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.

One other major finding of the paper is that, through innovation and improvements on their own products tend to make up a large part of the growth in effectively lead to long run growth.

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.

It is widely known that small businesses account for a huge percentage of our labor force. This research goes to show how much our economy, especially now and going forward should take measures ensuring that young businesses (which usually tend to be small in size) are given the tools to rebuild once the pandemic is over.

I have written a lot about how regulations disproportionately affect small businesses and why small businesses tend to get the short end of every economic downturn as witnessed by the coronavirus. Both of these phenomenon have deeper running impact on our economy now and going forward. People are worried about how long it would take for the economy to bounce back. That definitely depends on a huge part on how long small businesses will take to bounce back.

As research keeps showing, small businesses are the backbone of our economy. The ability for people to create startups and successfully grow them is what leads to economic growth. Anything that deeply hampers that ability is bound to lead to long-term harmful economic consequences.  It will be helpful that states focus on reducing burdensome regulation, especially at a time like this, to make sure small businesses are not hindered once they start rebuilding.