New US firms bloom despite recession
While corporate giants are busy cutting back operations to cope with treacherous economic conditions, small business men and women are launching new companies at a record rate.Skip to next paragraph
Subscribe Today to the Monitor
''There are a number of signs that point to a new age of entrepreneurship,'' says David E. Gumpert, small business editor of The Harvard Business Review.
Perhaps the most striking sign is that in 1981 a record number of new firms incorporated. Despite a recession of major proportions, some 581,661 small businesses added ''Inc.'' to their name in 1981, up 9 percent from 1980, according to Dun & Bradstreet figures.
At the same time, over 200 colleges and universities are offering courses in entrepreneurship, ''up from a handful'' in 1970, Mr. Gumpert says. And more than half the states now have some kind of program that tries to help small business owners, vs. only a few a decade ago, he adds.
Ironically, interest in small business is high at a time when business failures have reached record levels. For the period ending April 2, some 5,705 businesses failed, as against 3,709 in the same period last year, according to Dun & Bradstreet. In 1981, failures rose 45.2 percent over 1980, to 17,044.
The significance of the strength in small business creation goes beyond the impact it may have on proprietors' pocketbooks. Although companies with fewer than 500 employees account for less than half of the nation's output, ''they are the ones that do the most job creating,'' says David L. Birch, director of the Massachusetts Institute of Technology's Center on Neighborhood and Regional Change.
MIT data indicate that 86 percent of the new jobs in the nation are created by such companies. And almost 66 percent of the new jobs are provided by those with fewer than 20 employees.
Small business also plays a major role in producing technical innovation, a critical factor in business competition between the United States and other nations. A National Science Foundation study suggests that small companies are two to three times as innovative as bigger ones.
Despite their ingenuity, managers of small concerns are subject to the same economic problems as managers of larger ones. So they face major hurdles launching companies when interest rates are high and consumers are scrutinizing their personal budgets looking for fat. ''This is not an auspicious time'' to go into business, admits David Cullen, public affairs director for the National Federation of Independent Business. Nevertheless, federation membership is up for the first three months of 1982.
''High interest rates have brought our capital expenditure program to a screeching halt and they have had a negative impact on the industries we serve, '' notes John F. Berger, president of the Electronic Controls Company of Boise, Idaho. The small firm makes electronic safety gear for construction equipment and serves as a subcontractor to electronic equipment makers.
The tough economy may prove fatal for some of the small companies now being launched. Dun & Bradstreet figures indicate that those with fewer than 20 employees have only a 37 percent chance of surviving four years. Only 9 percent of such enterprises are still in business after 10 years.
But only about 5 percent of businesses that close actually declare bankruptcy , cautions Professor Birch at MIT. Owners at the others often walk away, ''because it was too much effort or they were not making money.''
Despite the potential for failure, more than twice as many businesses opened their doors in 1981 as did a decade earlier. ''The sharpest increase in 1981 over 1980 came in the mountain states (including Colorado and Arizona) and the west South Central states (including Texas and Oklahoma),'' says Rowena Wyant, vice-president of Dun & Bradstreet's business economics division.
Strange as it may seem, some small companies are formed because business is bad. ''Some people get catapulted into a business of their own'' when they lose a job elsewhere, notes Elyse Sommer, co-author of ''The Two Boss Business'' (PO Box E, Woodmere, N.Y. 11598), a study of firms run by husband-and-wife teams. ''These temporary blips (in new small business creation) happen from time to time,'' often during recessions, adds Birch.
Other experts note that forces in addition to the recession are spurring small business formation. Mr. Gumpert at The Harvard Business Review notes that the ''antiwar generation of the '60s now is in its 30s, which is the prime age for starting businesses.'' Gumpert, co-author of ''The Insider's Guide to Small Business'' (published by Doubleday), contends that members of the so-called ''me generation'' recognize that ''small business offers a real creative outlet.''
The lure of small business is not limited to 30-year-olds. ''There is a strong trend among young retirees in their 40s'' to go into business when they find they are not getting promotions, Mrs. Sommer says.
Educators note that many of the students who take courses in operating small businesses will not form such companies immediately, but will wait until they're more experienced. ''We don't assume their first position will be'' as a small company owner, says Philip H. Thurston, a professor at the Harvard Business School. ''We offer preparation for a career, not for the first job.''
There have been trends in technology that have assisted company founders of all ages, Mr. Thurston notes. For example, the growing use of personal computers has created a demand for companies to produce programs, a task that can be performed with a relatively small capital investment. ''It is easier to start a software company than an automotive company, as John De Lorean's (founder of a troubled sports car company) experience shows.''
Annual business failures 1975 11,432 1976 9,628 1977 7,919 1978 6,619 1979 7,564 1980 11,742 1981 17,044 Source: Dun & Bradstreet