Business Dynamism in High Tech (Blog Post)

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Author	Carlin Cherry and Dylan Dickens
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© edegan.com, 2016

Abstract

This blog post identifies a potential cause behind the decline of business dynamism in high technology sectors.

Blog Post

The American perception of entrepreneurship and innovation is an overwhelmingly positive one; Americans believe not only that there are good opportunities for starting a business, but also, as according to Forbes, that they have the capabilities to start one themselves. The Global Entrepreneurship Monitor U.S. report found that 43% of Americans believe there are good opportunities for entrepreneurship, and that 56% of American adults believe they have the capability to start a business. Recent trends in business birth and death rates however tell a more sinister story.

A study from the Kauffman Foundation reported sustained declines in entrepreneurship and business dynamism across the U.S. economy. Though the Wall Street Journal and many Americans still view the high-tech sector as the pinnacle of entrepreneurship and innovation, the Kauffman Foundation found the decline in business dynamism that occurred broadly across the U.S. economy over the past two decades also dragged on the high-tech sector in the post-2000 period. The high-tech sector, or the group of industries with very high shares of workers in the STEM occupations of science, technology, engineering, and math has been found to be in decline, which begs the question: what happened in the American economy to cause the decline of business dynamism in high technology sectors?

During the period of aggregate productivity and job growth in the 1990's, the high tech sector and newly listed public companies exhibited increases in indicators in dynamism and entrepreneurship. However, since 2000, the National Bureau of Economic Research has observed the high tech sector and publicly traded firms exhibiting a decline in dynamism. The number of IPOs has fallen in the post-2000 period and those that have entered have not exhibited the same rapid growth as earlier cohorts.

Why the decline? The primary challenge start-ups in general face is access to capital. According to Bank of America, only 29 percent of small business owners said they’ve applied for a business loan over the last two years. Millennials report turning to friends and family for loans, rather than taking out a traditional loan from a bank. Millennials also have less access to personal capital in that they often take on significant student debt when attending college. A study from Penn State University found "a significant and economically meaningful negative correlation between changes in student debt and net new businesses employing one to four employees, the firms most dependent on personal debt for financing." Personal debt and lack of access to capital are particularly problematic in the high tech sector where millennials compose a majority of the workforce and are more comfortable making advances in technology, as noted by PricewaterhouseCoopers.

The overwhelmingly large presence of millennial entrepreneurs in the high-tech sector combined with the overwhelmingly large burden of college debt in millennial's lives may be causing the "one-two knockout punch" which has contributed to the decline in business dynamism. While student debt is used to fund increases in human capital, the utilization of student debt reduces an individual's ability to access other forms of credit. As a result, the Penn State study's findings may suggest a debt trade-off in which larger amounts of student debt lower an individual's ability to start a new business. The study further found that an increase of one standard deviation in student debt use results in a decrease of 70 new small businesses per county, a decline of approximately 14.4%.

Millennials and recent college graduates comprise a large majority of those with interest in the high technology workforce. Because their access to capital appears to be limited both institutionally and due to high levels of student debt, many of these workforce participants may be either unable or unwilling to take on more debt to start their own businesses. This is perhaps the cause of the decline in business dynamism in the high technology sector. If this connection proves true, a decrease of 70 small businesses per increase in standard deviation in student debt could be expected. Perhaps increasing access to capital through easily attainable bank loans or implementing policies aimed towards lowering student debt could help to reverse the trend.

References

In line. See above. Original text by Carlin Cherry? Edited and formatted by Dylan Dickens

Link

https://docs.google.com/document/d/1cHWPSHRkYKfGPwtPlgBKLn70Xt7BPfv3sEi-yfMemBY/edit