Professor Scott Shane of CWRU's Weatherhead School of Management cites evidence that entrepreneurial activity is declining in the United States. The number of employer firms created annually has declined significantly since 1990, and the numbers of businesses created and those claiming to be self-employed have declined as well.
Most Americans would like to believe that this country is getting more entrepreneurial over time. While I wish this were true, the data don’t agree. Policy makers need to take a look at these data and acknowledge the pattern. More important, they need to understand why the rate of entrepreneurship is declining over time.
What accounts for this trend? Shane thinks one reason is "the Wal-Mart effect."
Large, efficient companies are able to out-compete small start-ups, replacing the independent businesses in many markets. Multiply across the entire economy the effect of a Wal-Mart replacing the independent restaurant, grocery store, clothing store, florist, etc., in a town, and you can see how we end up with a downward trend in entrepreneurship over time.
That may be true. It seems to me that another likely contributor is the increased regulatory burden. It is well documented that regulation can increase industry concentration. Smaller firms typically bear significantly greater regulatory costs per employee than larger firms (see, e.g., this study), and regulatory costs can also increase start-up costs and serve as a barrier to entry. While the rate at which new regulations were adopted slowed somewhat in recent years at the federal level (see here), so long as the cumulative regulatory burden increases, I would expect it to depress small business creation and growth.
Maybe it's necessary to analyze on a per-sector basis.
Just like in Atlas Shrugged.....why bother, it's hardly worth it anymore to stick your neck out.
One example: the passage of laws in some areas requiring businesses to post nutritional information in their menus. If you have a national chain with a standardized menu, this isn't much of a burden as the cost of testing new dishes will be spread across dozens or hundreds of location. If you only own one loaction though, this is a significant burden.
Thus a chain like Applebee's or Chili's can significantly undercut the prices at Bob's Cafe
Heck, to add insult to injury, one of the machine shops that supplies very high precision parts to my actual day job is either going to be moving or closing down, since they are looking at a large tax increase in the coming year that will wipe out their profits, completely. It will be a pity to see him go, and the jobs disappear, but I completely understand.
Me, bitter? Why do you ask?
Vis-a-vis WalMart effect vs. over-regulation:
How about both?
I don't think that either hypothesis explains the issues so much as the fact that folks are less interested in doing what it takes to make a business successful. Working for someone else is comfortable and secure in comparison to working for yourself. Working for yourself is very time-intensive (I am putting 60 hours per week in these days), has fewer "benefits" (in HR language), etc. And so from a simple economic perspective, most folks are better off working for someone else.
I think the emphasis on material consumption is a major depressing force for the entrepreneurial spirit. If you NEED that nice car, that wide screen TV, and so forth, you won't want to jeopardize this lifestyle by starting a business. If you can do with a $300 used car for a few years, don't care about the nice TV, etc. you might be more willing to do so. After all the most important benefit to working for yourself is you don't have to worry about organizational politics, etc. to the same extent and you can focus instead on just doing a good job at a reasonable price.
The message is clear: government is not interested in making the employment process easy for small employers. If you wonder why so many people employ "off the books," you have never tried the books.
I think the emphasis on material consumption is a major depressing force for the entrepreneurial spirit."
I second what einhverfr says. I too am self employed and do it for the reasons einhverfr cites and then some. I have done the big business thing and just have to cop to the fact that I don't fit in very well with typical office politics and the ass kissing that one generally has to do to climb the ladder.
Also is the author talking about entrepreneurs who incorporate or are sole propriators included? Maybe both or other categories are included in the numbers, I don't know, but if for instance, he is only talking about those who incorporate that may limit the actual business activity that is taking place and that is being reported.
Additionally his examples are retail oriented, does the Walmart effect apply to other industries and services? Or in effect are there large national companies that limit opportunity for manufacture's reps or real estate services, etc., across many different business categories?
When I was in the food brokerage business (I am now in another business) we got calls from many Mom &Pop outfits that said they had the best new BBQ Sauce, etc., and would we sell it for them? The barrier to entry back then was that the large retail food chains charged hundreds of thousands of dollars to just get a product on the shelf which naturally they could not afford. Today, with Amazon, etc., those same Mom &Pops don't have those same barriers to getting their product to market.
My guess overall, is that like most things, entrepreneurship
ebbs and flows with the times. Not that there are not concerns many of which have been expressed in the article and comments on this thread. Here is hoping that for the long term that the trend is up.
Actually I am looking at starting a series off-shore businesses in the next year and beyond which will not only serve to help deal with overflowing demand here but also allow me to reach new markets as well. However, in my case, regulation is only a small element. The fact that that there are labor cost discrepancies is another issue (those are fueled by material consumption too). These make it very hard for me to compete internationally unless I create overseas businesses for some areas of services.
Also, I started my business because I didn't want to go back to a big business desk job and the dot com crash had just happened and I was unemployed anyway. When I started I had $3000 in the bank and help from my parents. Three years later, my business became self-sufficient and stable.
But let's not kid ourselves. Investing in one's own business requires belt-tightening, reducing one's income temporarily, etc. to a much greater extent than elsewhere.
Next time you meet a liberal ask them what they want to liberalize
Aside from where people can put their penises.
2) due to Economies of scale, you get what you describe as the "wallmart effect" (this is a good thing)
3) due to politics and subsidy behavior we get legislation that benefits the bigger players in the game (bad! rent seeking!)
4) due to tax regs a lot of small business moves into the grey/black/informal sectors of the economy and thus isn't counted in the statistics. The Soviet Union was infamous for this as the informal sector made the economy actually work.
On point 4) I have an amusing anecdote: I was informed that now due to the taxes, a weeks supply of legal cigarettes costs more than a week's supply of legal marijuana joints. I expect to see a lot of cigarette sales move underground. In europe you see a similar thing happen with "heating oil" commonly being used in diesel vehicles and diesel being transported labeled as "heating oil" to avoid the taxes, despite it being illegal.
s/weeks/week's/
Just trying to find qualified investors to talk to can be a problem, and the SEC has proposed to raise the minimum level of assets a person needs to be "qualified". So the pool of these people within any community will shrink even further.
And the general level of policy chaos we are getting from the present crew in Washingon is causing people to still clutch their wallets.
Enough venting. I have always been happier as an entrepreneur or self-employed, but I have always felt more comfortable as an employee. There is something comforting about not writing "self" in the employment box of an application (because someone is there to vouch that you are not a deadbeat) and being in "group" health insurance having a "benefits administrator" (who will help untangle glitches and has any form you might need in a file) and looking forward to a raise or bonus--based on how hard you work instead of how well you do. The vast majority of things are arranged for wage earners, not entrepreneurs or the self-employed. I suppose that makes sense because that is the status of the vast majority of people. But it does mean that all the incentives are against striking off on your own.
One other thing. I would not be surprised if this economy, after a while, resulted in an increase in self-employment/ entrpreneurship. I know that both businesses I started were during a recession because I had lost a job. A friend of mine made a fortune and retired at 40 because he was laid off and could not find another job. When there is no longer the opportunity cost of turning down or leaving a job, starting a business or attempting self-employment costs less, and therefore the numbers should go up. In other words, necessity may be the mother of self-employment/ entrepreneurship.
Out of a top law school and moving to a new state it was funny to have someone from Fred's Law School and Bait Shop ask me what percentage of my class I was in. "The lowest 50% of my class was a hell of a lot smarter than the top 10% of yours you dipsh!t, why am I here asking you for a job?" was what I wanted to say...
But at this point I would never hire an employee. I don't care if I could make more money. I'll hire independent contractors, or go semi John Galt and run a smaller business with less profit. Which is what I am doing.
Someone sounds a bit bitter that bad grades at a good school wasn't enough to do well at OCI.
I dunno. Being unemployed and having no immediate job offers and facing a lot of competition in job applications, even if one has almost no money, is a great incentive to do SOMETHING to make money, and that usually means starting a business.
People with a strong attachment to a particular outlook tend to be most likely to decree explanations based on other outlooks irrational. But this tendency is itself often emotional, not rational, in character.
"We don't really know" is often the best rational explanation. But humans have a great fear of the unknown. And that fear is often quite rational. After all, one has to respond in some fashion to the world around one, and a coherent mental framework - any framework - provides a basis for response, and usually has some data to support it. Often any response is better than no response.
If we ever de-link health insurance and employment, run the numbers again ten years after that.
It would be interesting to interview current business owners (like myself) and past business owners who went back to being an employee (either through going out of business or acquisition) and stayed there for more than 5 years.
I personally don't think a simple cost-benefit analysis leads people to want to start their own business. Personal temperament is a much bigger matter, IMO. And folks who start their own businesses must live for a period of time outside a sort of natural comfort zone that comes from working as an employee where you get told what to do and paid to do it.
Also to others, a point about raising capital.... There are always ways to raise capital from both accredited and non-accredited investors alike without running amok with securities laws. For example, in my state, any VP or member of the Board of Directors is automatically allowed to invest, so sometimes it just means giving up a little more control. My problem with raising capital is that I am so used to running lean that I get told the amount of capital I am trying to raise is simply too small to be of interest.
Some became big, some failed, and some got bought by the ones that became big. Now personal computers are a huge industry with a set of established players, and it's a lot harder to break in. There are still entrepreneurs and consultants around the edges, handling specialized things, but the wave of major foundings seems to be done. At least in this country.
The same thing happens with every new technology... lots of firms start up, but only a few are left by the time the industry matures. I don't know what the next technology will be, but it seems likely that there will be a next one.
I hope it isn't biotech, at least not in a way that applies to human health. That could get messy, from both a social and regulatory perspective. But if it's something interesting in energy or transportation, that could be a lot of fun.
If enough firms die off in the current crisis, there will be room for newcomers in some older industries too. Knowledgeable people out there to run new companies, too.
Health care as a self-employed person costs about $5,000 more per year for family coverage than for group coverage, for comparable care. In contrast, in say, New Zealand, it is much less risky to start out and begin a new business without having to have spouse with the "benefits" job to balance that risk.
Financing anything with an irregular income (even if it is on average the same) is also much more difficult, which matters both in terms of available consumption and in terms of refinancing -- one is often locked into pre-business loan terms since reporting one's income is no longer straight forward.
The paperwork involved in the taxes for a small business owner are much greater than those for a wage earner, and per business volume much greater than for a big business, even though the actual tax burden probably averages a little less for a small business owner (who discovers expense account living) than for a wage earner.
Overall increased regulatory burden is doubtful, however. Few small businesses (before or after) are in industries that have seen greatly increased regulatory burdens since 1990s.
Yes, there is a Wal-Mart effect, although part of the issue is a counting issue. Wal-Mart is really an exception -- a large investor own unitary company turning into a category killer. The more common event is that independent businesses are being replaced by franchises, which are a contract based hybrid of big business methods and small business entity organization. McDonalds is a huge, highly uniform business, but most of its franchises are technically small businesses. Many small businesses have consented to be assimilated into big businesses.
Even in situations where there is only one formal entity, like a large law firm, there is often a de facto franchise, with little fiefdoms that are largely economically independent of each other and are economically self-sufficient, that unite around a brand for select marketing and central support service purposes. Big firms have grown to a good extent by gobbling practice groups.
I suspect the barriers are different for the two cases.
I tried starting my own firm years ago doing web/design ad work, and had no problems with regulations. However, I found that my only clients were other small business owners; larger companies simply didn't trust a small company to be able to handle their workload even (in two cases) when they liked my presentation better. Also, I couldn't offer health insurance, and no benefits other than free legal software, so whenever someone had a kid, they'd leave for a larger company that did have such benefits. Eventually, I myself had a child, and ended up working in the design department of a midsize computer accessories firm.
Owning your own business might be the American dream, but I ended up getting hosed. I doubt I'll ever try anything so audacious again.
Not to mention "vacation" meaning "only working 4 hours a day instead of 10."
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