What’s The Future For American Entrepreneurship?

Despite obstacles and declines, start-ups still popular.
An Executive Briefing produced by the Michigan Business and Professional Association

American entrepreneurs – both current and prospective – are facing difficult times these days. The still-struggling economy, combined with unpredictable tax policies and tighter availability of lending capital has made starting and running a small business more challenging than any other time in recent history.

Several recent news reports suggest that the deep-rooted U.S. tradition of starting and running one’s own business has reached its peak, and is now in a declining state, while other reports and experts counter that new business creation through self-employment and other means has been higher than average.

It’s a statistician’s dilemma. Whether entrepreneurism is wilting or thriving depends on how it’s defined, and how the numbers are juggled.

From a “glass half-empty” standpoint, a number of studies are warning of America exiting the business of starting new businesses. One report, from the non-profit New America Foundation, says that the U.S. is in serious danger of losing its entrepreneurial spirit because the number of small businesses created has been declining since the 1970s. Their study contends that the rate of entrepreneurship has fallen as the population has increased – down 53 percent between 1977 and 2010, and that the share of self-employed Americans has been declining since 1991 – dropping more than 20 percent by 2010.

According to Lina Kahn, co-author of the study, the U.S. government has largely “failed to adjust how it gathers data to reflect the outsourcing revolution of the last two decades” and counts as small business independent contractors who depend on one large company for work.

One example, published in the July/August 2012 edition Washington Monthly, is the classification of FedEx Ground drivers in many states as independent corporate entities, with drivers leasing their own trucks from the company, and responsible for their own benefits. “Even those drivers who might have been counted as wage and salary workers are now counted as independent small businesses,” the report said.

Another widely-publicized 2011 report, by the Ewing Marion Kauffman Foundation, which regularly tracks entrepreneurial activity, said the number of business births had already “peaked,” and the number of new independent employers dropped 27 percent in a three-year period (2006-2010). A later Kauffman study,  released March 2012, said the startup rate for new businesses declined again in 2011 by 5.9 percent and new entrepreneurs were more likely to “go it alone” than hire employees.

And, a March 2011 report by the Federal Reserve Bank of Cleveland, which, like Kauffman, follows various measures of entrepreneurism, found that the number of new businesses which has hired employees – one indicator of entrepreneurial activity, like self-employment, dropped considerably. It said 68,500 more businesses closed in 2009 versus the 2007 closure rate — up 11.6 percent. In addition, in 2009, 116,800 fewer employer businesses were founded than in 2007, marking a 17.3 percent drop in new startup companies.

All of the studies which have reported a drop in entrepreneurial activity point to a number of factors which have stifled small business growth over the last several years. Among them:

Industry Consolidation: Scott Shane, a professor of economics at Case Western Reserve University, calls it “the Wal-mart effect.” The economies of scale spreading across industry after industry – particularly in retailing – have encouraged the growth of mega-companies. “Wal-mart replaces a lot of people who have their own businesses,” Shane says. “This is the long-term trend in many industries.” Similarly, the nation has witnessed Home Depot capturing a vast proportion of the U.S. hardware market, Best Buy taking the lead in electronics and appliance sales, and Macy’s, through its acquisitions over the past decade of smaller, regional department stores, grabbing the lion’s share of U.S. department store sales.

Some retail industry analysts have argued that many of the former smaller, regional department stores such as Marshall Field’s and Kaufmann’s would have failed anyway because they lacked the buying power needed to offer customers attractive prices. 

Technology:  Over the last generation, Internet retailing and other online services have displaced many “bricks and mortar” independent businesses. A walk along any main street in America will show a lack of travel agencies, book stores, and music stores. In addition, technology has created opportunities to combine many smaller businesses into the hands of a few giant online retailers, such as Amazon, which sells a vast variety of goods, and in the bookselling sector alone has created a nationwide monopoly. On the other hand, technology in the form of less expensive computers, easy-to-use bookkeeping software, and credit card readers have enabled many individuals to start and run a their own businesses. And, not to forget that many of the most famous business startups in recent decades (think Apple, Microsoft, and Facebook) have been in high-tech fields.

Financing: While the U.S. has the world’s most mature venture capital industry, it’s more difficult than ever to obtain business startup financing. James Hop, a business professor at Northwood University and chairman of its Entrepreneurship Department, speaks from his former experience as a commercial banking executive. “How to find capital is a pressing problem for new businesses. Simply put, banks don’t like to fund startups,” he said. “In order to encourage and drive entrepreneurism, we need to have a continued source of investment and venture capital.”

One financing problem of late, according to the Washington Monthly, is that the vast majority of entrepreneurs have traditionally relied on personal savings and contributions from family and friends to start their businesses. However, the poor economy and inflation in both health care and higher education costs means fewer families have the savings needed to start a small business. The report also blames the large consolidation of the banking industry for a lack of startup capital: “Relatively few bank officers today have the leeway and local knowledge to lend to local established businesses, much less new ventures.”

Tax policy: According to Northwood’s Hop, the lack of a long-term federal tax policy for businesses – both small and large – has dissuaded many potential entrepreneurs from taking the first steps towards business creation. “Everyone is unsure of what the taxing situation is in store for businesses,” he says. “We don’t know from one year to the next, and no political body can seem to come to grips with a consistent, long-term tax policy. This has a huge impact on startups and the willingness to loan or invest capital. It would be great to know what the next 10 years will be like.” In Michigan, repeal of the controversial personal property tax on business will go a long way towards freeing up money for small business expansion and investment, Hop says.

Regulation: Poorly-conceived government regulation makes it difficult for entrepreneurs to get into and stay in business. Excessive paperwork, redundant requirements, and licensing laws can discourage even the most-impassioned, forge-ahead entrepreneur. Bob Zadek, a finance attorney and manager of a small business lending firm, told CNBC.com, “Licensing requirements have little to do with the protection of the public, but rather are imposed to keep out competition.” Professor Hop, who also operates a small business in addition to his teaching duties, says he believes most small businesses are happy to comply with regulations which ensure a safe working environment out of responsibility for their employees, but that “government in many cases has to get out of the way, and help small companies pursue chances for growth.”

Despite the claims of a “slow-motion collapse of American entrepreneurship,” as the Washington Monthly forecasts, there are plenty of bright spots attesting to the “can-do” spirit of Americans willing to put up the cash and take the risks in order to be able to control their own destiny. For instance:

• As of 2012, there are an estimated 8.3 million women-owned businesses in the U.S., generating nearly $1.3 trillion in revenue and employing nearly 7.7 million people, according to the second annual “State of Women-Owned Business Report, commissioned by American Express OPEN. The growth in the number (up 54 percent), employment (up 9 percent) and revenues (up 58 percent) of women-owned firms over the last 15 years exceeds the growth rates of all but the largest publicly-traded firms. “There has been a significant increase in the number of women entrepreneurs in the last 20 to 30 years,” says Christine Janseen-Selvadurai, director of the entrepreneurship program at Fordham University. “Technology has really made things easier.”
• According to the 2011 Kauffman Foundation report, even with the drop in startups, the level of entrepreneurship in 2011 is among the highest during the last 16 years, with overall business creation over the past four years higher than average.
• The Kauffman Foundation Index of Entrepreneurial Activity reports new Latino entrepreneurs more than doubled from 10.5 percent to 22.9 percent from 1996 to 2011. During that same time period of entrepreneurs ages 55-64 grew from 14.3 percent to 20.9 percent, and immigrants now make up nearly 14 percent of small business owners.

“Entrepreneurialism is alive and thriving,” says Northwood University’s James Hop. “Many of our students and alumni want to control their own destiny. They’ve seen what’s happened to their parents and grandparents and their jobs, and they see entrepreneurship as a better place to be.

“An entrepreneur can be someone who is simply self-employed, or one who has the ability to employ dozens of people. There are probably 20 different definitions of what constitutes an entrepreneur,” Hop notes. “The most important thing is that you are doing something which is creating value, and contributing to the overall economy.”