Report Shows Declining Business Dynamism

May 7, 2014

pic-business-charts.smOn Monday, May 5 the Brookings Institution released a paper citing a gradual decline in business dynamism in the U.S. The paper, “Declining Business Dynamism in the United States: A Look at States and Metros” defines business dynamism as “the process by which firms continually are born, fail, expand, and contract, as some jobs are created, others are destroyed, and others still are turned over.” The report shows that this dynamism has experienced a notable slowing over the past six years—a result of the Great Recession—with a gradual decrease over the last two decades.

Brookings evaluated various data, specifically on geographic regions to determine if there is a particular area or industry that has been especially hard hit, but found that the declines in business dynamism have impacted all regions and industries relatively similarly.

While the paper stops short of explaining why this is happening, it does assert that it is in-line with growing business consolidations and highlights the fact that older and larger businesses are faring better than younger and smaller ones. It also cites the fact that small firms, entrepreneurs and employees are becoming more risk averse: “businesses are hanging on to cash, fewer people are launching firms, and workers are less likely to switch jobs or move.”

One caveat to the report is the fact that it has been three years since their latest data was collected, with researchers stating that “it’s entirely possible that  some of these negative trends have reversed—or at least stabilized—since then.”

The report echoes NSBA’s calls for the federal government to better promote entrepreneurship and small-business formation and growth. NSBA has pinpointed many hurdles to business formation including health care costs—which make keeping an existing job with health benefits often far more attractive than branching out on one’s own—the burgeoning federal regulatory burden, wildly complex tax rules and an inability for new entrepreneurs to access affordable capital.

The paper suggests that federal policies to expand the numbers of immigrant entrepreneurs and foreign students graduating from U.S. schools in STEM fields would likely address this decrease in dynamism. On a state and local level, it calls for governments to continue experimenting with ways to promote new business formation.

Please click here to read the full report.