The Economic Downturn and New Firm Creation (c) 2009 Paul Reynolds 4/14/2019 The Economic Downturn and New Firm Creation Paul D. Reynolds George Mason University [pauldavidsonreynolds@gmail.com] Friday, 30 October 2009 Beyond the Crisis – Implications for SMEs and Entrepreneurs Swedish Entrepreneurship Forum House of Sweden 2900 K Street Washington, DC 20007 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

(c) 2009 Paul Reynolds 4/14/2019 Two arguments Business creation as a career option for those that are loosing their jobs Image of desperate unemployed rushing into business creation Lots of media coverage of people pursing new career options Lack of social safety net may lead to more start-ups Business creation as a source of jobs to reduce unemployment Well established that new firms are a major source of job creation, would contribute to an economic recovery 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

(c) 2009 Paul Reynolds 4/14/2019 On the other hand--- Majority of nascent entrepreneurs are pursuing promising business opportunities The are “pulled” into this career path by perception of business opportunities Small proportion are “pushed” into business creation—necessity entrepreneurs 4 of 5 nascent entrepreneurs have a job or are managing a going business 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

Evidence of changes in Business Creation reflecting Downturns (c) 2009 Paul Reynolds 4/14/2019 Evidence of changes in Business Creation reflecting Downturns Consider Global Patterns based on annual surveys of the Global Entrepreneurship Monitor Project Consider US patterns reflected in the Panel Study of Entrepreneurial Dynamics Both programs use the same procedures for locating nascent enterprises—firms in gestation or start-up efforts 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

CONCEPTUAL MODEL – The Start-up Process (c) 2009 Paul Reynolds 4/14/2019 CONCEPTUAL MODEL – The Start-up Process Social, Political, Economic Context Adult Population Growth NE Firm Birth Start-up Processes Persist ? NI Business Firm Population Quit ? NE = NASCENT ENTREPRENEURS NI = NASCENT INTRAPRENEURS ? GEM PSED PSED 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

Cross National Analysis (c) 2009 Paul Reynolds 4/14/2019 Cross National Analysis Consider dramatic case: Argentina Consider general patterns 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

(c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

(c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

R = 0.11, n= 179 (c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

2005 GDP per Capita greater than $31,000/yr (c) 2009 Paul Reynolds 4/14/2019 2005 GDP per Capita greater than $31,000/yr R = 0.38, n= 77 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

(c) 2009 Paul Reynolds 4/14/2019 Cross National Data Isolated examples of major impact when dramatic changes occur in the economy As a general rule, prior economic growth seems to have little effect In rich countries, growth in GDP per capita has a statistically significant impact on increase in business creation Prevalence of business creation activity is a very stable feature of most countries 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

U.S.: Consider Business Creation Patterns in Previous Recessions (c) 2009 Paul Reynolds 4/14/2019 U.S.: Consider Business Creation Patterns in Previous Recessions US Data is limited, little useful data prior to 1990 Four data series New entries in federal social security files New entries in state unemployment insurance files Reports in monthly Current Population Survey of efforts to pursue self-employment Survey respondent reports of active involvement in start-ups: nascent entrepreneurs Two “official” recessions since 1990 [NBEA] 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

Recessions (c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

(c) 2009 Paul Reynolds 4/14/2019 Two major inferences There is no clear impact of business downturn on new firm creation There is a lot of attrition in the process 12 million of 190 million are nascent entrepreneurs 7 million identified in CPS data collection Create 864,000 new employee establishments (BLS) Create 648,000 new employee firms (US Census) Takes 13 active nascent entrepreneurs to create one new employer establishment 17 to create a new employer firm Other nascents succeed as non-employer firms 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

Consider character of US nascent entrepreneurs in 2005 (c) 2009 Paul Reynolds 4/14/2019 Consider character of US nascent entrepreneurs in 2005 These are individuals active in the business creation process Consider their labor force status as they work on new start-up 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

One in twenty are unemployed seeking work! (c) 2009 Paul Reynolds 4/14/2019 One in twenty are unemployed seeking work! 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

(c) 2009 Paul Reynolds 4/14/2019 Summary so far Only 4% of nascents in 2005 were unemployed looking for work Another 20% were not working, identified as homemakers, disabled, retirees, or students Consider the changes in the number of US workers since 2005 in work [BLS data] 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

(c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

(c) 2009 Paul Reynolds 4/14/2019 Comments The total number working has dropped in 2009, 6 million less than 2008 This reduces the base from which most nascent entrepreneurs emerge The number not working, including the unemployed, has increase by 8 million from 2008 to 2009 Participation rate in start-ups among this group is half that of those in the working group Two processes have opposite effects Less workers will reduce the supply of experienced, opportunity nascent entrepreneurs More unemployed may increase the supply of necessity nascent entrepreneurs The net effect is difficult to predict without more precise data on participation in business creation 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

Assessment: Negative Effects (c) 2009 Paul Reynolds 4/14/2019 Assessment: Negative Effects Major impact may be on the perception of business opportunities Reduction of consumer demand will reduce the attractiveness of opportunities This may reduce the prevalence of nascent entrepreneurs Changes in access to resources for the new firm Harder to obtain financial support 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

Assessment: Positive Effects (c) 2009 Paul Reynolds 4/14/2019 Assessment: Positive Effects Alternatives to firm creation may be less attractive: Wage work less stable, reduction in economic benefits May increase the attractiveness of business creation Lots of data that self-employed/business owners happier that wage workers This may increase the prevalence of nascent entrepreneurs Changes in access to resources for the new firm Inputs more readily available Cost of inputs—supplies, components, rental of space, wages—may be reduced This would increase potential for a profitable new firm In the US, expect substantial variation across geographic regions and economic sectors 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09

References ‘http://www.psed.isr.umich.edu’. (c) 2009 Paul Reynolds 4/14/2019 References ‘http://www.psed.isr.umich.edu’. Gartner, W.B., K.G. Shaver, N. M. Carter, and P. D. Reynolds (Eds). (2004). Handbook of Entrepreneurial Dynamics: The Process of Business Creation. Thousand Oaks, CA: Sage Publications. Reynolds, Paul D. (2007). Entrepreneurship in the United States: The Future is Now. Boston, Kluwer Academic. Reynolds, Paul D. (2007). New Firm Creation in the U.S.: A PSED I Overview. Hanover, MA: now Publishers, Inc. Reynolds, Paul D. (2009) Screening Item Effects in Estimating the Prevalence of Nascent Entrepreneurs. Small Business Economics 33(2):151-163. Reynolds, Paul D. and Richard T. Curtin. (2008). Business Creation in the United States: Entry, Startup Activities and the Launch of New Ventures. Chapter 8 in U.S. Small Business Administration. The small Business Economy: A Report to the President. Washington, DC: U.S. Government Printing Office (in press). Reynolds, Paul D. and Richard Curtin (2008). Business Creation in the United States: Panel Study of Entrepreneurial Dynamics II Initial Assessment. Foundations and Trends in Entrepreneurship. V(3):155-307. Reynolds, P. D. and R. T. Curtin (Eds). (2009). New Firm Creation in the United States: Preliminary Explorations with the PSED II Data Set. New York City, NY: Springer, Pp. 219-238. Reynolds, Paul, Niels Bosma, Erkko Autio, Steve Hunt, Natalie De Bono, Isabel Servais, Paloma Lopez-Garcia, and Nancy Chin. (In 2005) Global Entrepreneurship Monitor: Data Collection Design and Implementation: 1998-2003. Small Business Economics: 24: 205-231.   Reynolds, Paul D., William D. Bygrave, Erkko Autio, and others (2004). Global Entrepreneurship Monitor: 2003 Summary Report . Babson Park, MA; Babson College (140 pages). 4/14/2019 9:28:36 AM FSF_WashDC_30Oct09 FSF_WashDC_30Oct09