Decline in American Dynamism
City Labs (not) recently reported on a study that found that overall entrepreneurship in the American economy has been steadily declining since the height in the late 1980s. As the article suggested, these findings are somewhat surprising given all of the press entrepreneurship (especially tech entrepreneurship) has been getting lately. As I read further, though, I realized that in fact these findings shouldn’t be surprising at all. As they say in the article, it’s increasingly advantageous to be an incumbent business. Couple that statement with the following quote:
The researchers further probed the kinds of entrepreneurial firms that have declined, making the important distinction between Mom and Pop businesses, or so-called “subsistence entrepreneurs”, and “transformational entrepreneurs” of the sort that create new technology and drive growth. Here they found the decline in subsistence entrepreneurs plays an important role in the broader decline in business dynamism. They note that this is especially severe in the rapidly growing retail and service sectors of economy, where Mom and Pop stores have increasingly given way to big boxes like Walmart and Target. But this reduction in subsistence entrepreneurs, they found, is not solely responsible for decreases in business dynamism. Indeed, when it comes to the more transformational high tech sectors of the economy, they found an increase in dynamism up to around 2000 and a sharp decline since then. They conclude that high-growth, high-tech transformation enterprises have seen substantial declines since 2000.
…and you get to the heart of the problem: big business. Basically the winners in the American (and the global) economy are those firms that got big between 1980 and 2006, and have reached a sort of escape velocity for the economic woes at the middle and lower ends of the spectrum. Naturally mom and pop shops have decreased, since big box businesses have made entire industries compete on price alone, which are of course the one way in which small stores can not compete. This has far reaching consequences for the US economy, since small businesses have historical been the employers of most Americans. As the number of small businesses decline and large firms increasingly lay off people due to business efficiencies, it’s not surprising we have the sort of jobless recovery we’ve seen over the last 6 years.
The one thing this article doesn’t discuss is the role of Big Money in all of this. Basically borrowing costs have been ridiculously low for established firms for quite some time and they have taken advantage of this by sucking up capital like it’s going out of style, while small or young firms are unable to borrow the seed capital they need to grow their businesses. This has been the case since the last tech bubble burst, and the difficulty in raising seed capital probably has a tremendous amount to do with the lack of new firm starts.