Will increased layoffs lead to the creation of more businesses? The lead researcher of the Global Entrepreneurship Monitor explains why it's possible
Americans expect entrepreneurs to help pull the economy out of recession, but the latest findings from an international study show a declining trend in U.S. entrepreneurial activity. The 2006-2007 Global Entrepreneurship Monitor also includes research findings about women and minority business owners.
Smart Answers columnist Karen E. Klein spoke to lead researcher Elaine Allen of the Arthur M. Blank Center for Entrepreneurship at Babson College about the survey, which can be read online here. Edited excerpts of their conversation follow.
Compared to other developed countries, U.S. rates of entrepreneurship are still among the highest in the world, according to your study. But your latest figures show a trend downward in U.S. entrepreneurial activity from 12.4% in 2005 to 9.6% in 2007. Where does that downturn place the U.S. globally?
In 2006, the U.S. ranked ninth in established small business prevalence rates for high-income countries, which measures businesses in existence for more than 42 months. But in 2007, we declined to 16th on the same scale. This is due, in part, to the fact that other high-income countries we study experienced high growth in the percentage of their entrepreneurs in established businesses.
These numbers reflect U.S. entrepreneurial activity in 2006 and 2007. Have you looked at 2008 yet?
We did an additional survey in August and the findings will be reported in January. Just from the numbers I've seen so far, we don't see a big rise in entrepreneurship but it also looks like we don't see a big decline. I'd say that over the next 12 months we may see an increase in entrepreneurship, as a high level of dynamism arises because people are getting downsized and they may start their own businesses to act as a bridge between jobs.
In your study, 40% of U.S. startup entrepreneurs reported that they don't expect to add any jobs in the next five years. Why not?
We feel that that's caused by two things: First, so many startups are virtual companies whose business model doesn't include employees; and second, the weak economy. When we subdivided those findings, by the way, we saw a clear trend where women and no-white immigrant entrepreneurs fell heavily into that 40%. That may be because those groups do not have the ambition to grow their businesses right away, or it may be because they don't get enough training and funding to grow quickly.
Despite the growth in women-owned businesses in the last decade, your study showed that gender differences remain high for U.S. entrepreneurs.
Yes. The entrepreneurship rate for males is still 50% higher than that for females in the U.S. Women continue to make gains but it's not yet enough to close that gap.
What international trends did you find significant?
We discovered that the developing countries of Eastern Europe behave like established European countries, in that they have relatively low levels of entrepreneurship. In developing countries in Latin America, the Philippines, and Thailand, by contrast, almost everyone starts businesses. What we're going to study next is the quality of that business activity.
This GEM report also studied entrepreneurship rates within U.S. immigrants and minority groups. What are some of the key findings there?
For the first time, GEM reported on U.S. minority business owners from four groups: Korean-Americans, Mexican-Americans, African-Americans, and a white control group. GEM found that minorities exhibit higher rates of entrepreneurship than whites. We also saw a rise in entrepreneurship among immigrants, particularly Latin-Americans.
As a whole, the immigrant class showed more startups than our native-born Caucasians and African-Americans. That immigrant entrepreneurial activity tends to be centered in urban areas, which isn't a surprise. Their businesses also tend to be smaller, have fewer employees, and grow slower than small businesses as a whole.
Did you ask why more minorities and immigrants start businesses?
Yes, and this was interesting in terms of helping drive policy in the future. We found that 70.4% of African-Americans, 72.6% of Mexican-Americans, and 57.1% of Korean-Americans said they started their businesses after perceiving that they were rejected for a job because of their ethnicity.
What advice would you give the new Administration as it seeks to stimulate entrepreneurship?
I'd urge them to fund our study! It takes very little money, relatively, to find out about what drives entrepreneurship, and it's so important. I'd also encourage more funding of business incubators—not just as places where entrepreneurs can find money but where they also can find help and information.