NCPA - National Center for Policy Analysis

Start-Ups are Essential for Vitalizing the Economy

April 14, 2015

There are many motives for mergers: to minimize competition; to reduce costs by elimination overlapping operations; to acquire a hot product or technology; to enter new geographic markets; or to get bigger. But the popularity of M&A actually involves economic weakness.

Although buying another company may enhance the acquiring firm's innovation, it does not add much to society's. And society's capacity to innovate is crucial. It generates the wealth needed to raise incomes and dampen social conflicts.

The recent reductions in forecast growth imply a dimmer outlook for innovation, as measured by labor productivity. Weaker productivity growth in turn means weaker wage and income growth.

Productivity's performance since the Great Recession has been abysmal. From 2009 to 2014, it has averaged a meager 0.9 percent annually. That is less than half the average growth of 2 percent since the late 1940s and one-third of the 3 percent rate of the first two decades after World War II. These differences have huge implications for wages and incomes. At 3 percent, incomes double in about 25 years; at 2 percent, about 35 years and at 1 percent, around 70 years.

Productivity occurs primarily through the private sector. If companies are hidebound, productivity will suffer. Evidence suggests that entrepreneurship is in decline and that U.S. firms are becoming older, more entrenched and less dynamic.

  • Start-ups fell from 15 percent of all businesses in 1978 to 8 percent in 2011.
  • Older firms jumped from 23 percent of businesses in 1992 to 34 percent in 2011. Their share of jobs was even higher, almost three-quarters of all workers.

Start-ups ultimately account for a disproportionately high share of new job creation and innovation. The vigor of these new firms is essential for the economy to revitalize itself.

Source: Robert Samuelson, "Fewer Start-Ups Is An Ugly Economic Signal," Real Clear Markets, April 13, 2015.

 

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