Declining High-Growth Entrepreneurship

High-growth entrepreneurship refers to companies that “introduce major innovations, create many jobs, and disproportionally contribute to productivity growth”. John Haltiwanger, Ron Jarmin and Javier Miranda highlight recent evidence suggesting that the impact of the high-growth, transformational entrepreneurial firms has declined in recent years.

They write,

A growing literature documents a 30-year decline in various measures of business dynamism and entrepreneurship in the US (e.g. Decker et al. 2014, Hathaway and Litan 2014). That trend can be seen in data on young firm activity as a share of employment, as shown in Figure 1. An important question is: Does the decline in entrepreneurship reflect a decline in ‘transformational’ entrepreneurs or a decline in ‘lifestyle’ entrepreneurs? The answer may have important implications for labour markets and economic growth (see Davis and Haltiwanger 2014). Figure 1 cannot answer this question by itself, but as we shall see, the differences in the patterns across sectors offer clues. In particular, the decline in young firm activity in the 1980s and 1990s is dominated by young firms in the retail trade sector, while in the post-2000 period, young firms in the information sector exhibit a sharp decline.

Technological benefits from the presence of companies such as Google and Facebook may have made their presence felt in the economy, however the magnitude and the whole movement may not be large enough to offset the decline in total productivity due to this decline in the number of high-growth, entrepreneurial high tech companies.

The study concludes,

The post-2000 decline in high-growth young businesses in key innovative sectors like high tech suggests there has been a decline in transformational entrepreneurs in this sector. Why this decline has occurred is an open question. In the post-2000 period, high tech includes fewer young firms, and the young firms that are present are less likely to have high growth. This period of decline in high-growth entrepreneurship in high tech coincides with the decline in aggregate productivity growth in the high tech sectors of the economy as documented by Fernald (2014). Given the important role high-growth young businesses have played historically in the US, especially in sectors like high tech, understanding the causes and consequences of this decline should be a high priority for future research.

Google and Facebook have been at the vanguard of entrepreneurial disruption. In recent years though, it seems that each next major start-up has less scope or smaller addressable markets than the generation before. One contributing factor here is probably that Google and Facebook are hoovering up the most promising next big things, e.g. Deep Mind or Oculus Rift.

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