All this may explain how Paul Reynolds found himself counting companies. Reynolds, a soft-spoken sociologist, works at the University of Minnesota. Several years ago -- "in the midst of a career change," he says, which in academia means shifting from one research interest to another -- he began thinking about the effects of entrepreneurship. Was it really making a difference to local and regional economies? How many new businesses were there, anyway?
As it happened, the people at the university's Center for Urban and Regional Affairs were interested in the same questions. So in 1984 Reynolds got a grant for a small pilot study, gathering information on about 550 new businesses in Minnesota. Two years later he contracted with the Appalachian Regional Commission, a 13-state development agency that is based in Washington, to do a full-scale survey of new-business creation and job generation in Pennsylvania. At the same time, he undertook a similarly complete study back home in Minnesota, this one funded by 10 separate agencies and institutes.
"Paul Reynolds," a colleague says admiringly, "knows more about this stuff than anyone else."
Reynolds set out both to measure the extent of new-business formation in the states he was studying and to learn more about the companies being created. His starting point, he figured, had to be the DMI. "It's an imperfect but necessary data source," he says. "There's really nothing else." But he knew too that he wanted firsthand information, gathered and verified by a staff he would hire and train himself.
By the time of the second Minnesota study, begun in early 1986, he had the methodology pretty well worked out. First, he ascertained that the DMI listed some 24,000 companies in Minnesota started between 1979 and 1984. Dividing that group by region, industry, and start date, he selected a representative sample of more than 5,000. The plan was that he and 10 researchers would call every company in the sample. When they reached executive officers of a business, they'd ask them a few screening questions, such as when the company was founded and whether it was independently owned.
Calling began in late fall of 1986. As the reports piled up, though, Reynolds noticed the same disconcerting phenomenon he had observed in his other studies. The D&B listings just weren't checking out very well. No, we're not a new company, some respondents would say. We just changed ownership, or restructured, or whatever, in the year you thought we started. Others had gone out of business. Still others couldn't be found at all or were invalid listings, such as duplications. All told, fully half of D&B's supposed new businesses didn't check out. That was almost exactly what Reynolds had found in Pennsylvania and in the earlier Minnesota study. If the case for entrepreneurship rested on the DMI, so it appeared, it was resting on a slim reed indeed.
But Reynolds wasn't through. Companies that qualified as both new and independent got a 16-page questionnaire. How many employees had they hired? Where did they do most of their business -- just locally or in wider markets? Who founded the company, and why did it locate where it did? If the companies didn't respond to a couple of mailings, Reynolds's researchers got on the phone again and again, until they had good data on 75% of the group. Then it was time to put the information into the computer and see what it said.
What leaped out at Reynolds, in the end, wasn't the startling inadequacy of D&B's statistics. It was the startling importance of entrepreneurship even after half the apparent new companies had vanished into thin air. Like Pennsylvania, Reynolds discovered, Minnesota depended heavily on new-business formation for its economic growth. Translating his sample into statewide figures cut the number of new companies from the 24,000 listed by D&B to 12,000. But these new businesses alone accounted for 119,000, or 42%, of the 282,000 net new jobs added to Minnesota's economy between 1978 and 1986.
That figure was significant, particularly since it now had the kind of scientific validation D&B alone could never have provided. But it was still a dramatic understatement, because it didn't include any of the companies D&B missed. Reynolds made no independent attempt to estimate that number himself, relying instead on extensive calculations carried out by David Birch and Susan MacCracken a few years earlier. If the Birch-MacCracken estimates were accurate, Reynolds reported, new companies in Minnesota accounted for essentially all of the state's net job growth.
In analyzing the questionnaires, moreover, Reynolds realized that he was uncovering two distinct kinds of entrepreneurship -- and that only one of them was really responsible for growth. Nearly three-quarters of the companies his staff contacted grew slowly -- less than $100,000 in new sales per year -- or not at all. Their emergence, Reynolds says, "tends to reflect a turnover or replacement process." But another group of companies seemed to be filling niches that hadn't existed before, as reflected in significantly faster growth. These fast growers -- concentrated in the Twin Cities area -- made up only 25% of all start-ups. But they accounted for 60% of new jobs attributable to new companies, 80% of new-company sales, and 80% of new-company "exports," that is, goods or services sold outside of Minnesota. They were thus responsible for a vastly disproportionate share of the development that was attributable to entrepreneurship.
Paul Reynolds is one of the leaders of what might be called the "counting-companies" school of entrepreneurship studies. It's a demanding art, if only because it requires the practitioner to scare up large grants. As a result, its adherents are few. Even so, it promises answers to questions that have vexed public officials and businesspeople since the dawn of capitalism. Do tax rates affect new-company formation? (No, says Reynolds, they make no difference.) Do people move into a state to start a business? (No again -- they start companies where they live). Does a region need manufacturing to prosper? (Doesn't seem so. William Beyers, a geographer at the University of Washington, contacted some 2,000 service companies in the Seattle area and asked about the extent of each company's exports outside the Seattle area. His conclusion: "The growth of our regional economy is being fueled as much by the export of services as by goods.")
