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Steady New Company Creation

on January 14, 2010 Source: Policy Dialogue on Entrepreneurship

A new Kauffman Foundation study, Exploring Firm Formation: Why Is the Number of New Firms Constant?, reveals that the annual new-business creation in the United States remains remarkably constant across time. This indicates that economic conditions, population growth, scarce or abundant capital, technological advances and other external factors have little impact on prospective entrepreneurs' decisions to form new companies.

The study's authors, Dane Stangler, senior analyst, and Paul Kedrosky, senior fellow, both with the Kauffman Foundation, researched several firm formation datasets, including employer firms as tracked by the U.S. Census Bureau and the Small Business Administration, firm births in a dataset tabulated by the Census Bureau, and new establishments, including not only unique firms but also new locations established by existing firms, as tracked by both the Census Bureau and the Bureau of Labor Statistics. Regardless of the dataset examined, each year's total of new companies is consistent with other years, with annual numbers fluctuating only mildly.

In addition, the study showed that entrepreneurship education and venture capital, two indicators that have received heightened attention in recent years, had no appreciable impact on entrepreneurial activity in the United States. However, the authors point out that entrepreneurship education, venture capital and similar entrepreneur-friendly measures might have helped maintain a constant level of firm formation.

In terms of what these findings mean for policy, Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation said: "Consistency of firm formation from year to year still means that hundreds of thousands of Americans are poised to become entrepreneurs at any given time. Policies and economic conditions will affect this number at the margins, but the most important thing we as a nation can do to encourage entrepreneurship is to provide a hospitable environment that helps more startups become fast-growing, job-creating companies."

"It is possible that we'll only be able to perceive the fast-growing companies that emerged out of a particular year's class of new firms in retrospect," Litan said, "but we should enact policies, provide education and make available capital and technologies that will enhance the possibility of success for every new company."

Category:  General 

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