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Nascent Entrepreneurs

Nascent Entrepreneurs

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Published by Enrique
This paper sheds some light on the massive scale of entrepreneurial activity in the U.S.
This paper sheds some light on the massive scale of entrepreneurial activity in the U.S.

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Published by: Enrique on Jul 17, 2011
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11/27/2011

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A proposal to improve our understanding of entrepreneurship using the 
THE VIEWS EXPRESSED ARE THOSE OF THE AUTHOR(S) AND DO NOT NECESSARILYREPRESENT THOSE OF THEIR EMPLOYER(S) OR THE KAUFFMAN FOUNDATION. ALL ERRORS AND OMISSIONS ARE SOLE RESPONSIBILITY OF THE AUTHOR(S).
 
CURRENT POPULATIONSURVEY:
EXPANDING
 
UNDERSTANDING
 
OF
 
U.S.
 
BUSINESS
 
CREATION
 
SUMMARY
Three additional modules are proposed for the Current PopulationSurvey [CPS] to provide the following: 1) identification of nascententrepreneurs active in new firm creation; 2) details about the nascententerprises under development; and 3) utilization of the CPS panelfeature to track short-term developments during the firm gestationprocess. Additional data on the nascent enterprises could bedeveloped through the following: 4) long-term tracking of nascententerprises once they are no longer part of the CPS panel; and 5)integrating the CPS new firm cohorts with data from otheradministrative data sets maintained by Bureau of Labor Statistics(BLS) and the U.S. Census Bureau to provide tracking over the entirefirm life course.
THE POTENTIAL OF THE CPS AS A BASIS FOR TRACINGNEW FIRM CREATION
The focus of this proposal is to apply the operational experiencegained from the Panel Study of Entrepreneurial Dynamics [PSED]research program to add modules to the CPS. This would providemore precise and detailed estimates of U.S. business creation andexpand capacity to understand the processes critical to new firmcreation. The PSED research program has demonstrated thefeasibility of identifying U.S. adults active in business creation and thevalue of tracking their efforts until there is a resolution. Longitudinaldata on new firm creation has been assembled with cohorts identifiedin 1999 and 2005. Similar screening procedures have been employedin over sixty countries in the Global Entrepreneurship Monitor [GEM]initiative.The CPS is considered the most accurate ongoing survey of the U.S.population. It is used as the benchmark for the calibration of mostcommercial and marketing household and population surveys(http://www.bls.census.gov/cps/cpsmain.htm). While a sample ofabout 57,000 households representing about 112,000 individuals areinterviewed each month (ICPSR Project 4559, pgs 1-2), eachhousehold is interviewed monthly for two four-month periods (U.S.Census, 2006, pg 3-14). There is, however, an eight-month gapbetween these periods. This allows month-to-month changes in thework activity of each person to be examined for each of these four-month periods, as well as over the eight-month gap.
Proposed by 
Paul D. ReynoldsGeorge Mason UniversityPaulDavidsonReynolds@gmail.com
Priority changes suggested 
Use CPS to screen for nascententrepreneurs.
Obtain nascent enterprise detailsfrom CPS.
Track nascent enterprise progresswith CPS panel.
Track nascent enterprise progressafter depart CPS panels.
Track the firm life course usingestablished administrative datasets.
Potential advancement in understanding entreprenership 
Provide details about who entersthe firm creation process and therelative impact of different factorson the outcome.
Provide details about the causalprocesses affecting start-upoutcomes, the firm life course and,in turn, contributions of new firms toeconomic growth.
 
2008 Kauffman Symposium on Entrepreneurship and Innovation Data
2
CURRENT POPULATION SURVEYWWW.KAUFFMAN.ORG/DATASYMPOSIUM
The CPS is primarily designed to capture the working activity of those in the U.S. labor force, not thecharacter of the organizations in which people work, nor the economic entities they may attempt to create.For those identified and emphasizing a shift to self-employment, only two items of information on this newventure are obtained: 1) whether or not the business is incorporated; and 2) the industry sector in which itplans to operate. No other data on the emerging businesses currently is obtained.As a result, there are a number of ambiguities regarding the nature of the CPS-identified new businesses.For example, without data on the number of owners—and over half of all new firms have multiple owners—itis hard to translate “an increase in time devoted to self-employment” into a number of unique businessventures. Second, the emphasis is restricted to the effort devoted to the business activity; there is noinformation regarding the extent to which this new venture actually is part of the economy—with sales tocustomers, supplier purchases, bank loans, tax payments, employees, etc.
1
It may or may not be anindependent decision-making entity—competing with other firms for customers and affecting the quality,price, and amount of products or services traded in the market. No information is obtained on the scope ofactivity, as represented by the number of employees—and a self-employed person may hire others to workin the business—or the sales revenue. Finally, no effort is made to gather information about whether thenew business has been incorporated into the standard business registries, such as the state unemploymentinsurance files, the federal social security files, federal tax rolls, or other business lists.In sum, this effort, which is the basis for the Kauffman Index of Entrepreneurial activity,
2
provides animprecise indicator of efforts to pursue self-employment as a sole career focus, but excludes the majority ofindividuals working on business creation. The existing data does not provide the information required tounderstand how this may lead to business creation or be related to other measures of the entrepreneurialprocess. A further discussion of the Kauffman-sponsored index is provided in Appendix A.It is proposed that the PSED field-tested screening procedures be added to the CPS to identify those in theU.S. [about six per 100] that are active in business creation and track their success in transforming anascent enterprise into a viable new business. The extensive work/career history, socio-demographic, andlocation details of CPS respondents would provide invaluable contributions to the analysis of factorsassociated with the decision to enter the business creation process. This would allow analysis of the effectsof work, family, economic and community contexts on the outcomes—implementing a new business,disengaging from the process, or continuing the effort to implement the new firm. Complete informationabout the PSED procedures, interview schedules, and data sets is available at www.psed.isr.umich.edu.
WHY UNDERSTANDING BUSINESS CREATION IS IMPORTANT
From the beginning of the republic, business activity was considered an important aspect of life in theUnited States. Many of those who founded and expanded the United States would be consideredentrepreneurs, and they created many new businesses. It is only recently, however, that the uniquecontributions of new firms have been understood fully. New firms are known to be one major source of new jobs, market innovation and change, and sector productivity improvements.
3
The representative samples of business creation developed as part of the PSED research program suggestthat over twelve million adults are pursuing new firm creation at any one time.
4
Developing a new businessis a major career option for many. Several features of this process, based on the results of the PSEDresearch program, are significant for public policy.
About one-third of the nascent enterprises become profitable new firms; it takes five or more yearsafter conception for 90 percent the nascent enterprises to complete the transition to a new firm ordisengage. [Half do so within twenty-four months.]
5
Even after five years, one-third still are in thestart-up mode.
1
See Basic Monthly Survey CPS Questionnaire [http://www.bls.census.gov/cps/bqestair.htm].
2
Fairlie (200ba).
3
For job creation, see Armington and Odle (1982); Birch (1981); Schreyer (1966); and Acs and Armington (2004). For economicinnovation, see the review by Baumol (2005). For productivity gains, see the recent review by Davis, Haltiwanger, and Jarmin(2008).
4
Reynolds and Curtin (2008), pg. 174.
5
Reynolds (2007b), pg. 57.
 
2008 Kauffman Symposium on Entrepreneurship and Innovation Data
CURRENT POPULATION SURVEY
3
 WWW.KAUFFMAN.ORG/DATASYMPOSIUM
There is a great deal of attrition between entry into the business creation process and establishinga viable employer firm.
o
About twelve million nascent entrepreneurs working on over seven million nascent enterpriseslead to the annual addition of 600,000 new employer firms
6
 —it takes over twelve nascententerprises to generate one new employer firm.
Entry into the process is influenced heavily by the age, gender, and ethnic background of theindividual, as well as situation factors associated with work, community, and personal context.
Completion of the process with a profitable new firm is affected largely by work experience, therange of start-up activities, and the intensity of the contributions to the creation of a new firm—notpersonal attributes.
7
 
The resources devoted to business creation, voluntarily by the start-up teams on an informal basis,are substantial:
8
 
o
About ten billion hours of work each year, 2 percent of the total annual hours of work for pay inthe United States
o
About $70 billion dollars each year, compared with $23 billion for all venture capital firminvestments and $1 billion for venture capital sponsored start-ups.
o
Over 75 percent of these informal, personal investments are made by those that will NOTlaunch a viable new firm.
The United States currently is doing well in terms of global competition with twice as many nascententerprises as Europe. But both India and China have sixty million nascent entrepreneurs, fivetimes as many as the United States. The level of entrepreneurial activity in developing countrieswill pose a major competitive challenge to the United States.
9
Understanding new firm creation inthe United States will help maintain a major competitive advantage.In brief, the new firm creation process is a major activity in the United States. New firms have substantialimpact on national economic well-being and are major career options for many.A more complete understanding of a number of issues associated with firm creation would advancepractitioner and policy effectiveness, including:
Who gets involved in creating a new business?
How many nascent entrepreneurs/nascent enterprises exist?
What do nascent entrepreneurs do to create a new firm?
To what extent are new firms based on advances in technology and science?
What proportion of nascent enterprises complete the process to become a new firm?
How long, after entry into the start-up process, does it take to resolve the outcome for a nascententerprise—transition to a new firm or deactivation of the effort?
What is unique about nascent enterprises that become new businesses, compared with those thatdo not complete the firm birth transition?
What is the social cost, in terms of sweat equity and personal investments, associated with the firmcreation process?
What is unique about new firms expecting to have a substantial growth trajectory after launch?
6
U.S. Small Business Administration (2007), Table 1.2.
7
Reynolds (2007b), pg. 89.
8
Reynolds and Curtin (2008), pg. 231-236.
9
Reynolds (2007a) Chapter 9.

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