Startups Across America

How many new businesses are created each year? A new Kauffman Foundation study tracks entrepreneurial activity in the U.S.

by Jeffrey Gangemi

• View Slide Show

The rate of business creation in the U.S. held steady at 290 adults out of every 100,000 creating new businesses each month between 2005 and 2006, suggesting that nearly 465,000 people created new businesses on average per month. That's according to the Kauffman Index of Entrepreneurial Activity, an annual study that measures business startup activity for the entire U.S. adult population at the individual owner level. The Kauffman Foundation, a private organization in Kansas City, Mo., that promotes entrepreneurship, plans to release its annual Index, which it first commissioned in 2004, on May 23.

Though the Index hints at subtle year-to-year shifts in the gender distribution and geographic and ethnic makeup of U.S. entrepreneurs, the rate of business creation has remained fairly steady, in the range of 0.27% to 0.32%, over the past 11 years, with an average rate of 0.29%. "What we continue to find interesting is the remarkable consistency of entrepreneurial activity in the U.S. That's why we continue funding this study," says Alyse Freilich, senior analyst at the Kauffman Foundation.

Demographic Data Mostly Unchanged

The Kauffman Index measures the population of adult nonbusiness owners who start a business each month by analyzing matched data from the Current Population Survey, a monthly survey conducted by the Bureau of the Census and the Bureau of Labor Statistics. "Essentially, there's nothing else like it—no other measure that looks at how many people say they start a business each year. You know how many businesses there are, but you don't know how many are new," says Robert Fairlie, an economics professor at the University of California at Santa Cruz and author of the study.

The Index showed the rate of entrepreneurial activity for men and women was largely unchanged from last year. Asians led the largest increase in entrepreneurial activity, from 0.27% in 2005 to 0.32% in 2006. The rate for non-Latino whites remained constant at 0.29%, the rate for African Americans decreased slightly from 0.24% in 2005 to 0.22% in 2006, and the Latino rate increased slightly from 0.32% to 0.33%. The immigrant rate of entrepreneurial activity increased from 0.35% in 2005 to 0.37% in 2006, much higher than the rate for the native-born population, 0.27%.

The rate of entrepreneurial activity among all major industry groups in 2006 was highest in the construction category, followed by in the services industry.

Activity Reflects Population Shifts

The study also rates entrepreneurial activity by state and drills down further to gauge activity in the major U.S. metropolitan areas. The large major metropolitan areas with the lowest rates of entrepreneurial activity were Detroit (0.13%) and Chicago (0.18%). The rate of entrepreneurial activity decreased in the Midwest overall, from 0.26% in 2005 to 0.22% in 2006. As a result, that region had the lowest level of entrepreneurial activity of all regions for the first time since the study began.

"My guess is that the entrepreneurship index is related to economic growth. There hasn't been a lot of economic growth [in the Midwest]. There's less construction activity, and people are moving to the South and West and those areas. From last year to this year, there weren't huge macroeconomic changes in the U.S., and that's why entrepreneurship rates didn't change that much overall, but there are these regional changes—shifting and movement of the U.S. population," says Fairlie.

Click here for a slide show on the top 15 metro areas for new business creation.

Jeffrey Gangemi is a freelance writer based in Mendoza, Argentina.