Fostering Startups is Key to Job Creation

Jobs are our fundamental connection to the economy. A job not only provides us with our livelihood, it is also an important factor for our well being. It is the basis of our social status and a major determinant of our identity in today’s world. The serious recession of 2007-2009 has hit us where it hurts us most: our jobs, our real economic health.

At the macro level, the gross domestic product (GDP), the broadest measure of economic activity, has recovered from the recent recession and most analysts expect to see a real economic growth rate of over 3 percent in 2010. The economy has also added nearly 800,000 net payroll jobs between January and June of 2010.

At the same time, unemployment has remained high at over 9 percent. For every worker without a job, the unemployment rate is a very personal statistic. To get down to a 5% unemployment level, which has been the norm for our economy for many years, the U.S. has to create millions of new jobs – millions of jobs for those who are currently unemployed and millions more for recent entrants into the labor market.

Clearly our biggest challenge today is new job creation. The question is: where will they come from? An answer was provided by a Kauffman Foundation research paper released in November 2009. For the last thirty years, young companies (less than five years old) have provided most of the net job growth in the U.S. But what about the job contribution of large established firms? While large firms do create jobs, much of this job creation is negated by layoffs and mergers and acquisitions. In other words, net job creation by large firms in the aggregate is very small, if not zero.

But there is still a nagging question. What about all of the startups that fail? Although new and young firms are terrific job creators, this category of business does suffer from a high rate of failure. The only way this category remains a job creator is that there is a high rate of growth in the number of startups – therefore a high growth rate of startups is critical for net job creation in our economy.

Digging deep into the job creation dynamics of our economy (U.S. Census Bureau Business Dynamics Data Base), a March 2010 Kauffman Foundation study found that among the total population of young startups, there are a few that show extraordinary rates of job creation. These highest flyers, also known as “gazelles”, give rise to a disproportionately high number of jobs in the economy. While they represent only about 1 percent of all companies in the economy (about 55,000) but account for around 40 percent of new jobs in any given year. A second tier of fast-job-growing firms – the top 5 percent in the economy (273,000 firms) – create approximately two-thirds of the new jobs in any given year. Undoubtedly, if we are serious about rapid job creation, we need to focus more on fast-growing startups.

It is important to remember that not all gazelles or fast-growing firms are immune to failure; many fail, but many also survive for years and sometimes become iconic firms of the future such as IBM, Google, or Apple, or Intel, and Microsoft. In their early years as they scale up, gazelles create large number of jobs and this is what is important for our economy. The scaling up process is where most jobs are created. Hence we need to focus on strategies that assist and support companies that want to expand their operations. This must be our prime job growth strategy in the 21st century.

For our job-starved economy, the national and regional policy imperatives are fairly straightforward. They include:

1. Help create business startups making sure that entrepreneurs in the region have access to investment capital, access to innovative ideas from universities and think tanks and other elements of a successful innovation ecosystem. By simple arithmetic, creation of a sufficient number of startups will boost job growth.

2. Implement tax incentives for startups as well as for companies that are in a “scaling up” stage. In addition, simplify regulation and simplify the business permitting process.

3. Finally, help promote and facilitate the transfer and commercialization of cutting edge technology from research universities and think tanks to the private sector.

Let us not forget that ultimately entrepreneurs will lead us out of the current job recession.

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2 Comments

Filed under Business, Economy

2 responses to “Fostering Startups is Key to Job Creation

  1. the number of jobs created by start-ups is quite impressive, considering the economy. This means that entrepreneurs, like myself, need to have the tools and business savvy to scale up and make our business successful.
    Also, is it correct to assume that 1 out of 5 start-up succeed while the other four go belly-down in less than three years.
    I am currently in the process of researching products based on innovative technology that can be used in the US as well as internationally – provide needed services at an inexpensive cost.

    • Ibis:Good to hear from you.After 22 years I have ended my stint as a coulumnist.Never missed a deadline.
      I have started blogging again.Follow me at www/tapanmunroe.com.I am also working on two new books based on collection of my columns.
      Look forward to hearing from you.

      Best,
      Tapan

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