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Useful Stats: High-growth firms on the decline nationwide

March 28, 2024
By: Conor Gowder

High-growth firms are often conflated with all other firms. Unfortunately, this tendency makes it extremely difficult to differentiate those with a higher likelihood of significantly impacting the economy and innovation. While reports like the Global Entrepreneurship Monitor (GEM) have found increasing rates of entrepreneurship over the past decade, barring a drop at the onset of the pandemic, new U.S. Census Bureau data on high-growth firms reveals the opposite for the number of high-growth firms, with steady, significant decreases in the number and share of high-growth firms across the nation.

This edition of Useful Stats will look at the Business Dynamics Statistics of High Growth Firms (BDS-HG) experimental dataset from the Census Bureau. Specifically, it explores state-level trends for the percentage share of high-growth firms among all firms since the late 1970s. SSTI calculated the percentage share of high-growth firms by taking the number of high-growth firms and dividing by the total number of firms captured by the BDS-HG.

Firm growth data within the BDS-HG is broken down into nine growth rate bins, ranging from -2 to 2. The -2 bin represents exits, which were not used in SSTI’s calculation, while the 2 bin represents entries. The Census data creators define high-growth firms as those that fall within the firm growth rate bin of 0.8-2 based on their formula.

Data is also broken down into five weighted growth rate percentile bins, but these will not be explored in this edition of Useful Stats.

The methodology of the data set can be found here, along with more detail on and explanations of the various ranges and variables.

 

High-growth firms on the decline in every state and DC

In 1978, the first year captured by the BDS-HG, the share of firms across the nation classified as high-growth firms was 4.77%, totaling approximately 170,000. Since then, the share of high-growth firms has decreased across over 60% of years to the most current rate of 2.32%—around 125,000—in 2021.

This downward trend is consistent across all states and Washington D.C. (D.C.) over the same period.

Figure 1 shows a line chart of these values for up to five states at a time. By default, the national trends and the first four states by alphabetical order are shown. To adjust the data displayed, click on the search bar titled “Enter series to show,” and either type or scroll and click on up to five states, D.C. and/or the national values.

Looking at the figure below, one may see that outside of the long-term downtrends, many geographies have slightly increased percentages of high-growth firms in the years following more recent recessionary periods. There is, however, not enough evidence with this data alone to attribute post-recessionary periods with increased high-growth firms. Although, conceptually, a period of increased hiring following a recession seems likely to correct the labor market from an extended period of furloughs and layoffs.

Figure 1: High-growth firms as a percentage of all firms captured by the BDS-HG by geography and year

 

In 2021, Alaska had the highest percentage of high-growth firms, at 2.95%, down from 7.46% in 1978. Utah followed at 2.86%, surpassing Idaho’s 2.77%, Nevada’s 2.67%, California’s 2.65%, and Arizona’s 2.57%.

The national value in 2021 was 2.32%, with 16 states above this value and the remaining 34 and D.C. below.

Hawaii’s share of high-growth firms was the lowest of all states in 2021, at just 1.75%. New York, West Virginia, Nebraska, Pennsylvania, and Ohio followed, each with under 2% of the firms falling into the high-growth category.

From 1978 to 2021, Nevada had the largest decrease in the percentage of high-growth firms, dropping from 7.63% to 2.67%, or 4.96 percentage points. Alaska had the next largest decrease at 4.52 percentage points, followed by Colorado at 4.07 points, Wyoming at 3.97 points, and Oregon at 3.90 points.

While no jurisdiction increased the percentage share of its firms within the high-growth category, D.C.’s decrease was the lowest, dropping from 3.55% to 2.01%, or 1.54 percentage points. North Carolina at 1.69 points and New York at 1.72 points followed.

 

What are the implications of a decreasing share of high-growth firms?

A downtrend in the share of high-growth firms indicates a particular state’s or the nation’s overall portfolio of businesses has a proportionally smaller share of high-growth firms; the trend on its own does not mean that the total number of high-growth firms is decreasing. However, a previous SSTI analysis of BDS-HG data found exactly that: when comparing 2021 data to 10 or more years prior, the majority of states experienced a decrease in the number of high-growth firms within their borders.

Policy interventions addressing barriers for more firms to become high growth, such as those supporting competitiveness and innovation gains, may be productive measures for reversing these trends.

 

This article was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.

useful stats, census, entrepreneurship