Rates of early-stage entrepreneurial activity surged around the world in 2011, jumping nearly 60 percent in the U.S., according to a survey released this week by the Global Entrepreneurship Monitor. More than 12 percent of U.S. adults reported starting a business or running new businesses last year, up from just below 8 percent in 2010.
The GEM report reverses a trend toward declining startup activity that started in the U.S. in 2005 and persisted throughout the recent recession, says Donna Kelley, an associate professor of entrepreneurship at Babson College and a co-author of the report. The GEM’s international teams interviewed more than 140,000 adults in 54 economies and concluded that 400 million individuals all around the globe are engaged in entrepreneurship. Kelley spoke about the report’s findings with Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.
Your report showed that total early-stage activity increased significantly in the U.S. last year. Was that surprising given several years of declining numbers?
At first we were alarmed when we got the numbers because we wondered if we did something wrong. We went back to our survey vendor to check that there wasn’t a mistake, but then the other numbers started to come in and we saw the trend is not something that’s just isolated to the U.S.
Did you analyze what these numbers mean in terms of the overall economy?
Not specifically yet, but we have analyzed several different recessionary situations previously. What we see is a pattern of nascent entrepreneurship declining just before a recessionary period, as optimism about entrepreneurial opportunities starts to go away. During a recession the entrepreneurship rates continue to drop, although there are a higher proportion of entrepreneurs who say they are motivated by necessity, rather than opportunity. Those people may be temporary entrepreneurs, just earning some money until the economy improves and they can get a job again.
As you come out of recession an increase in entrepreneurship often signals the end, as people see positive indicators and some stakeholders start to loosen up with funding. So someone who has always dreamed of being an entrepreneur might have more confidence and be more comfortable putting in their own money or asking a great-aunt for some money.
Internationally you found entrepreneurship increasing in both developing economies and mature economies.
Yes. In the 20 developed economies we surveyed, all but four increased over last year, and even those that decreased went down only slightly. In 16 developing economies the increase was 25 percent, including in places with above-average entrepreneurship rates in 2010, like China, Argentina, and Chile.
You also asked about why people discontinue businesses. What did you find?
For the more developing economies, people reported negative factors, like lack of profitability and difficulty getting financing. In developed economies people were more likely to cite positive reasons, like a sale, retirement, or new opportunity.
Another difference between those two broad groups was that early-stage entrepreneurs were four times more likely in developed economies to be competing in the business services sector than early-stage entrepreneurs in developing countries, where direct-to-consumer sales are more prominent. That’s important for policymakers who want to expand the knowledge base and service sector in their economies.
Does your survey catch some entrepreneurial activity before it makes a dent in an economy overall?
We measure individual participation in entrepreneurship, which is essentially how many people are employing themselves by creating their own jobs. That means we get a lot of activity that’s not measured by things like firm formations or business registration. The individual entrepreneurship level is often informal, part time, and team-based, especially in countries where there is very difficult bureaucracy, instability, or corruption that hinders people from officially registering their business activity.
The bright spot in this report is that 140 million entrepreneurs around the world say they expect to add at least five new jobs over the next five years. That’s why we think entrepreneurship is the economic engine that will revive our international economy, which has been weakened in the past few years.