Slump in U.S. Entrepreneurial Activity Levels Off
Posted by: laurakujawski on Wednesday, August 20, 2003
Topic Special Features
Entrepreneurial activity in the United States held steady in 2002 after a sharp drop in 2001, according to the "Global Entrepreneurship Monitor" (GEM), the unique annual study of entrepreneurship conducted by Babson College and funded by the Kauffman Foundation of Kansas City.
The 2002 U.S. entrepreneurial activity level, which found just over one in 10 Americans creating or growing new businesses, remained 50 percent higher than it was in 1998, according to the GEM report. In what researchers considered another good sign, the number of Americans who were optimistic in 2002 about the climate for starting a new business held steady from the previous year at 37 percent.
"The good news here is that the 2001 slump in entrepreneurship bottomed out in 2002 and may have set the stage for a return to new growth this year," said Kauffman Foundation president and CEO Carl Schramm. "This report makes a powerful case for stepping up the best efforts of the Kauffman Foundation and others to get more new entrepreneurs into the pipeline. It is vitally important to have a thriving entrepreneurial class today, but we also have to think ahead and work harder to groom new generations of entrepreneurs who will continue to innovate, create jobs and contribute to a more prosperous national economy."
GEM report author Heidi Neck, assistant professor of entrepreneurship at Babson College, added: "Entrepreneurship in the United States continues to thrive at a very high level, even in the wake of world economic decline. Though U.S. entrepreneurial activity peaked in the year 2000, the level reported for 2002 may simply reflect an ongoing post-boom retrenchment rather than a structural decline."
KEY STUDY FINDINGS
Slump bottoms out. The 2001 decline in entrepreneurial activity in the United States halted in 2002 at a level that was still 50 percent higher than it was in 1998. After surging in the 1998-2000 period, U.S. entrepreneurial activity fell considerably in 2001.
Optimism holds steady. The number of Americans who were optimistic in 2002 about the climate for starting a new business held steady from the previous year. When asked if there will be "good opportunities for starting a business" in the next six months, 37 percent of American adults said yes, which was the same as 2001 levels, but considerably below the 52 percent in 2000. Interest among U.S. adults in starting a new business started surging in 1998 and then peaked in 2000.
"Informal" capital holds the key. "Informal investment" in the U.S. is holding up better than venture capital. Venture capital funds slumped 59.6 percent in 2001, while "informal investment" declined only 19.5 percent in 2002. Informal investment topped VC investment in the United States in 2002; nearly one in 20 (4.6 percent) adults reported investing money in entrepreneurial firms, with 50 percent of those proceeds going to companies owned by relatives.
Gender gap persists. Women continue to be less engaged in entrepreneurial activity than men. There are 1.6 men in the U.S. involved in entrepreneurship for every woman engaged in the same activity. In the 18- to 24-year-old age bracket, men are three times more likely than women to start or grow a new business.
Strong education-jobs link. The GEM data show a solid correlation between entrepreneurship, education and job creation. Nearly a third (30 percent) of entrepreneurs with less than a high school education expect to remain self-employed over the next five years, while 35 percent of the most highly educated entrepreneurs expect to employ 20 or more people over the next five years.
Report Implications
The Kauffman Foundation's Schramm indicated that the GEM study underscores the importance of a number of ongoing Foundation initiatives and also provides a road map for other needed steps, including:
Emphasis on entrepreneurship in the classroom. If individuals with a college degree are more likely to engage in entrepreneurial businesses that create new jobs, as documented in the GEM study, then entrepreneurship training should be more fully integrated into the collegiate setting. The Kauffman Foundation recently launched a $25 million initiative aimed at making entrepreneurship education a campus-wide opportunity. Fifteen colleges are currently competing in the "Kauffman Campuses" initiative, which will provide grants this December of up to $5 million each to five to seven universities that can best demonstrate the ability and commitment to make entrepreneurship training available across departments and to students of diverse disciplines.
Babson College is also looking at innovative ways to make entrepreneurship more accessible to diverse populations and has recently formed a partnership with four historically black colleges and universities to create curricular materials focusing on African American entrepreneurs and minority-owned businesses.
Improving access to capital. The GEM study finding showing a continuing decline in classic venture capital available to entrepreneurs is a strong call for greater tax and other incentives for those who invest in new and growing business. "Informal investments by family and friends are what get the large majority of start-up entrepreneurs off the ground," said Schramm. "We need to find ways to incent more people to invest in these young businesses." Schramm added that accessing capital is especially hard for women and minority entrepreneurs, and that the Foundation is exploring new ways to help level the playing field.
Promoting more entrepreneurship by women. The new GEM findings underscore the importance of uncovering the reasons behind the lower rate of entrepreneurial activity among women. "We are committed to undertaking major research and convening a national dialog to determine what can be done to close the gender gap that separates men and women today when it comes to starting and building businesses," Schramm said. "In the long run, this may be one of the most important things the Foundation can do to ensure that entrepreneurship in America is as healthy as possible in the coming decades."
Babson College, in turn, through its Center for Women's Leadership, is conducting research on women-led family businesses, and is finding that the success of such businesses may be the result of unique management techniques of women.
Schramm also said that the GEM report points to a number of problems and issues associated with entrepreneurship that will require new and substantial research if progress is going to be made. "We need to undertake rigorous analysis that shows us why certain entrepreneurs succeed when others don't," he said. "We have to try to define the 'trigger points' in the process so that a higher percentage of entrepreneurs who launch ventures stay on track with their dreams and goals."
The full text of the GEM report can be found online. |
