Virginia is home to a significant number of new businesses.
Why is This Important?
Entrepreneurship is often viewed as an engine of economic growth. While the number of new business startups varies positively with economic expansions, the role of entrepreneurship in job creation is less clear. One view of the relationship between startups and economic growth is that entrepreneurs breed innovation. However, low rates of survival and limited growth of most small businesses suggest that business startups do not significantly contribute to employment growth.
How is Virginia Doing?
Virginia was ranked 16th in the nation in 2003 for the number of new employer establishments, with a growth rate of 11.6 percent. The national average was 11.5 percent. Virginia's rate was higher than North Carolina (11.2 percent), Tennessee (10.6 percent) and Maryland (11.1 percent). Nevada had the highest rate of new employer establishments at 17.2 percent growth. Within Virginia, the number of new small business startups (consisting of between one and 250 employees) per 1,000 population has increased from 0.75 in 1998 to 1.22 in 2005. Northern Region had the most new small business startups in 2005 with 1.64, while Eastern had the least with 0.47 new small business startups per 1,000 population.
Demonstrating the volatility of small establishments, the greatest percent change in employment due to firm startups and deaths arose from firms consisting of between one and four employees. In 2002-03, there was a 15 percent increase in employment caused by the startup of these small firms. During the same time period, deaths of small firms resulted in a decline of 12.2 percent employment. On the other end of the spectrum, new firms with over 500 employees resulted in a significantly lower rate of change in employment, with a 5.1 percent increase in employment due to startups and a 5.4 percent decline in employment due to failures.
What Influences Business Startups?
Low cost of capital and high unemployment rates that precede economic expansions can serve as catalysts for new business startups. Lower cost of capital reduces the expense and risk involved with starting a business. Higher rates of unemployment encourage business startups because, when faced with few employment opportunities, unemployed individuals are more likely to opt for self-employment. Additional factors that influence the rate of business startups are the education level of the population, physical infrastructure, access to finance, business climate and existence of networks that may encourage clusters of similar startups.
What is the State's Role?
States can provide informational resources to facilitate business startups and offer grants or subsidies to ease the financial risks involved with startups. States can also minimize the time and expense required to comply with the regulations and procedures for starting a business.
Currently, Virginia's Department of Business Assistance offers a variety of services, including assisting with access to capital, small business counseling, workforce training and pro-active business problem-solving.
Data Definitions and Sources
Statistics of U.S. Businesses
Establishment - A single physical location where business is conducted or where services or industrial operations are performed.
Enterprise - An enterprise is a business organization consisting of one or more domestic establishments that were specified under common ownership or control. The enterprise and the establishment are the same for single-establishment firms. Each multi-establishment company forms one enterprise - the enterprise employment and annual payroll are summed from the associated establishments.
Virginia Employment Commission
New small business startups were firms that had at least one employee and matched the following criteria:
- Setup Date and Liability Date occurred during same the Year and Quarter
- Establishment had no Predecessor UI Account Number
- Business is privately owned
- Average employment is less than 250
- No other accounts with the same UI Account Number existed that did not match the above criteria [The fifth criteria ensures that here were no other previous establishments by the same enterprise.]
Population Estimates: U.S. Census.
Mata, Jose, Small Firm Births and Macroeconomic Fluctuations, Review of Industrial Organization 11, (1996): 173- 182.
Audretsch and Acs, New-Firm Startups, Technology, and Macroeconomic Fluctuations, Samll Business Economics 6, (1994): 439-449.
Schumpter, J., The Theory of Economic Development, Oxford: Oxford University Press, 1934.Popkin, Joel and Company, Small Business During the Business Cycle, Small Business Administration, Washington, D.C., 2003, available at http://www.sba.gov/advo/research/rs231tot.pdf
Firm Startups, Technology, and Macroeconomic Fluctuations, Small Business Economics 6, (1994): 439-449.