Business Dynamism in High Tech (Issue Brief)
This issue brief examines the business trend in the high-tech sector and explores the reason of declining number of start-ups in the sector.
Definition of High-Tech Sector
- The group of industries with very high shares of workers in the STEM occupations of science, technology, engineering, and math.
- Formal definition: According to a Bureau of Labor Statistics study published in 2005 that followed an interagency seminar aimed at classifying high-tech industries, a high-tech industry is defined by the presence of four factors: a high proportion of scientists, engineers, and technicians; a high proportion of R&D employment; production of high-tech products, as specified on a Census Bureau list of advanced technology products; and the use of high-tech production methods, including intense use of high-tech capital goods and services in the production process.
Measurement of Business Dynamism
- Job creation
job creation reflects a net addition of employment at a particular business through one of two channels—the expansion of employment at an existing business establishment or the birth of a new one in a particular year.
- Productivity growth
Job Creation and Destruction
Analysis: The high-tech boom in the second half of the 1990s, with a high pace of job creation and a slightly increasing rate of job destruction during this period. The spike in job destruction in 2001 to 2002 period is associated with the well-known dot-com bust. The slowdown in the overall pace of job creation and destruction in the post- 2002 period, is evident in the declining trends of both job creation an job destruction.
Young High Tech Firms
Analysis: The number of young high-tech firms increased considerably during 1982 to 2000 and starts to decline after 2000. For the private sector as a whole, young firms held steady throughout much of this period and start to decline after 2008. The slope of decline for high tech sector is slightly deeper compare to the total private sector.
The entrepreneurship rate in the high-tech sector has declined significantly despite the actual increase in absolute numbers during the same period. The high-tech entrepreneurship rate fell from a high of nearly 60 percent in 1982 to a low of 38 percent by 2011.
Conclusion: The pace of business dynamism, as measured by the pace of job reallocation, has declined in the high-tech sector in the post-2002 period at a pace that exceeds that of the overall economy.
Key points in business dynamism in high-tech
- Prior to 2000 key sectors like high tech as well as publicly traded firms exhibited a rise in indicators of dynamism. The evidence shows that in high tech, high growth young firms play an especially critical role in job creation and productivity growth. However, since 2000 the high tech sector has exhibited a decline in dynamism.
- Prior to 2000, the decline in the startup rate was dominated by sectors like retail trade. Since 2000 there has been a sharp decline in the startup rate in key innovative sectors like high tech. The decline has been substantial enough that the net entry rate has turned negative in the last several years.
- In some sectors like retail trade a case can be made that the declining dynamism has largely been benign, reflecting a shift in the business model to large, national chains that are both more productive and more stable. However, in other sectors such as high tech, such arguments are less persuasive. In this respect, it is worth noting that the acceleration in the decline in dynamism and the decline in dynamism in key innovative sectors like high tech in the post-2000 period coincides with a decline in U.S. economic growth whether measured by productivity or job growth.
- One possible explanation is increased barriers to adjustment for firms and workers. The decline in the employment-at-will doctrine contributes nontrivially to the decline in business dynamism. Likewise the rapid increase in occupational licensing requirements may be an important factor.
- Another possible explanation is that more recent generations are more risk averse. There has been a shift in the willingness to take on the risks that are inherent in a highly entrepreneurial economy. One possible hypothesis is that something in the economic environment has changed that makes taking on risk less attractive.
- It may be that the U.S. has become relatively less attractive for the type of dynamic, entrepreneurial activity that has been its hallmark. Some have speculated that the U.S. is still the place to develop and design new products and processes but it is relatively less attractive as the place to produce such new products. In considering these issues, this is not an argument against globalization since this brings greater economic efficiency and considerable gains to consumers. Likewise further innovations in IT will raise productivity and yield gains to consumers. But it may be that the U.S. is less well positioned to deal with the inevitable disruptions that occur when there are structural changes such as IT and globalization.