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The Importance of Young Firms

Posted By Guy Pfeffermann, Monday, January 04, 2010
Updated: Tuesday, January 29, 2013

Guy PfeffermannRobert Litan, John Haltiwanger, Ron Jarmin and Javier Miranda have come up with evidence that "young firms", i.e., entrepreneurial ventures, are key to job-creation in the US. I just returned from Peru, where the vast majority of the labor force work in the "informal sector" and/or in small firms. Even more than in the US, entrepreneurship is of the essence in emerging markets.These topics will be discussed at this year's GBSN 5th Annual Conference (Washington, DC, June 10-11).

A "can-do" culture -- combining intense ambition with a flexibility to adapt and an instinct for innovation -- ensures that the economy will ultimately rebound strongly. The harsh recession may have actually improved the long-term outlook by purging high-cost firms and forcing efficiencies. Productivity (output per hour worked) has risen 4 percent in the past year. Profits are already up 21 percent from their low; surviving firms will soon expand.

Which vision will prevail?

The answer may hinge on two things: trade and entrepreneurship. Most economists see stronger exports as a substitute for weaker consumer spending. Unfortunately, that depends heavily on economic growth and trade policies abroad. By contrast, entrepreneurship is a sleeper issue that depends on what Americans do.

If you doubt its importance, consider this: All net job creation from 1980 to 2005 came from firms that were five years old or less, according to a study by economists John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau. In any one year, that may not be true; but over time, mature firms lose more jobs than they create. "It's not small firms but young firms that count," says economist Robert Litan of the Kauffman Foundation, which sponsored the study.

If Americans don't continue to create firms -- not just high-tech start-ups such as Facebook but construction companies, florists, restaurants, dry cleaners, engineering firms -- the economy may languish. Beginning a business is a risky, exhausting, chaotic process. Every year, there are roughly 500,000 to 600,000 company "births" and almost as many "deaths." Half of new firms don't make it to year five, says Litan.

» Read "In the aftermath of the Great Recession" by Robert J. Samuelson on the Washington Post



Guy Pfefferman is the founder and CEO of the Global Business School Network.

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