The Disciples of David Birch

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.")

At least some of the questions, though, may be answered more quickly -- and less expensively -- by a group of social scientists who are already mining a big, computer-readable, and largely untapped source of data about new businesses, compiled on a state level and completely independent of Dun & Bradstreet. Among this group is the University of Michigan's John E. Jackson.

Jackson, a political economist, had been doing research at Harvard during the early '70s, when the Massachusetts economy was still smarting from the southward migration of textile and other old-line manufacturers. "When I moved to Michigan in 1980, I heard the same story," he remembers, "only you had to substitute Japan for the Carolinas and automobiles for textiles. But now people were saying, why couldn't we be more like Massachusetts?"

With good reason. Between 1978 and 1982, Michigan lost close to 400,000 manufacturing jobs, more than half of them in the automobile industry alone. At the depth of the 1982 recession, unemployment hit an incredible 17%. "Residents were bombarded almost daily with stories of firms and people leaving Michigan for the Sun Belt," Jackson says. Asked to serve on an economic-development task force organized by Democratic governor James Blanchard, however, he realized how little was really known about the Michigan economy. That was when he began looking into the state's unemployment-insurance data.

ES-202 files, as state unemployment records are known, record every company operating in a state from the moment it establishes a payroll. They're updated quarterly, with new employment figures for every company. And they record company failures the moment a business stops incurring tax liability. A few states don't allow outsiders access to the files, while in others the files aren't easily accessible. Michigan offered no such obstacles -- and the data, it turned out, were of high quality. "Not only are the data more timely than Dun & Bradstreet's," Jackson explains, "but Michigan is particularly good at flagging predecessor and successor companies [when a company is restructured or changes ownership]. D&B doesn't do that so well."

Uncertain as to what he would find, Jackson got tapes beginning in 1978 and ending, for the first phase of his research, in 1984. Running them through his computer, he found that the press had missed fully half the story.

Yes, the automobile industry was shrinking. Even during the post-1982 recovery it never came close to replacing the number of workers laid off in the recession. And yes, many other industries -- steel, machine tools -- had plenty of dying or declining companies. But side by side with this decaying economy was what amounted to another economy being born. New and growing companies were generating jobs by the tens of thousands. In manufacturing alone, nearly as many companies were created as went out of business. Of the manufacturers that had survived over the six-year period, more than half increased their employment, and the average increase was nearly 50%.

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