Assessment of business start-up activity

October 10, 2005

More than 500,000 new businesses launched each month, economist's study says

Immigrants, Latinos show strong start-up activity; African American rate low, but increasing

More than half a million new businesses are started each month, according to a new national assessment of entrepreneurial activity developed by UCSC economist Robert Fairlie.

Robert Fairlie

The number of businesses started by immigrants and Latinos shows strong start-up activity, and the rate for African Americans is growing, according to the Kauffman Index of Entrepreneurial Activity, launched by the Ewing Marion Kauffman Foundation.

The Kauffman Index is the first study to measure business start-up activity for the entire U.S. adult population at the individual owner level. The data are derived from the monthly Current Population Survey (CPS), a national population survey conducted by the U.S. Bureau of the Census and the Bureau of Labor Statistics.

Two especially surprising findings from the study are that the Latino rate of entrepreneurship increased from 0.38 percent in 1996 to 0.48 percent in 2004, which was higher than the white, non-Latino rate of 0.39 percent, and that immigrants have substantially higher rates of entrepreneurship than native-born individuals. The average rate of entrepreneurship for immigrants was 0.46 percent compared with 0.35 percent for the native-born.

Over the period from 1996 to 2004, an average of 0.36 percent of the adult population created a new business each month, representing approximately 550,000 new businesses per month, according to the Kauffman Index. The rate of overall entrepreneurship activity remained relatively constant over the period despite major changes in the economy, with the rate of business creation generally between 0.3 and 0.4 percent. The average rate of entrepreneurship was 0.36 percent in 1996, 0.35 percent in 2001, and rose to 0.4 percent in 2004. It is too early, however, to know whether the recent increase in entrepreneurship is due to cyclical or structural factors.

"Although research on entrepreneurship is growing rapidly, there are very few large national datasets other than the Kauffman Index of Entrepreneurial Activity that provide information on recent trends in entrepreneurial business creation," said Fairlie, an associate professor of economics.

Unlike other studies that capture young businesses that are more than a year old, the Kauffman Index captures all adults 20-64 who initially start a business, including those who own incorporated or unincorporated businesses and those who are employers and nonemployers. The Kauffman Index, which is defined as the percentage of the adult U.S. population of nonbusiness owners who start a business as their main job each month, will be conducted annually.

Among the other findings:

Entrepreneurship activity is substantially higher among men than among women. From 1996 to 2004, the average rate of entrepreneurship for men was 0.46 percent and the average rate for women was only 0.28 percent.
The rate of entrepreneurship increased in the early 2000s for men, but not for women. The male entrepreneurship rate was 0.43 percent in 2001 and rose to 0.50 percent in 2002.
Entrepreneurship activity is much lower for African Americans than other ethnic/racial groups; however, rates appear to be increasing. The average rate of entrepreneurship for blacks was 0.29 percent in 1996 and 0.35 percent in 2004.
New entrepreneurship activity is highest in the West. Other regions have similar rates of entrepreneurship.
Entrepreneurship activity increased the most in the West and South in the past few years. The entrepreneurship rate in the West increased from 0.42 percent in 2001 to 0.49 percent in 2004, and the entrepreneurship rate in the South increased from 0.35 percent to 0.41 percent.
The construction industry has the highest rate of entrepreneurship of all major industry groups.

The Kauffman Index differs from the recently released 2002 Survey of Business Owners (SBO) conducted by the U.S. Census Bureau in several major ways. First, it is based on household survey data and measures individual business owners. The SBO includes all firms operating during 2002 that filed tax forms as individual proprietorships, partnerships, and any type of corporation.

Second, the Kauffman Index captures business entry, whereas the SBO captures numbers of existing businesses. Increases in the number of existing businesses over time may be a result of more business creation, less business closure, or a combination of the two.

Third, the Kauffman Index only includes individuals starting businesses as their main work activity with a substantial hours commitment. The SBO includes all firms with receipts of $1,000 or more, which may include side or "casual" businesses owned by wage/salary workers, the unemployed, or retired workers. Finally, the Kauffman Index includes all new business owners, whereas the SBO excludes agricultural and a few other types of businesses.

The Ewing Marion Kauffman Foundation of Kansas City www.kauffman.org is a private, nonpartisan foundation that works with partners to advance entrepreneurship in America and improve the education of children and youth. The Kauffman Foundation was established in the mid-1960s by the late entrepreneur and philanthropist Ewing Marion Kauffman.

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