Business Dynamism in High Tech (Blog Post)

Article

Introduction

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 that they have the capabilities to start one themselves. [1] 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. [2] But recent trends in business birth and death rates tell a more sinister story. Many studies report sustained declines in entrepreneurship and business dynamism across the U.S. economy. [3] Though many Americans view the high-tech sector as the pinnacle of entrepreneurship and innovation [4], the Kauffman Foundation found the declines in business dynamism that occurred broadly across the U.S. economy over the past two decades also occurred in the high-tech sector in the post-2000 period (high-tech sector being defined as the group of industries with very high shares of workers in the STEM occupations of science, technology, engineering, and math). [5] This article aims to ask what happened in the American economy to cause the decline of business dynamism in high technology sectors, and the impacts of this slowdown on economic growth.

Cause of decline

During the period of aggregate productivity and job growth in the 1990s, the high tech sector and newly listed public companies exhibited increases in indicators in dynamism and entrepreneurship. However, since 2000, the high tech sector and publicly traded firms have exhibited 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. [6]

Why the decline? The primary challenge start-ups in general face is access to capital. 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. [7] Millennials also have less access to personal capital in that they take on significant student debt when they go to 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 older members of the workforce do not. [8]

The overwhelmingly large presence of millennials has contributed to the decline in business dynamism particularly in high-tech sectors because these members do not have the means or desire to finance a small business given that they are often saddled with debt from college.

Impacts

While student debt is used to fund increases in human capital (education), the utilization of student debt reduces an individual's ability to access other forms of credit. As a result, the study's findings suggest a debt trade-off in which larger amounts of student debt lower an individual's ability to start a new business. Penn State's study found that an increase of one standard deviation in student debt uses results in a decrease of 70 new small businesses per county, a decline of approximately 14.4%.[9]

Conclusion

Millennials and recent college graduates comprise a large majority of those with interest in the high technology workforce. Because their access to capital is limited both institutionally and due to high levels of student debt, many of these workforce participants are either unable or unwilling to take on more debt to start their own businesses. This has resulted in a decline in business dynamism in high technology fields to the tune of a decrease of 70 small businesses per increase in standard deviation in student debt. It seems as though increasing access to capital through easily accessible bank loans or implementing policy aimed towards lowering student debt would help to reverse the trend.