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Where Have All the New Firms Gone?

Mark Marich

At a time when policymakers throughout the U.S.--and all over the world for that matter--are pointing to the job creating power of entrepreneurs and small business owners, a new study from the Kauffman Foundation points out a worrisome trend. The nation's business startup rate fell below 8 percent for the first time in 2010, marking the lowest point on record for new firm births.

The new Business Dynamics Statistics report, Where Have All the New Firms Gone?, shows that new firms as a percentage of all firms continued a steady downward trend in 2010 – going from a high of 13 percent (as a percentage of all firms) in the 1980s to just under 11 percent in 2006 before making a steep decline to the 8 percent in 2010 – the most current year of data available.

No matter how you look at the numbers, it doesn't point to an easy path to full economic recovery.

"Without the new jobs created by business startups, the Great Recession would have been even deeper, with many more jobs lost," said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation. "Unfortunately, new firm formation has waned since the 1980s, and the recession accelerated the decline. If we are to achieve and sustain a hearty recovery, policymakers, educators and organizations that help entrepreneurs commercialize their technologies must be willing to address every obstacle that stands in the way of new business formation."

The national decline is seen in all states, although some states have fared better than others. States that experienced the largest declines also were, for the most part, those in which young businesses had the highest initial shares of business activity in the 1980s. These states typically were in the West, Southwest and South – the regions hit hardest by the recession.

The report was written by John Haltiwanger, University of Maryland; Ron Jarmin, U.S. Bureau of the Census; and Javier Miranda, U.S. Bureau of the Census.

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