Introduction
Despite accounting for only a small portion of overall revenue and profit made by all enterprises, small businesses are critical to the health of the U.S. economy. Starting a small business enables entrepreneurs to bring new goods or processes to market, and small firms have created many new jobs. In an average year, new small businesses produce 3.3 million jobs, accounting for more than 40% of all new jobs (Hubbard & O’Brien, 2018).
However, the number of new businesses launched has slowed in recent years, raising worries among economists and politicians. The fall in new business formation is not restricted to one industry or geographic location, but has been especially severe among persons under age 35 (Hubbard & O’Brien, 2018). This is unexpected, given the attention given to high-tech firms founded by youthful entrepreneurs.
Reasons Behind Declining Number of Start-Ups
Some economists argue that the reduction in company start-ups is related to a slowing in technical growth in the U.S. economy as a whole, which implies that there are fewer possibilities for businesses to start offering new goods and services. Others argue that increased government rules have increased the price of beginning and operating a small firm. Many vocations, for example, now need a license, and some towns strictly restrict the construction of new commercial structures (Hubbard & O’Brien, 2018).
Some cities also forbid people from doing business from their homes. Many economists and politicians are concerned that if there is a decrease in the number of young entrepreneurs establishing new businesses, the U.S. economy would become less dynamic and less able to adapt to high rates of economic growth. New firms are more likely to adopt “disruptive” innovations for several reasons.
Reasons Behind Disruptive Innovations
First, new firms are unencumbered by old structures and processes, which allows them to be more flexible and adaptive to changes in the marketplace. They can make quick decisions and implement new ideas without the barriers in older firms. Second, new firms are often made up of young, energetic entrepreneurs willing to take risks and seek new opportunities. They are not tied to outdated models and can use new technologies and trends to create innovative products or services. Third, new firms have fewer constraints in existing client bases and partner arrangements. They can start from scratch and create new value for customers, which can be difficult for older firms with established relationships with customers and partners.
Assuming that new firms are the most important source of productivity-enhancing innovation, the implications for the future of the U.S. economy could be significant. A decline in the number of new firms could slow technological progress and impair the competitiveness of U.S. firms, limiting the nation’s economic growth and innovation. One reason for the decline in new ventures may be the slowdown in technological progress (Gold, 2021).
If new technologies and ideas are not developed quickly enough, it may be difficult for entrepreneurs to find new opportunities to create innovative products and services. A second reason may be the increased government regulations and costs of starting and operating a small business. Bureaucratic processes and high taxes may discourage entrepreneurs and reduce their motivation to start new firms.
Conclusion
In conclusion, a declining number of new businesses could negatively affect the U.S. economy. To maintain high economic growth, it is necessary to encourage the creation of new firms and ease the environment for entrepreneurs. This may include reducing regulations and tax burdens and providing access to financing and resources for young entrepreneurs.
References
Gold, E. R. (2021). The fall of the innovation empire and its possible rise through open science. Research Policy, 50(5). Web.
Hubbard, R. G., & O’Brien, A. P. (2018). Macroeconomics (8th ed.). Pearson.