NCPA - National Center for Policy Analysis


December 5, 2008

Last month, the Organization for Economic Co-operation and Development, working with the European Union's statistics agency, Eurostat, published the first set of comparable data on measures of entrepreneurial activity, such as entry and exit rates, and the rate of formation of high-growth companies.  So far the data -- which the OECD and Eurostat collected this year from the business registers maintained by national statistics offices, using harmonized definitions of the variables -- cover 15 European countries, the United States, Canada and New Zealand.  They contain some interesting findings, say Enrico Giovannini, chief statistician for the OECD, and Carl Schramm, president and CEO of the Kauffman Foundation.

For one thing, there are big differences in firm birth rates by sector:

  • On average, there is faster growth in firms delivering services than those in manufacturing; at the same time, closure rates are also higher in services -- reflecting a greater degree of experimentation in services as well as higher entry and exit costs for manufacturing companies.
  • Not surprisingly, a high proportion of businesses fail in their first year of operation: 10 percent to 20 percent across most of the reporting countries, but as high as 40 percent in the Netherlands.

This is not necessarily bad news, say Giovannini and Schramm.  Innovation in all spheres of life is a process of trial and error.  Business creation is no exception.

Among the countries surveyed, the most rapid formation of firms with at least one employee beyond the founder is taking place in Central and Eastern Europe.  After many state-owned firms in this part of the world met their demise in the years after the Berlin Wall fell, new firms have sprung up like wild flowers, say Giovannini and Schramm:

  • Leading the pack in the rate of employer firm formation are countries like Romania (with 16 percent growth in a year), Slovakia (14 percent) and Estonia (13 percent).
  • Lagging behind with rates around 10 percent or lower are Austria, Italy and the Netherlands.
  • However, these firms, like others elsewhere in the world, face a more difficult economic environment in this global downturn.

Source: Enrico Giovannini and Carl Schramm, "Where Companies Grow; Finally, a way to measure countries' entrepreneurs," Wall Street Journal, December 3, 2008.

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