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Americans Must Get Back to Starting Businesses

Americans need to get back to starting businesses again or the sluggish rate of entrepreneurship in this country will never reverse itself. While Americans remain as positive as ever about entrepreneurship as a concept, fewer want to go into business for themselves. That’s translating into record low levels of new business formation. This is a significant problem, since we need folks to launch new ventures to make up for those that fail.

The latest evidence of depressed entrepreneurial activity is the Global Entrepreneurship Monitor (GEM) 2010 report on the United States, which was released last month. Its main finding: Entrepreneurial activity declined from 2009 to 2010, a year of supposed economic recovery. Many indicators of startup activity are now at record low levels. The per capita rate of employer firm formation in 2009 is less than half its 1977 level and is at the lowest rate since the U.S. Census Bureau first began tracking the creation of new businesses with employees.

While the recession has exacerbated the decline in business formation, the downward trend began well before the economy turned south. Census figures show that the per capita rate of new employer firm formation has been falling since 2005. GEM data show that early stage entrepreneurial activity—which measures people in the process of starting businesses, plus people who have recently established new companies—has been declining since then as well.

Since the late 1970s, when data were first gathered, each passing decade has marked lower rates of new business formation. For the most recent decade (2000s), the average annual per capita rate of new employer firm formation was 17 percent lower than it was in the 1980s.

Entrepreneurial Dream Is Fading

Interest in being self-employed—an imperfect but commonly used proxy for entrepreneurship—is now significantly lower than it was a decade ago. The Flash Eurobarometer, a survey conducted for the European Commission by the Gallup Organization, reveals that the share of Americans who want to run their own companies fell, from 69 percent in 2000 to 55 percent in 2009.

While Americans’ interest in starting businesses has been eroding, they have maintained a favorable view of business ownership. Gallup reports that in 1997, 63 percent of Americans had confidence in small business; in 2011, this figure was up to 64 percent. And the GEM survey indicates that more Americans hold successful entrepreneurs in high regard now than in 2003, when 64 percent held that opinion; by 2010, 76 percent did.

Moreover, Americans continue to see becoming an entrepreneur as a good career choice. The GEM survey reveals that in 2003, 63 percent held that opinion; in 2010, it was 65 percent.

Most still think new business opportunities abound. The same share of Americans reported that there are good opportunities for new businesses in the 2008-2010 period as in the 2002-2004 period, according to the Global Entrepreneurship Monitor.

What’s Holding Americans Back?

Surveys of potential entrepreneurs indicate that two factors are holding back would-be entrepreneurs. The first is access to capital. The Gallup survey revealed that the share of Americans who reported that “it’s difficult to start one’s own business due to a lack of available financial support” increased from 70 percent in 2000 to 83 percent in 2009.

The second is high administrative costs. The Flash Eurobarometer indicates that in 2000, 61 percent of Americans indicated “it is difficult to start one’s own business due to the complex administrative procedures.” In 2009, 70 percent held that view. Moreover, the World Bank reports that it took twice the share of per capita income for an American to start a business in 2011 as it had taken in 2006.

While some economists, policy makers, and pundits are skeptical that limited access to financing and administrative costs truly pose obstacles to starting businesses today, that doesn’t really matter. People act on their perceptions. If Americans believe they face these obstacles to starting businesses and are therefore less willing to found companies, the rate of entrepreneurship will go down.

Policy makers need to change these perceptions before it’s too late to reverse the downturn in entrepreneurial activity. Most Americans still hold very positive views of entrepreneurship. But if policy makers don’t address the perceived obstacles to starting companies, those views might not remain favorable for long.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.

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