American Entrepreneurship Is Declining

America’s entrepreneurial and small business dynamism—the process in which firms are created, fail, expand, and contract—is in decline. That’s the conclusion from a new report released by the Brookings Institution. Ian Hathaway and Bob Litan examine firm entry and exit rates in the United States from 1978 to 2011. The authors find that the firm entry rate (the share of firms that are one year old or younger) fell from nearly 15 percent in the late 1970s to around 8 percent in 2011. 

Source: Brookings Institution

Source: Brookings Institution

This trend is similar on the state and metropolitan level. 

Source: Brookings Institution

Source: Brookings Institution

Chris Ingraham at the Washington Post took the authors' data and mapped it across 50 states. The top 5 states with the small declines include New York, Illinois, Texas, New Jersey, and Missouri in the top 5. Wyoming, New Mexico, Vermont, Hawaii, and Alaska rank at the bottom for the steepest decline. 

Of course, this isn’t a good thing for the U.S. economy. Economies that allow creative destruction to run its course grow to be more productive and prosperous, while citizens enjoy new and better products, better jobs, and increased standard of living. Resources flow to innovating firms and industries, and away from less innovative firms and industries. While creative destruction is an essential facet of a market economy, the severe downturn of this trend is alarming. 

So why is America’s start-up engine experiencing this decline? Hathaway and Litan don’t really go into details and there isn’t really a straight answer. The authors observe that business consolidation is occurring in the U.S. economy and larger businesses are doing better relative to younger, smaller firms. The authors offer suggestions on what the policymakers can do to induce increased entrepreneurship rates including work visas for immigrant entrepreneurs and business accelerators at the state and local level. 

These are good ideas, but they only scratch the surface. Reforming the tax-code that’s more favorable to start-ups and entrepreneurs, easing burdensome local regulations, and allowing for greater public investments in innovation, infrastructure, and broadband are a few things we could do to recover from this decline. Fortunately, we’re seeing these policy changes on the local level. But it will take a lot more than a few dozen forward thinking cities to reverse this trend.