. It is also the case with small start-ups of specialty technology used in networks. Seems they come up with a niche software/hardware platform and are immediately vacuumed-up by the big boys in the field and their product sent to China and India for manufacture and support, or best case being supported here by H1-B workers.
Trump says he is going to make sure that jobs return to America, but I suspect virtually all of his backers will insist on "business as usual" to keep the money offshore and avoid the taxes while reaping the profits.
George N Romey Added Feb 10, 2017 - 2:25pm
Bill I suspect you are right.  Also there are very few resources for people to start businesses.  SBA money has all but dried up.  Even more so you have to be a person of means to start businesses and therefore the ones that are started tend to be high tech.  High tech millionaires form another start up employing their already rich friends.
Bill H. Added Feb 10, 2017 - 3:34pm
We may also be losing the "brainpower" that we once had due to lack of stimulation in the education process. Things like shop classes, labs, and other hands-on training are what once stimulated young minds on a path to success and also stimulated the learning process itself. Now we have kids that do their math on calculators and never get to use tools or test equipment until they get out of college, therefore the brain is not yet connected to the rest of the body in terms of full functioning in a field of study.
I think the difference is obvious with students who come from other countries where they still use the classic learning stimulation methods.
I have met some people in my industry that came from both India and Korea who told me that they were able to study electronics within a hands-on lab environment in grade levels that we now refer to as middle school (junior high). I was not able to achieve this until High School.
These days, I am told that lab and shop classes like electronics, wood shop, metal shop, and plastics shop no longer exist.
How in the hell are we supposed to stimulate students?
George N Romey Added Feb 10, 2017 - 4:00pm
Bill we teach kids to take tests in the same way corporations just want people to create spreadsheets from data dumps.  There is no sense of critical thinking or logic.  Our economic problems in this country are solvable but instead we rely on Federal Reserve gimmicks to postpone the day of reckoning because people with solutions and ideas are not valued.  
Dino Manalis Added Feb 10, 2017 - 5:38pm
Small businesses are the backbone of the economy and employ the most workers, but they're facing tough times; more regulations; high costs; and weak demand, which is why we need pro-growth policies to stimulate the private sector to spend; invest; hire; and broaden the tax base.
Kaushik Venkatasubramaniyan Added Feb 10, 2017 - 6:14pm
True Dino,
 
"Regulations" or more accurately non-tariff barriers are a key factor for the shrinking of the small business base. People won't buy a product that kills them unless they are forced too which they can't be if they are free. The only conditions should be those of a contract namely full disclosure and informed consent. 
Bill Kamps Added Feb 10, 2017 - 6:29pm
SBA was never a great source of lending for small businesses, it was just too difficult to qualify.  What has hurt small businesses are the regulations the banks are under, coupled with the repeal of Glass-Steagall.   
 
Bill H, nothing wrong with big companies buying out the little companies, this is one way for the owners to cash out, so they can get paid for their efforts of starting the company.  Otherwise, how do they get paid for  their equity in the company ?  Not every start up is going to go public, if you dont go public, you have to sell to someone, usually a  larger company.
 
Glass-Steagall prevented banks from investing depositor funds into the stock market, and in other financial instruments like derivatives.  As much as greed, this repeal led to the financial recession of 2008, as trillions were invested in risky derivatives.
 
What the repeal does now, is allow banks to invest their deposits into the stock market, which is far more liquid than investing in small businesses.  You can buy GE stock one day, and sell it the next.  You cant get out of a small business loan, days after you make it.  This helps large corporations, and is one reason the stock  market is at a high, but hit hurts small businesses.
 
At the same time government, has increased the regulation on bank lending, making it  more difficult for small businesses to comply with the fewer loans the banks are interested in making.  There are more rules to follow, more forms, and higher hurdles to qualify for the business line of credit, both  secured and unsecured loans. 
 
Anytime there is an increase in regulation, or an increase is the paperwork necessary to quality for  a loan, this helps big businesses, because they can afford to go through the hurdles to qualify. 
Cliff M. Added Feb 10, 2017 - 8:09pm
George, Seed money has gotten very tight along with wages.Initial carrying costs to get a business going remain high with working capital high on the list.The business cycles are favoring the big money more and more virtually squeezing out the little guy.
Stephen Hunter Added Feb 10, 2017 - 8:44pm
Good points George. Definitely concerning trend because as more people have to work for big conglomerates, the more it is like state labor. 
Bill H. Added Feb 10, 2017 - 10:28pm
 
I have seen occurrences of small start-ups getting purchased and dissolved simply to stifle the competition and in several cases, to kill a patented software or hardware platform simply because the Big Boys were working on something similar, but were lagging behind.
This is the kind of stuff these days that discourages many very smart people from even stepping forward with an idea or moving to open a startup, knowing they may only exist for a few months. Quite a few associates that I worked with about 4 to 5 years ago expressed this, and these were very talented people with some good cash backing. It was occurring on a regular basis in my industry. And the Big Boys I am referring to would simply send the hardware systems off to China to be assembled and distributed and the software systems off to India for debug, production, distribution, and technical support.
And of course, the Big Boys would laugh all the way to the (Swiss) bank.
Sorry - I really can't support that way of doing business.
Mircea Negres Added Feb 11, 2017 - 1:24am
George, it seems to me that business mirrors society, or at least human nature. Its youth from 1945 until the late 1970s grew fast and expanded, then it hit maturity until the mid-1990s and is now in a period of what middle-aged people do- consolidate gains, minimise inefficiencies, eliminate competition, prevent new threats from rising and take as much as possible in order to feather the nest for the decrepitude of old age without giving the future beyond the grave much thought.
 
If this trend is not reversed and growth encouraged like it was after the end of World War 2, the global economy will resemble Egypt after the end of the age of pharaohs- a lot of large, beautiful monuments surrounded by hopeless deserts and overrun by foreign hostiles determined to control what's left and what they don't understand for even dumber reasons.
 
From my side, I support small business whenever possible, even if it's a little or more expensive than chain stores and supermarkets, because I know that in the end we will lose the current low prices and benefits of economies of scale once the big boys muscle out the little guys. The future lies in growth, not in stagnation, but just you try to get politicians to listen to somebody running a corner shop instead of the WalMart CEO...
Jeffry Gilbert Added Feb 11, 2017 - 4:23am
Big corporations are actively working against small business. Like everything else the game is rigged. 
 
Guillotines are the only solution 
Jeff Jackson Added Feb 11, 2017 - 9:24am
All of the small "startups" are trying to get bought up by the larger firms. If you read The Wall Street Journal, you know that Microsoft is actively seeking out new firms to acquire, since Bill Gates really missed so many of the innovations that have captured the markets and had left Microsoft in the economic dust.
Kaushik Venkatasubramaniyan Added Feb 11, 2017 - 9:59am
Nice one Jeff :) 
Kaushik Venkatasubramaniyan Added Feb 11, 2017 - 10:00am
That's a way owners who lack the wherewithal to go all the way can get compensated for the progress they have made with the business at least part of the way