Many policymakers believe that encouraging more people to start businesses will revitalize the economy and increase job creation. An article in Small Business Economics suggest that this is wrong.
The article argues that offering loans, tax benefits and regulatory exemptions to people who start a new business is a bad idea. After all, most start-ups in the U.S. fail within the first five years.
The analysis suggests that policies designed to increase the number of startups do not create jobs and wealth. This is due to three reasons:
- Bad Entrepreneurs: Data shows that unemployed people are more likely to start a business than people with jobs. However, companies started by people who are out of work are less successful than companies started by people who have jobs.
- Bad Ecosystems: People are more likely to start businesses in impoverished areas, while wealthier regions have declining rates of entrepreneurship. This makes new firms less productive than existing firms on average.
- Bad Industries: When governments encourage new firm formation, it stimulates the creation of start-ups in industries with lower barriers to entry. Low entry barriers make these industries more competitive and cause firms in these sectors to be more prone to failure.
The article suggests that policymakers should focus on company expansion instead of creation: “Investing a dollar or an hour of time in the creation of an additional average new business is a worse use of resources than investing a dollar or an hour of time in the expansion of an average existing business.”
The full article can be found here.
Contributed by Caroline Pringle.
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