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The State of American Entrepreneurship: New Estimates of the Quantity and Quality of Entrepreneurship for 15 US States, 1988-2014

Listed author(s):
  • Jorge Guzman
  • Scott Stern
Registered author(s):

    While official measures of business dynamism have seen a long-term decline, early-stage venture financing of new companies has reached levels not observed since the late 1990s, resulting in a sharp debate about the state of American entrepreneurship. Building on Guzman and Stern (2015a; 2015b), this paper offers new evidence to inform this debate by estimating measures of entrepreneurial quality based on predictive analytics and comprehensive business registries. Our estimates suggest that the probability of a significant growth outcome (either an IPO or high-value acquisition) is highly skewed and predicted by observables at or near the time of business registration: 69% of realized growth events are in the top 5% of our estimated growth distribution. This high level of skewness motivates the development of three new economic statistics that simultaneously account for both the quantity as well as the quality of entrepreneurship: the Entrepreneurial Quality Index (EQI, measuring the average quality level among a group of start-ups within a given cohort), the Regional Entrepreneurship Cohort Potential Index (RECPI, measuring the growth potential of firms founded within a given region and time period) and the Regional Entrepreneurship Acceleration Index (REAI, measuring the performance of a region over time in realizing the potential of firms founded there). We use these statistics to establish several new findings about the history and state of US entrepreneurship using data for 15 states (covering 51% of the overall US economy) from 1988 through 2014. First, in contrast the secular decline in the aggregate quantity of entrepreneurship observed in series such as the Business Dynamic Statistics (BDS), the growth potential of start-up companies (RECPI relative to GDP) has followed a cyclical pattern that seems sensitive to the capital market environment and overall economic conditions. Second, while the peak value of RECPI is recorded in 2000, the level during the first decade during this century was actually higher than the late 1980s and first half of the 1990s, and also has experienced a sharp upward swing beginning in 2010. Even after controlling for changes in the overall size of the economy, the second highest level of entrepreneurial growth potential is registered in 2014. Third, the likelihood of start-up firms for a given quality level to realize their potential (REAI) declined sharply in the late 1990s, and did not recover through 2008. These findings suggest that divergent assessments of the state of American entrepreneurship can potentially be reconciled by explicitly adopting a quantitative approach to the measurement of entrepreneurial quality.

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 22095.

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    Date of creation: Mar 2016
    Handle: RePEc:nbr:nberwo:22095
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