Amidst all the discussion of the trend toward fewer young firms in the economy, this question occurred to me.
I think of entrepreneurship as a trial-and-error learning process. If we had perfect knowledge in the economy, we would not need new firms. Is it possible that information about business prospects is getting better, so that we do not need as many new firms?
The analogy might be with inventories. In the 20th century, a major factor in recessions was that auto and steel manufacturers often were caught with large excess inventories, resulting in layoffs as the companies reduced production to work off the unwanted inventories. Over the last 25 years, computer and communication technology has caused the inventory cycle to be much more subdued.
What if “big data” in the economic and business environment has a similar effect on starting new ventures? Instead of having to spend years to determine whether a new business idea is viable, suppose it takes months, or can be predicted with reasonable accuracy even before it is launched?
In that kind of environment, I think that some of the advantage shifts away from entrepreneurs and toward existing businesses. As Amar Bhide pointed out, ambiguity deters large established businesses but attracts entrepreneurs. We think of rapid technological change as adding ambiguity to the environment, because change creates uncertainty. But if one of the effects of change is to make the business environment easier to read, maybe the ambiguity is lower today than it was 20 years ago.
Put this post in the “ideas I put out there but to which I am not committed” category.
UPDATE: That didn’t take long. from the comments:
I think if this were the case we would expect to see fewer of the types of entrepreneurs that don’t grow/fail quickly, but the types of entrepreneurs who grow rapidly and create a lot of jobs would not be affected (because predictions of success are becoming more accurate). This may have been the case prior to 2000, but we show that since 2000 the top of the growth rate distribution for entrepreneurs has fallen. Entrepreneurs aren’t growing as fast, and/or the high-growth types aren’t entering the market, which I think reduces the plausibility of the “lower ambiguity” theory. See http://updatedpriors.blogspot.com/2014/08/entrepreneurial-decline-mom-n-pop-or.html
I think if this were the case we would expect to see fewer of the types of entrepreneurs that don’t grow/fail quickly, but the types of entrepreneurs who grow rapidly and create a lot of jobs would not be affected (because predictions of success are becoming more accurate). This may have been the case prior to 2000, but we show that since 2000 the top of the growth rate distribution for entrepreneurs has fallen. Entrepreneurs aren’t growing as fast, and/or the high-growth types aren’t entering the market, which I think reduces the plausibility of the “lower ambiguity” theory. See http://updatedpriors.blogspot.com/2014/08/entrepreneurial-decline-mom-n-pop-or.html
Slower rates of communication, business development and change provide space for small businesses to take hold.
Speed kills.
If you include nonemployers, the number of firms in the U.S. has been trending up over the last decade. Here are the total numbers (millions):
2002 – 23.3
2003 – 24.4
2004 – 25.4
2005 – 26.4
2006 – 26.8
2007 – 27.8
2008 – 27.3
2009 – 27.5
2010 – 27.8
2011 – 28.2
See here for why this may not be a good thing: http://ideas.repec.org/p/tor/tecipa/tecipa-517.html
I think we must divide new ventures into at least two different groups:
1. New businesses that are filling some reasonably well known existing market. So a new hair dresser, new car wash, etc. Some of these may be very innovative in some way. But the net product they provide to customers is highly substitutable with existing product.
2. New product, or the first major penetration of a new product. Facebook is really very different from, say, quicken.
Group #1 may as a whole add innovation and dynamics to the economy, but the contribution of any one entrant is small.
Group #2 is all innovation and dynamics all the time.
Simply counting the number of “employers” may be badly misleading because of regulatory arbitrage. [Get people or small groups of people to be subs rather than direct hires – so “employers” pop up who do nothing but, say, hire people on 1 year contracts for Microsoft. Shows as another employer. But only exists to arbitrage employment law and staffing realities.]