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Tuesday, July 7, 2009

Is entrepreneurship down, and why?

Scott Shane of Case Western argues that entrepreneurial activity is declining, due to competition from larger rivals with superior scale.

Meanwhile, Jonathan Adler (also of Case Western) has a contrary argument:
It seems to me that another likely contributor is the increased regulatory burden. It is well documented that regulation can increase industry concentration. Smaller firms typically bear significantly greater regulatory costs per employee than larger firms (see, e.g., this study), and regulatory costs can also increase start-up costs and serve as a barrier to entry.
What I find interesting is that entrepreneurial opportunities and activities are not equally distributed across the country: more firm formation happens per capita in Silicon Valley than in (say) Northeastern cities. And California is larger than any other state, the total numbers will be even higher than the ratios.

Today, California is going through a series of changes that are making the business climate less attractive, especially for startups:
  • a shortage of venture capital
  • increasing taxes
  • cutbacks in education and other infrastructure spending
  • a political climate that is encouraging increased regulation
California entrepreneurs may continue despite such burdens, or they may move somewhere else, or they may not start a company after all. But a decline in entrepreneurship in California would certainly reduce the total number of US startups more than in a smaller or less entrepreneurial state.

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