Dynamism in Retreat

Bottom Line: Entrepreneurship in the U.S. is in retreat. While this decline has been true for the last four decades it is especially pronounced since the Great Recession. Firm deaths actually outpaced firm births in the recession's aftermath. Entrepreneurship has also become more concentrated in a handful of major metro areas, while firms contract in small cities and rural areas. Corporate consolidation has led to a handful of big firms dominating markets. This fall in entrepreneurship has affected workers, who enjoy fewer good job opportunities as a result. 

Startup rates have fallen for decades, but the effects of the Great Recession were so severe that firm births fell below firm deaths more than 20 years ahead of the trend. Nearly 120,000 more firms opened than closed on average each year from 1977 to 2007. Since the recession, however, net entrepreneurship has been essentially flat. The U.S. economy added only 104,600 firms between 2010 and 2014, compared to nearly half a million from 1983 to 1987.

Prior to 2008, the vast majority of metro areas— at least 80 percent—saw more firms open than close in any given year, including recessions. But by 2014, three out of five metro areas were losing firms. As entrepreneurial dynamism fades, the U.S. economy becomes more reliant on a narrow geographic base to power its growth. From 2010 to 2014, five metro areas alone produced as big an increase in firms as the rest of the nation combined. Only one in seven metro areas now keeps pace with the national startup rate.

At the same time, the dynamism gap between large and small metro areas is growing, with startup rates falling faster in smaller metro areas on average. In general, high population growth areas had the most entrepreneurship, followed closely by the more familiar innovation-oriented startup hubs, such as San Francisco. Small manufacturing-oriented metro areas in the Midwest registered the lowest firm formation rates.

While entrepreneurship fades, corporate consolidation increases. Companies at least 16 years old are increasingly dominant in U.S. industry with nearly three out of every four American workers on their payrolls in 2014. The four largest firms now capture at least 25 percent of the market in nearly half of U.S. industries. Meanwhile, corporate profits have climbed to a record 9.4 percent of GDP. From 1977 to 2014, the number of new firms per $1 billion in GDP fell from 95 to 25, and the number of patents outside of health and IT per $1 billion halved relative to the 1980s.

This fall in entrepreneurship hurts workers, reducing the quality and quantity of job opportunities. The economy would have produced 924,000 additional jobs in new companies in 2014 alone had the startup rate been as high as in 2006. Historically, new companies create an average of 2.9 million jobs per year, while established companies tend to be net job destroyers.

Read the full study HERE.