U.S. Entrepreneurial Activity Increased in 2003, But Job Growth Lags, Study Finds

Encouraging entrepreneurship has been a predominant focus since the recession and jobless recover, but a recent report from one of the country's leading colleges for entrepreneurial education cautions the current wave of new business starts will not cure many job woes.

Less than one out of every five businesses started in the U.S. has the innovative spark that could lead to strong job generation capabilities over the next five years, according to the 2003 Global Entrepreneurship Monitor (GEM), a study conducted by Babson College.

The GEM research shows a rise in new business start-up activity last year after two years of decline, yet most of these new companies are self-employed start-ups that replicate existing goods or service businesses and project less than five employees over the next five years. While the U.S. maintains a leadership position in encouraging new business formation, more is needed to spur innovation, the report advises.

After two years of decline, entrepreneurial activity in the U.S. is bouncing back, increasing from 10.5 percent in 2002 to 11.9 percent in 2003, according to GEM. But many of these business start-ups merely replicate existing goods and services businesses. In fact, six out of every 10 business owners say that their products or services are not new to any customer.

Further, many of these businesses do not seek to hire. Forty percent of current new business owners are self-employed and do not offer jobs to other people. Of the remaining 60 percent, nearly two-thirds employ less than 20 people.

"The good news is the increase in overall entrepreneurial activity," said William D. Bygrave, the Frederic C. Hamilton Chair for Free Enterprise Studies at Babson College. "The bad news is a disappointing drop in the level of classic venture capital funding."

Bygrave reports that the study found an 80 percent decline in VC funding in the U.S. since 2000. This is the greatest percentage drop in all the G7 nations plus Israel.

According to Bygrave, "The GEM report shows an indisputable need to invest in seed funding, start-ups, and early-stage companies."

Funded by the Ewing Marion Kauffman Foundation, the 2003 GEM report highlights several steps governments can take to help improve both the level of start-ups and entrepreneurial activity among existing firms:

• Provide a more positive personal context by increasing education and training in business start-ups, including capacity for opportunity recognition, and increase contact with existing entrepreneurs.
• Reduce the complexity and cost of registering a new business.
• Increase net in-migration.
• Increase national cultural support for entrepreneurial career options.
• Reduce the scope of economic activities managed by government.
• Create incentives to encourage more informal investment.

The 2003 U.S. GEM report is available at http://www.gemconsortium.org and http://www.kauffman.org.