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Business Dynamics Statistics Briefing: High Growth and Failure of Young Firms

Business Dynamics Statistics Briefing: High Growth and Failure of Young Firms

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Business startups that survive grow faster than more-established companies, according to Business Dynamics Statistics data funded by the Ewing Marion Kauffman Foundation. However, because entrepreneurial ventures also have higher mortality rates than older companies, they also have higher rates of job loss reflecting an “up or out” pattern.
Business startups that survive grow faster than more-established companies, according to Business Dynamics Statistics data funded by the Ewing Marion Kauffman Foundation. However, because entrepreneurial ventures also have higher mortality rates than older companies, they also have higher rates of job loss reflecting an “up or out” pattern.

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Published by: The Ewing Marion Kauffman Foundation on Aug 10, 2009
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08/10/2009

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BUSINESS DYNAMICS STATISTICS BRIEFING:
High Growth and Failure of Young Firms
March 2009
Fourth in a series of reports using data from theU.S. Census Bureau’s Business Dynamics Statistics
 John HaltiwangerUniversity of MarylandRon JarminU.S. Bureau of the Census Javier MirandaU.S. Bureau of the Census
 
Business Dynamics Statistics Briefing: High Growth and Failure of Young Firms
[2]
 About the Business Dynamics Statistics
The Business Dynamics Statistics (BDS) is a product of the U.S. Census Bureau that measures businessopenings and closings, startups, job creation and job destruction by firm size, age, industrial sector, andstate. The U.S. economy is comprised of more than 6 million establishments with paid employees. Thepopulation of these businesses is constantly churning-some businesses grow, others decline, and yet othersclose. New businesses constantly replenish this pool. The BDS monitors this activity to provide a picture of the dynamics underlying aggregate net employment growth. More information about the BDS can be foundat http://www.ces.census.gov/index.php/bds/bds_home
 
Business Dynamics Statistics Briefing: High Growth and Failure of Young Firms
[2]
Newly released data from the U.S. Census Bureau,the Business Dynamics Statistics (BDS)
1
, allowunprecedented tracking of business dynamics forU.S. firms and establishments. This is the fourth in aseries of briefings to highlight some key features ofthe data.What is the role of young entrepreneurial firms in job creation? Until now, researchers lackedcomprehensive data broken out by firm age necessaryfor understanding this fundamental dynamic in oureconomy. A novel feature of the BDS is thatemployment growth and market selection can betracked by firm age for the universe of U.S. private,non-agricultural businesses.Figure 1 shows the relationship between firm age,and both the net employment growth rate forcontinuing establishments and the job destruction ratefrom establishment exits.
2
Omitted from the chart areestablishments of new startup firms who, bydefinition, only contribute to job creation. Startupsaccount for about 3 percent of the stock of all jobs.The chart shows that young firmshave higher employment growth rates,if they survive, than older firms. Forexample, establishments belonging tovery young firms (age 1) have a netemployment growth rate of about 15percent conditional on survival, whereasthose belonging to older firms (age 29+)have a net employment growth rate ofabout 4 percent conditional on survival.However, younger firms experiencemuch more employment loss due toestablishment exit, nearly 20 percent atvery young firms, than do larger firms.The pattern for young firms is thusone of “up or out” with very rapid netgrowth for survivors balanced by a veryhigh exit rate. This pattern highlights theimportance of developing richermeasures of business dynamics, such asthose in the BDS. Understanding U.S.business dynamics requires not only statistics bybusiness size and age, but measures of the variabilityof business outcomes, as well. Lumping together allfirms of the same age is clearly misleading, given this“up or out” dynamic. Young firms obviously are doingboth better and worse than more mature firms interms of growth and survival.This briefing highlights only one dimension of theCensus Bureau’s new Business Dynamics Statistics.The BDS includes measures of business startups,establishment openings and closings, andestablishment expansions and contractions in termsof both the number of establishments and the numberof jobs. The BDS data provide these new statisticsfor the 1977-2005 period on an annual basis withclassifications for the total U.S. private sector, bybroad industrial sector, by firm size, by firm age,and by state. Further information about the BDScan be found at: http://www.ces.census.gov/index.php/ bds/bds_home
High Growth and Failure of Young Firms
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1. The BDS was developed at the Census Bureau’s Center for Economic Studies with support from the Census Bureau and the Ewing Marion Kauffman Foundation.2. These rates are computed with total employment as the denominator. Detailed definitions are available athttp://www.ces.census.gov/index.php/bds/bds_overview#_Concepts_and_Methodology

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