1. 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
Friday, 30 October 2009
Beyond the Crisis –
Implications for SMEs and Entrepreneurs
Swedish Entrepreneurship Forum
House of Sweden
2900 K Street
Washington, DC 20007
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2. (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
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3. (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
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4. 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
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5. 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
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6. Cross National Analysis
(c) 2009 Paul Reynolds
4/14/2019
Cross National Analysis
Consider dramatic case: Argentina
Consider general patterns
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7. (c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09
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8. (c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09
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9. R = 0.11, n= 179 (c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09
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10. 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
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11. (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
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12. 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]
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13. Recessions (c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09
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14. (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
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15. 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
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16. One in twenty are unemployed seeking work!
(c) 2009 Paul Reynolds
4/14/2019
One in twenty are unemployed seeking work!
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17. (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]
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18. (c) 2009 Paul Reynolds 4/14/2019 FSF_WashDC_30Oct09
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19. (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
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20. 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
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21. 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
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22. References ‘http://www.psed.isr.umich.edu’.
(c) 2009 Paul Reynolds
4/14/2019
References ‘
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):
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):
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
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: Small Business Economics: 24:  
Reynolds, Paul D., William D. Bygrave, Erkko Autio, and others (2004). Global Entrepreneurship Monitor: 2003 Summary Report . Babson Park, MA; Babson College (140 pages).
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