Thursday, 27 November 2014

Two faces of modern entrepreneurship

The Atlantic had a very interesting recent text on the "Mysterious Death of Entrepreneurship in America" where they tell the tale two breads of entrepreneurs, one thriving and the other one hopelessly failing. At the same time when Silicon Valley entrepreneurs are soaring, the smartphone app market is booming, pages like Kickstarter are redefining the the very supply and demand for funding (providing a very interesting alternative to all sorts of traditional lending schemes), but on the other hand business dynamism overall is declining. Mom and Pop stores are dying out. BLS has the data: 



Brookings has produced a study describing the very same process of entrepreneurial decline, where the declining business dynamism is obvious across all sectors of the economy. As I've written before, the process of creative destruction in the US has halted in the past years. And why is this worrisome? Because of the effect on job creation. No longer are US SMEs the key driving force of new employment. 























This could be down to several reasons. One is surely the effect of the recession, even though the trends of declining business dynamism go all the way back to the 1990s (see further data here). Another could be the fact that the big companies are expanding more and more and are thus simply taking up more space in the corporate game, successfully running the small stores out of business. These big companies are usually not the source of major job creation (see the final graph), since they tend to expand abroad after reaching a certain size, where they focus much of their new job creation. This is why historically the domestic job growth in countries like the US has always originated from SMEs. Which is also why Americans like start-ups and small businesses. This is the famous US entrepreneurial spirit: 
"One paradox of globalization is that it's localized employment. Since big companies off-shore much of their job growth (or replace what's left of it with software or smart hardware), the future of work in the U.S. will come from work that absolutely has to be here, like health care, education, and food services. Start-ups can be special for many reasons—they can challenge lumbering incumbents, they can create new demand for stuff, they can introduce more ideas—but from a big-picture macroeconomic standpoint, they're also special because they're here, and when they expand they tend to expand here. It's easy to make fun of Silicon Valley these days. But at least its companies have a California address."
All in all, the declining trend of entrepreneurship is something to be worried about. It explains well why the US employment population ratio is still low, meaning that the US labor market hasn't really recovered (despite a low unemployment rate - I've mentioned this distinction several times on the blog). Furthermore all this could simply be pointing out to a new equilibrium for the US (Europe as well), where creative destruction has slowed down. The question is why? If it's a short-term consequence of the crisis, then a decade or so later we might see a reverse in trend. However, if it has slowed down due to structural instabilities and what Fukuyama refers to as political decay (I recommend his new book; read an excerpt from the book at Foreign Affairs), then the problem is extremely deep and it will take unprecedented effort to fix it. 

3 comments:

  1. It's not enough that a company is good, it also has to be exceptional enough to stick its neck out in the market. That just means that organizational efforts must be amplified to make a company not only functional and efficient, but also absorptive of workforce that is definitely waiting out there. Thanks for sharing such an informative post! All the best to you!

    Barton Wilson @ ISA Registrar

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  2. Robert Lucas predicted the decline in the number of small business people and small firms in 1978. The number of small firms will fall and the number of large firms will rise with increases in real wages.

    Lucas closed his 1978 discussion of the size distribution of firms, and how firms are getting larger an average over the course of the 20th century, with a discussion of a lovely restaurant he visited on the Canadian border. He predicted that in couple of decades time, these type of restaurants will be fewer.

    Nations that are more productive over time and have higher wages because they have accumulated more capital per worker.

    One consequence of more capital per worker is real wages increase at a faster rate than profits. For example, the rate of return on capital was stable over the 20th century while real wages increased many fold. This relationship turns out to be crucial in terms of occupational choice and the decision to become an entrepreneur – a small business owner.

    Higher wages reduces the supply of entrepreneurs and increases the average size of firms because entrepreneurship becomes a less attractive occupational choice.

    for more see http://utopiayouarestandinginit.com/2014/12/18/where-have-all-the-entrepreneurs-gone/

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    Replies
    1. That's a very interesting argument.
      However what about the data on stagnating real wages from the 70-ies onwards? e.g. http://www.pewresearch.org/fact-tank/2014/10/09/for-most-workers-real-wages-have-barely-budged-for-decades/
      Or do you perhaps mean rising income/wealth of the population that is partially discouraging entrepreneurship?

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