Will Surging Business Creation Continue?

It’s Global Entrepreneurship Week (GEW), a period each year when millions of people, thousands of organizations and almost every country on earth not only celebrate entrepreneurship but also find ways to help and support new entrepreneurs. To mark the GEW, can we measure the state of entrepreneurship globally?

Record-shattering growth in new business creation in the United States over the past two years has been documented here and celebrated by the Biden administration. (However, as shown below, growth began during the Trump administration in the mid-2020s.) The question of why such growth is occurring is interesting but perhaps not as important as another: Will it continue? To try to make some sense of that, let’s look at official data on business formation, other datasets on entrepreneurship, and global data to provide some context around what’s happening in the United States.

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First, a warning: Comparative and continuous measurement of entrepreneurship is not easy. There are competing definitions of what should and should not be measured. There are a variety of sources, from administrative statistics to surveys, if a consistent definition can be agreed upon. Time lags—sometimes significant—in reporting. And, globally, there is no standard way of tracking. With that giant grain of salt, what can different datasets tell us?

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Forming a record-setting trade

It’s well known by now: After 2020, new business formation in the United States has increased.

The blue line, Business Applications, captures applications filed with the Internal Revenue Service (IRS) for an Employer Identification Number (EIN). As the Census Bureau observes, this includes “persons associated with starting a new employer business.” Not every business application, that is, actually corresponds to the creation of a firm that employs people. For this reason, the census measures “high-propensity business applications,” those “with a high propensity to turn into a business with payroll, based on a variety of factors.” These are captured by the red line on the chart.

High-propensity business applications—a poor proxy for creating new employer firms—also rose to record levels beginning in the mid-2020s. The The monthly average of high-propensity business applications from June 2020 to October 2022 was 36 percent higher than from July 2004 to February 2020..

Do other datasets also show growth?

For the most part, yes. In the Kaufman Indicator of Entrepreneurship, the “rate of new entrepreneurs” reached record levels in 2020 and 2021. It is also based on census data, but not administrative data like commercial applications. Rates increased for men and women across race and ethnicity, and age groups and education levels.

According to the Global Entrepreneurship Monitor (GEM), a survey-based measure, total early-stage entrepreneurial activity in the United States “declined slightly in 2020” before “rapidly recovering in 2021” to near pre-pandemic levels.

What’s going on elsewhere

Rates of entrepreneurship across Organization for Economic Co-operation and Development (OECD) countries appear to be very uneven, although they are not so easy to compare. Looking at the now closed dataset on entrepreneurship, at the beginning of 2021 some countries were higher than in previous years in terms of new business creation (such as France).

In others, new business creation was significantly lower than before (e.g., Italy), while in still others there was essentially no change (e.g., Iceland). A new OECD dataset, Chronological Indicators of Entrepreneurship, also shows a mix although the data goes back to 2020 and 2021 depending on the country.

The World Bank also tracks entrepreneurship and tries to do so in almost all countries. The most recent data for any country, however, only goes back to 2020 so we cannot draw conclusions about the full impact of the pandemic. In some countries, such as Nigeria, “new business density” has increased in 2020 as part of a long-standing growth in entrepreneurship. Elsewhere, such as Israel, new business density decreased in 2020 but, again, as a continuation of a trend rather than a sharp reversal.

Overall, the GEM measure cited earlier found that early-stage entrepreneurial activity has “generally declined” in countries due to the COVID-19 pandemic.

Will it continue?

If this column had been written a few months ago, we might conclude that the pandemic-induced increase in business creation had run its course. Both series shown on the chart have been down for several months. Since then, however, total commercial applications and high-propensity applications have again increased on a monthly basis.

There has been good analysis by other organizations and individuals, looking not only at the growth in business applications but also at the relationship between those and subsequent developments among employing firms in different sectors. Most interestingly, John Haltiwanger is persistent Document That “non-store retailers” (read: online shopping) saw the largest epidemic growth in business applications, followed by professional and scientific services. That probably fits with many people’s intuitions: When closings and in-person shopping didn’t happen, new businesses popped up to meet the demand for e-commerce. With emerging signs that the boom in online shopping was temporary and not permanent, perhaps it will drag on more business formation in this and other sectors hardest hit by the pandemic.

A focal point for GEW

For the millions of people celebrating Global Entrepreneurship Week, the available data on entrepreneurship prompts important but difficult questions. What is the state of entrepreneurship at the local level? How likely is it that there will be any sustained increase in business creation? If pre-pandemic trends are returning (whether positive or negative), what does this mean for entrepreneurship support and policymaking?

Full disclosure: I am a senior advisor to the Global Entrepreneurship Network, the coordinating body of GEW, and many other programs and activities around the world.



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