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Posted by: Michael Mandel on May 03
First, my apologies for disappearing for a bit. I was travelling, and then got otherwise distracted.
People have hypothesized that it’s easier to start companies during downturns, because labor, rent, and other resources are cheaper (in economic jargon, the ‘opportunity costs’ are lower). And there have been plenty of news articles talking about out-of-work professionals going into business for themselves.
But here’s a slightly different question—is it easier to start a successful company during a downturn? Not so obvious, is it? It might be easier to start a company, but harder to start a successful one if the economy is weak.
Take a look at the table below, which was put together by Gary Beach, publisher emeritus of CIO magazine. The table, based on the Fortune 500, shows what percentage of top companies were incorporated during a recession (Gary was using Wikipedia’s list of U.S. recessions, which goes back further than the NBER’s list of U.S. recessions).
|Based on Fortune 500||percentage that were incorporated into business|
|during a recession year|
|Top 10 companies||70%|
|Top 25 companies||64%|
|Top 50 companes||52%|
|Top 100 companies||43%|
|Top 500 companies||36%|
|percentage of years that the U.S. has been in recession||39%|
|Data: Gary Beach|
By Gary’s count, the U.S. has been in recession for 39% of its years. Looking at the entire Fortune 500, 36% of them were incorporated into business during recession years, which is no great shakes.
But as we move up to the most successful companies—the ones at the top of the list—the situation changes. Among the top 10 companies, according to Gary, a full 70% were started during recession years.
Let’s look more closely at these top 10.
So this table includes the name of the company; the date that they were incorporated into business (when two companies merged, Gary took the earlier date); whether that was a recession year according to the Wikipedia listing, which Gary used; and then whether it was a recession year, according to NBER dates, which are similar but not identical to the Wikipedia listing.
|Top 10 companies|
|Fortune 500||Date Incorporated||Wikipedia||NBER|
|Data: Gary Beach, Fortune, NBER, Wikipedia|
Using the NBER business cycle dates, eight out of the top 10 companies incorporated during a recession year. Not bad.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.