Research shows more small business does not mean more entrepreneurs

Jan 21, 2014 by Marcia Malory report
Entrepreneurship rate: Number of billionaire entrepreneurs per million inhabitants, 1996–2010. Credit: PNAS, doi/10.1073/pnas.1307204111

(Phys.org) —Economists often measure rates of entrepreneurship by looking at the number of small businesses in an industry or a country. However, in a study published in the Proceedings of the National Academy of Sciences, Magnus Henrekson and Tino Sanandaji of the Research Institute of Industrial Economics in Sweden have found that small business ownership is a poor indicator of entrepreneurship. A better measure is the number of billionaires in the market, which correlates negatively with the number of small businesses and startups.

The researchers studied Schumpeterian entrepreneurs, defined as those who bring innovation to their industry and drive new growth. They noted that in the United States, most self-employed people are not entrepreneurs in this sense. Most of the self-employed run small businesses that do not grow. The majority do not have employees of their own. Previous research suggests that only between 10 and 20 percent of small businesses are innovative. The rest, such as landscaping companies, auto repair companies, restaurants, salons and child day care services, merely replicate businesses that already exist.

Henrekson and Sanandaji argued that the number of small businesses therefore does not provide an accurate measure of the number of entrepreneurs. To obtain a better measure, they looked at Forbes Magazine's annual lists of "The World's Billionaires" from 1996 through 2010. Of the 1,723 billionaires profiled, they identified 996 billionaires in 50 countries who had obtained their wealth by founding new companies. The researchers defined these as billionaire entrepreneurs.

There was a negative correlation between billionaire entrepreneurship and self-employment. Countries with the most billionaire entrepreneurs tended to have the lowest rates of self-employment. For example, Americans accounted for 40 percent of the billionaires, yet the United States has the second lowest self-employment rate of all developed countries. Within the U.S., this negative correlation occurred regionally and by industry. Boston and Silicon Valley, known for high levels of , had low levels of self-employment and small business ownership compared with the natural average. Industries with the most billionaire entrepreneurs had fewer businesses with less than 20 employees.

Henrekson and Sanandaji point out that by creating large companies, make it more harder for smaller businesses to thrive and grow. The emergence of corporations such as Walmart and Amazon has reduced the number of in their sectors. Large companies that do not directly compete with , such as Google and Microsoft, also decrease small business ownership by creating that attract people who might otherwise become self-employed.

Explore further: Researchers analyze growth potential in African bank loans

More information: "Small business activity does not measure entrepreneurship," by Magnus Henrekson and Tino Sanandaji. PNAS, www.pnas.org/cgi/doi/10.1073/pnas.1307204111

add to favorites email to friend print save as pdf

Related Stories

Entrepreneurial women needed to create growth and jobs

Nov 01, 2012

When it comes to adopting an entrepreneurial spirit, it's the men who have the edge. Despite European women accounting for over half of the population, they only make up a third of the EU's entrepreneurs, ...

Unlocking the entrepreneurial spirit

Jan 15, 2013

Being your own boss is an aspiration for many Europeans - almost 4 out of 10 people in fact. The prospect of a potentially better income, independence and the freedom to work wherever and whenever is a highly ...

Recommended for you

Will the real unemployment rate please stand up?

Sep 10, 2014

America's unemployment rate—most recently reported as 6.1 percent—has long been used to gauge the country's economic well-being. But a new working paper released by Princeton University's Woodrow Wilson School of Public ...

Promoting homeownership is not entirely risk free

Sep 10, 2014

For twenty years, Switzerland has been promoting homeownership by letting residents draw on their pension fund assets to buy a home. In a recent study, Philippe Thalmann, EPFL professor in economics and architecture, dispels ...

User comments : 7

Adjust slider to filter visible comments by rank

Display comments: newest first

antialias_physorg
3 / 5 (1) Jan 21, 2014
make it more harder for smaller businesses to thrive and grow

"more harder"? Is that correct english?
goracle
5 / 5 (1) Jan 21, 2014
make it more harder for smaller businesses to thrive and grow

"more harder"? Is that correct english?

While not entirely incorrect, the word 'more' is undoubtedly redundant.
Porgie
not rated yet Jan 21, 2014
What the article does point out is that over regulation and stifling fees hurt small business from propelling themselves into meaningful success. As developed as America is it thwarts entrepreneurship. Small business still accounts for more employment than larger corporations. Small businesses create opportunity. But, without proper regulation is stifles it. Liberal over regulation and bureaucracy is the problem not the free market.
alfie_null
not rated yet Jan 22, 2014
What the article does point out is that over regulation and stifling fees hurt small business from propelling themselves into meaningful success. . . .

No. The article does not mention regulation or fees. If (as it seems) you want to make the point, you need to provide support, because it's not in the article.
jackjump
not rated yet Jan 22, 2014
That conclusion doesn't take a lot of thought. A country with a lot of billionaires implies more wildly successful companies hiring large numbers of people at good wages a large number of whom might otherwise have started their own little business. When the choice is a sure thing job with a successful company in an attractive industry or taking a chance by starting your own business most people will choose the sure thing. In countries without big successful businesses there really is not much choice.
AndyH
not rated yet Jan 22, 2014
The author appears to be barely literate and phys.org apparently doesn't waste its money on copy editors.

Not only do we have "more harder" but also "Boston and Silicon Valley, known for high levels of entrepreneurship, had low levels of self-employment and small business ownership compared with the natural average."

I wonder what the natural average of self-employment and small business ownership is.

Sashidharan
not rated yet Feb 01, 2014
Hi,

I practice Business solutions.

You can find some useful products for entrepreneurs here - https://www.insta...ractice/]https://www.insta...ractice/[/url]

Regards,

Sashidharan

Links:

http://www.selfgr...dharan-b
http://in.linkedi...hidharan (Rated 'Expert' for profile strength)
http://www.zintro...dharan-b ISSME Global SME Expert (www.issme.org) http://ezineartic...dharan_B
Practice Website: http://sashidhara...olutions
Products from practice: https://www.insta...ractice/]https://www.insta...ractice/[/url]