Recent Research: Can Women Entrepreneurs Help Overcome Decline in U.S. Business Creation?

The U.S.s entrepreneurial culture, long celebrated as a key element in the country’s economic success, is being threatened by several long-term trends, according to a paper from the Brookings Institution’s Robert Litan and Ian Hathaway. Over the past 30 years, U.S. business starts have slid downward, with many experts and policymakers offering their own explanations for the trend. Litan and Hathaway examine the data and note two possible causes: regional population decline and business consolidation. Though these trends seem unlikely to change in the near future, a new survey by the Kauffman Foundation suggests that underutilized abilities of women entrepreneurs could help boost business creation if properly supported.

Litan and Hathaway identify two apparent drivers of U.S. entrepreneurial decline. First, slowing population growth in the West, Southwest and Southeast has dampened firm formation. Even controlling for total population and regional industrial effects, population growth is strongly associated with business creation. High level of growth in the late 1960s and early 1970s led to very high rates of entrepreneurship in these regions by the late 1970s. However, in-migration began to taper off in the early 1980s, followed by a decline in startups.

Second, business consolidation appears to have played a role in the decline, though the authors admit that this is not settled. Older businesses with activities in more than one location now play a larger role in the American economy. The authors note that only about 20 percent of workers are employed within companies that were created after the mid-1990s. The dominance of these older firms tends to standardize industry structure around the country and leave less room for new companies.

Litan and Hathaway provide a number of potential policy tools that could be used to offset these trends, including immigration reform that could boost the population of potential entrepreneurs in regions that have experienced a decline. Tax policy changes could alter the rate of business consolidation.

Download What’s Driving the Decline in the Firm Formation Rate? A Partial Explanation…

Despite the potential solutions provided by Litan and Hathaway, the overall trends driving the decline in entrepreneurship do not appear to be going away soon.  The Kauffman survey, however, provides some hope that policy solutions could help create new entrepreneurs. Kauffman surveyed 350 women startup leaders on the factors that have led to the low percentage of women running high-tech firms. Respondents reported that a lack of mentors and financing opportunities are the key obstacles to getting more women in top positions. Women reported experiencing a larger funding gap than their male counterparts, with almost 80 percent having to rely on their personal savings as their top funding source.

Authors Alicia Robb, Susan Coleman and Dan Stangler suggest that removing the barriers facing women entrepreneurs is a key economic growth issue for that country. Helping women connect to qualified mentors and secure funding could provide a catalyst for boosting American competitiveness.

Download Sources of Economic Hope: Women’s Entrepreneurship…