Last year’s deepening recession churned out more entrepreneurs, but not necessarily ones who will produce high levels of income, according to a new report.
The Kauffman Foundation today released its annual “Index of Entrepreneurial Activity,” a comprehensive report that tracks U.S. entrepreneurship rates and trends. It shows entrepreneurship rates rose to .32% in 2008 – meaning that an average of 32 of every 100,000 Americans started new ventures each month. That’s a slight increase over 2007’s 0.3% rate–and the highest rate since Kauffman started tracking new business formation rates in 1996.
An interesting revelation in the new data is that the percentage of new entrepreneurs starting businesses deemed as having “high income potential”—such as accounting, real estate or high-tech firms –decreased slightly last year, while those with low- or medium-income-producing potential rose. That suggests that more people are turning to entrepreneurship out of necessity in today’s bad economy, meaning they have limited job opportunities and start businesses to generate income rather than to chase a hot opportunity. In recessions, the numbers of “necessity entrepreneurs” tend to rise given lagging job markets.
“The total business creation rate increased over the past year, but this masks diverging underlying trends,” said the report’s author, Robert Fairlie, a University of California - Santa Cruz economics professor. “Entrepreneurship rates increased only for low-income types of businesses and not for high-income types, which may be early signs of how the recession is impacting firm formation. The continuing effects of the recession on business creation are important because entrepreneurs contribute to economic growth, innovation and job creation in the United States.”
The construction industry, which was among those that shed the most jobs last year given the sector’s woes, saw the highest level of entrepreneurial activity, the report said. The services industry saw the second highest number of new entrepreneurs.
The report also explores the educational achievement and demographics of new entrepreneurs and finds that immigrants continue to form new businesses at significantly higher rates than the U.S.-born. Latinos showed the biggest increase in entrepreneurship rates of any racial group, a trend that started in 2005. By contrast, African Americans’ business creation rate fell slightly in 2008.
Entrepreneurship among both men and women continued to increase, though women’s entrepreneurship levels returned to their 2005 levels of 0.24% after declining the past few years. Men continue to have a much higher entrepreneurial rate – 0.42% — than women.
Older adults surveyed, ages 55 to 64, saw the biggest increase in new entrepreneurship rates in 2008, climbing to 0.36% from 0.31% in 2007.
Another interesting finding: Americans who never graduated from high school were far more likely to start new businesses in 2008, compared with those with a college degree. Business formation rates for those without high-school diplomas rose to 0.48% from 0.42%, while they dropped to 0.30% from 0.31% for college graduates.
Overall, Kauffman’s data suggests the recession is helping spur entrepreneurship, but not necessarily for the best reasons. Necessity entrepreneurs often face an uphill battle, since they don’t always have the financial resources and risk tolerance or innate entrepreneurial drive of self-selected “opportunity” entrepreneurs. Still, some of the best ideas can be bred out of necessity.
Given that the economy only really started to nosedive in late 2008, next year’s Kauffman index should be even more interesting.
Readers, ever started a business out of necessity? Do you expect entrepreneurship rates will continue to climb this year?
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