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My pandemic pursuits included hula-hooping, song writing and covering my kitchen surfaces with aluminium foil to stop two kittens from stealing my meals. (It didn’t work.) Others took a more lucrative approach: countries including the US, France and the UK saw a surge in business creation. That was surprising given that recessions tend to snuff out start-ups. The even bigger surprise is highlighted by a recent study: in America the boom has been sustained. Unfortunately, there are reasons to fear it will not last.
A resurgence in business dynamism would be very good news. Over the past few decades the US entrepreneurial spirit seems to have dimmed, as business entry rates have fallen and bigger, older incumbents have become more dominant. This trend has afflicted others; an OECD study of 18 countries found that between 2000 and 2015, average business entry rates fell by three percentage points. Reversing the trend could generate new cohorts of highly innovative companies.
Over the first few months of the pandemic, things got worse. But then in places, including the UK and France, company formation zoomed up. In August 2023, monthly applications from those the US census bureau saw as “likely employers” were almost 40 per cent higher than in 2019. There was initial doubt over whether this remarkable rise in applications would lead to real businesses. But as Ryan Decker of the Federal Reserve Board and John Haltiwanger of the University of Maryland document, they did.
So is this a corporate renaissance? Maybe not, if it’s a temporary response to new patterns of demand linked to the shift to remote work. Decker and Haltiwanger see a “doughnut effect” of applications surging more in the outskirts than centres of big cities. Comparing 2019 with 2022, business registrations were roughly level in Manhattan, but elevated in the Bronx, Harlem and Brooklyn.
In another sign of a transitory pandemic-related shift, online retail accounted for around a quarter of Britain’s surge in business applications, and only a slightly smaller chunk of America’s. The beneficiary so far has been Etsy, whose global seller numbers exploded from 2.5mn in 2019 to 6.3mn today. Much as I genuinely appreciate the increasing availability of pumpkin soufflé-scented candles and hand-stitched bat costumes, it may not deliver the same oomph as, say, another Google.
Benjamin Pugsley of the University of Notre Dame raises a related concern: businesses in the incoming wave have been relatively small. As size is a predictor of survival, that is ominous. And sectors that saw disproportionate growth tended to be those with businesses that start small and stay small, including residential construction, building services and personal care.
In countries other than the US, it seems that business entry is already fading. A study by Saleem Bahaj and Sophie Piton of the Bank of England and Anthony Savagar of the University of Kent found that UK companies created during the pandemic were less likely to post jobs and more likely to dissolve — business entry is now back at its pre-pandemic trend. And data from the OECD suggests that in France, Sweden and the Netherlands the peak in new companies has passed.
It is possible that the US will defy trends. Perhaps its shock has lasted longer because more generous cash support gave people the funds to be their own boss. There is evidence that early stimulus cheques supported entrepreneurship, particularly in disproportionately black neighbourhoods. Or perhaps the hotter US economy made more people confident about customers. But in both cases, the outlook does not look promising. Pandemic-era savings are fading fast, and the Federal Reserve is doing its best to cool demand.
If you’re in an optimistic mood and all this is a bit gloomy, there are a few glimmers of hope. The US has seen a post-pandemic increase in applications from the potentially innovative high-tech “professional, scientific and technical services” category, which includes architectural services, computer systems design and scientific research and development. The increase happened before the Inflation Reduction Act was passed, so industrial policy wasn’t the trigger. It could help to sustain the boom.
A final fact to cling to is that it doesn’t matter if a lot of the new companies are tiddlers — that is almost always the case. All we need is a few that are super innovative, grow quickly and shake the incumbents out of their complacency. So far it doesn’t look as if productivity has risen out of its pre-pandemic malaise, though it’s still a little too early to tell. I’ll be hoping for the best, but expecting the worst.