Research shows new and young businesses account for a large share of growth

According to a recent NBER paper, researchers have found that,

New and young firms (ages 0 to 5 years) account for almost one-half of growth – three times their share of employment. Large established firms contribute only one-tenth of growth despite representing one-fourth of employment.

Overall, most growth from businesses tends to come from innovation and improvements that these companies do to their own products.

A majority of growth takes the form of quality improvements by incumbents on their own products. New varieties and creative destruction contribute less, but are still important. Such own innovation accounts for the bulk of the growth speedup and slowdown in the middle of our sample.

This has some significant implications.

New and Young businesses are a big driver of job growth. So this new research goes to show just how significant contributions from new businesses to the economy are.

The ability for people to create startups and successfully grow them is what leads to economic growth. And during a time like this, innovation is especially needed for recovery.

Unfortunately, new businesses — which tend to be small — are affected disproportionately by regulations. New unestablished businesses — usually small — also tend to be more affected by economic downturns. So it is highly possible that our recovery will be hampered by excessive regulation.

But knowing how many new businesses contribute to the economy, it is important that steps are taken to create a conducive environment for entrepreneurship. That includes, among other things, reducing taxes and loosening burdensome regulations, factors that discourage investment and raise the costs of starting a business.