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Low Entrepreneurial Activity Threatens Economic Growth

Written by Ken Gaebler
Published: 9/28/2009

This recession has seen a sharper drop in entrepreneurial activity than previous recessions, possibly threatening to delay economic growth.

Although some studies have suggested that entrepreneurship may be particularly well-equipped to weather economic downturns, as layoffs and other obstacles have been known to create "entrepreneurs of necessity," the Wall Street Journal had some bad news for entrepreneurs - or prospective entrepreneurs - with its latest analysis of startup data from the Bureau of Labor Statistics.

Entrepreneur Early Stage Company

The newspaper reported that business starts, which includes the founding of new companies as well as the creation of new units within existing companies, has fallen more during the current recession than it did in the 2000-2003 recession - a lag of approximately 5 percent.

The credit crunch may be partially to blame - "for entrepreneurial success, access to capital is the most important factor," University of California at Santa Cruz economist Robert Fairlie told the newspaper - in addition to the weak venture capital sector and the general risk aversion seen during recessions.

This trend is particularly concerning as businesses in their first 90 days of operations accounted for more than 14 percent of hiring between 1993 and 2008, the Journal reported. This drop in entrepreneurial activity may "threaten to damp growth in jobs and economic output for years," said the news provider.

However, what the economy lacks in the number of startups perhaps is compensated by the quality of new businesses - the Kauffman Foundation has found that the majority of businesses on the Fortune 500 list were founded during a recession or bear market.

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