The Disciples of David Birch

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The mosaic begins with a few basic pieces. How many new businesses are there? Where are they, and what are they doing?

Surprising as it may seem, no one yet knows definitive answers to such questions. No government agency disseminates comprehensive information on new companies nationwide. Dun & Bradstreet Corp.'s widely quoted "new incorporations" figure includes numerous entities incorporated purely for legal or tax reasons. The most widely used source of data is Dun's Market Identifiers (DMI) listing, which provides information on the roughly 6 million active companies in D&B's credit files. Birch's database begins with the DMI. So do the two databases maintained by the SBA.

If the DMI were a true census, it might be sufficient. In fact, it is limited in scope and uneven in quality, as even its defenders acknowledge. Many companies, particularly in the service sector, are likely to be a couple of years old before they come to Dun's attention, and smaller ones may never be listed at all. Since Dun's reporters are mainly interested in financial data, the information they gather tends to be spotty on matters such as start dates and sales figures. Birch and other researchers do their best to weed out obvious errors, to estimate the number of missing companies, and to correct for statistical quirks. But skeptics abound. "D&B," asserts economist Jonathan S. Leonard, of the University of California, "is pretty lousy data."

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.

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