Fewer Start-Ups Is An Ugly Economic Signal

From Robert Samuelson at Real Clear Markets:

On any given day, you can expect news of major corporate mergers.   In 2014, worldwide M&A totaled $3.5 trillion, up 47 percent from the year before...

The popularity of M&A actually involves economic weakness.  Unable to expand internally - by creating products or entering new markets - companies rely on M&A for growth.

However, what works for the firm may work less well for society.

Although buying another company may enhance the acquiring firm's innovation, it doesn't add much to society's.   And society's capacity to innovate is crucial.

It generates the wealth needed to raise incomes and dampen social conflicts...

In several studies, economists Robert Litan and Ian Hathaway of the Brookings Institution found that start-ups (firms less than a year old) had fallen from 15 percent of all businesses in 1978 to 8 percent in 2011.

Meanwhile, older firms (16 years or more) had jumped from 23 percent of businesses in 1992 to 34 percent in 2011.  Their share of jobs was even higher, almost three-quarters of all workers.

What emerges is a portrait of business that, though strikingly at odds with conventional wisdom, is consistent with poor productivity growth.  American capitalism is middle-aged.

Older firms, conditioned by success, are more rigid. They're invested, financially and psychologically, in existing markets and production patterns. They can adapt and innovate, but it's hard.

The M&A surge is one way older firms strive to overcome internal stagnation.

What's worrisome is not the success of the middle-aged businesses; it's the weakness of young firms and the apparent erosion of entrepreneurship.

As other research has shown, start-ups ultimately account for a disproportionately high share of new job creation and innovation.

The vigor of these new firms is essential for the economy to revitalize itself.

We don't know what explains their slide, though the sheer mass of government regulations is one candidate. Older firms have the lawyers and administrators to cope with the red-tape deluge; many small new firms drown.

But that's just a conjecture illuminating the larger question.

If the economy discriminates against young firms, we will all be paying the price for many years.
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Link: http://www.realclearmarkets.com/articles/2015/04/13/fewer_start-ups_is_an_ugly_economic_signal_101620.html