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Why It's Getting Harder to Start Your Own Business

New data from the Brookings Institution paints a dreary picture of the U.S. startup landscape, where entrenched competitors are walking away with a bigger share of business.
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You'd think that an increasing share of businesses sticking around for more years would be a good thing. But longer business survival rates are coming at the expense of startups, whose share is shrinking in proportion to the growing number of more entrenched firms.

That's the news from a July Brookings Institution report, entitled The Other Aging of America, about the aging of American businesses, published by Ian Hathaway, founder of economics research company Ennsyte Economics, and Robert Litan, a Brookings scholar.

They found, by examining U.S. Census Bureau data, that the percentage of companies surviving past 16 years rose to more than a third in 2011 from about 25 percent in 1992, a 50 percent increase in the two decades surveyed. 

By contrast, the number of startups created over the last 30 years has decreased dramatically, from about 15 percent in 1978 to about 8 percent in 2011. (On the plus side, business failure rates have bounced around a lot, and although they are actually on the rise again, they are a bit lower than they were 30 years ago.)

In other words, it's harder and harder to be a so-called disruptor, particularly in industries where there are a lot of large, established players. 

Over the past 30 years, the rate of startup creation has decreased.

"Early-stage failure rates have increased substantially in nearly each broad industrial sector, in each firm size, class, in every U.S. state, nearly every metropolitan area between the early 1990s and 2011," the authors write. 

Meanwhile, more people are working at older, larger firms than ever before, and that doesn't bode well for the economy, as small buinesses are the primary job creators in the U.S. In the last 20 years, the share of employees working at larger, more established firms has increased to about three quarters, from two thirds.

More specifically, businesses with 100 employees or less saw their share of employment fall over the last few years, while companies with 2500 or more workers saw their percentage of employment increase, with companies employing 10,000 or more workers having a share of nearly 30 percent of all employment by 2011, the report says. 

According to the authors:

It is increasingly advantageous to be an incumbent, particularly an older one, and apparently more difficult to be a new entrant...Holding all factors constant, we'd expect an economy with greater concentration in older firms and less in younger firms to exhibit lower productivity, potentially less innovation, and possibly fewer new jobs created than would otherwise be the case.

In an era of hyper-competition and global sales, that can't be a good thing. Small, disruptive businesses have led to the major innovations in every century, such as the automobile, the airplane, and the personal computer, the authors write.

"If we want a vibrant, rapidly growing economy in the future, we must find ways to encourage and make room for the startups of the future that will commercialize similarly influential innovations," Hathaway and Litan say.

 

 

 

 

 

 

 

IMAGE: Gallery Stock
Last updated: Aug 12, 2014

JEREMY QUITTNER | Staff Writer | Staff Writer, Inc. and Inc.com

Jeremy Quittner is a staff writer for Inc. magazine and Inc.com. He previously covered technology for American Banker and entrepreneurship for BusinessWeek.




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