Entrepreneurship Slump Kills Job Creation: So What Now?

New research from the Office of the Chief Economist shows entrepreneurship in Australia is suffering, while start-ups are volatile and dangerously concentrated in few industries meaning job creation has stalled and the economy is vulnerable to shock and change.

The author, ANU economist Sasan Bakhtiari, said entrepreneurship is:

the backbone of any progressive economy. Entrepreneurs that survive and thrive create jobs, introduce new products, and provide the required flexibility for an economy to cope with a changing world.  It thus raises some concern that entrepreneurship prospects are deteriorating in Australia.

This article explores the evidence Bakhtiari presents before highlighting the the difficulties that face both the Australian economy, and debates over the role of entrepreneurship (the “e” word) in our planning and policy future.

It concludes that in planning for a volatile future, and that in order for research to be translated into real world solutions and successes more careful attention should be payed to the detail of human experiences of entrepreneurship.

Failing Entrepreneurship, Failing Job Growth

Bakhtiari found new entrepreneurs in Australia dropped by almost 40 per cent between 2003 and 2015, a much faster slow down than the USA experienced over the same period - starkly contrasted to the entry rates in the UK and Canada, which were strong after a temporary slump during the GFC.

Compounding the problem, Bakhtiari said, the survival of entrepreneurs is also “declining at a considerable pace”, with rising insolvencies revealing a dangerous trend toward volatility.

The majority of new jobs added to the economy are created by small young firms, so it is not surprising that as start-ups decline, so does job creation - the rate in Australia dropped from 20 per cent in 2004 down to 14 per cent in 2014, while job destruction rates were stable at around 14 per cent and net job creation is close to zero after 2012 (see Figure 1).

Figure 1: The annual job creation and destruction rates in Australia. (Source: Department of Industry, Innovation and Science 2017)

Figure 1: The annual job creation and destruction rates in Australia. (Source: Department of Industry, Innovation and Science 2017)

Four areas, including construction, retail trade and real estate services make up close to half of new firms from 2003-2015, making Australia vulnerable to a shock that impacts these areas (see Figure 2).

Bakhtiari said this “situation can leave the economy vulnerable to industry-specific shocks. The economy as a whole enjoys better flexibility and better ability to weather sector-specific shocks with a more diversified portfolio of entrepreneurs”.

Figure 2: New firms by industry 2003-15 (Source: Department of Industry, Innovation and Science 2017).

Figure 2: New firms by industry 2003-15 (Source: Department of Industry, Innovation and Science 2017).

The lack of diversity is not the source of vulnerability, however, but symptomatic of a global trend in progressive economies where a shift toward service industries has emerged as manufacturing has been eroded.

Bakhtiari concludes that perceptions of increased risk undermine entrepreneurship, and  highlights five key drivers for the trend away from new ventures in Australia:

  1. The Resources Boom - which has favoured mining but killed investment in other industries.

  2. Increased Lending Costs - for young and small firms.

  3. Globalisation - Australian firms are competing with Asia, particularly China, a trend likely to increase “as trade barriers disappear and global value chains” expand.

  4. Changing Demographics - Australia is getting older, so there will be fewer potential entrepreneurs, and fewer consumers for their products.

  5. Increasing Monopolism - “Amazon, Apple, and Google in the US might actually be the real reason behind the declining dynamism” in that country, and as ownership and control of Australian industries grows more concentrated, entrepreneurship also declines.

Understatements, and the Unknowns

Bakhtiari’s assertion that this situation “raises some concern” is, perhaps, the understatement of the economic century given our policy makers consider innovation and entrepreneurship the panacea for the resources boom hangover.

Impacts of the Chinese pivot toward a service, education and research driven economy are yet to find their purchase in an Australia where the resources boom still dominates investment activity and shapes our entrepreneurship away from translating big ideas into real outcomes.

There are some things we can be certain of: resource decline and climate change will grow in their influence in a drier, hotter Australia that is subject to more violent weather, as oil prices skyrocket, and automation and AI render occupations obsolete (at an alarming rate).

Other areas are more opaque, but nonetheless, worth considering.

Commercial real estate industry performance globally is strong and will continue to be so: from 2012 to 2022, industry value added (a measure of the industry's contribution to the world economy) is expected to increase at an annualized rate of 5.1%, which is faster than expected annualized world GDP growth of 3.0% (IBISWorld Industry Report: Global Commercial Real Estate, April 2017).

However, residential industry performance is harder to understand on a global scale, and one obvious matter for concern locally is the prominence construction plays in Australian entrepreneurship, where a by-now famous “bubble” has been predicted as established during the resources boom, particularly in areas that support mining and major population centres, such as Sydney.

All this in a region where bullish Asian economies leverage global value chains and more open trade relationships to compete aggressively with their Australian neighbour - and China aggressively leverages its advantage to push for a stronger position against all nations.

Conclusions and the “e” Word

Recently, debate has emerged over whether “ideas” are really as useful as we thought they were, and the idea that ideas can fix our economic problems has been challenged by recent research out of the US.

A broad survey by Bloom, Jones, Van Reenen and Webb (2017) found “that research effort is rising substantially while research productivity is declining sharply”, concluding ideas “are getting harder and harder to find”.

Swinburne’s Beth Webster challenged this conclusion in The Conversation (November 23, 2017), asserting the bottleneck that restricts the flow of research into economic productivity is not caused by a lack of ideas, but the absence of investment in “research translation and change management... and may be lack of risk-loving investors”.

For Webster, innovation is the answer, we just need to spend more: “There is a saying that for every $1 spent on research, you need to spend $10 on development and $100 on translation.”

This is a debate held at such a macroscopic level, that it cannot be resolved - the participants quickly devolve their assertions to criticising the worthiness of evidentiary measures and models of assessment their opponents adopt.

Webster makes an excellent point, though, when she argues the meaning of the term “entrepreneurship” is far from settled. In an earlier commentary in The Conversation (August 16, 2016) she wrote, “the starting point of any discussion is to agree not to use the term. People often mean start-ups – new businesses – when they use the ‘e’ word”.

Certainly, Bakhtiari’s criteria aligns entrepreneurship with a certain type of new “firm”, or start-up, and he appropriates Schoar’s (2010) distinction between “subsistence and transformative entrepreneurs…. The former are those that enter the market to provide themselves  – and maybe a few others – jobs and subsistence incomes”.

He concludes, somewhat optimistically, that despite all this the role of “subsistence entrepreneurship” cannot be underestimated as a source of “autonomously” created employment as job creation shrinks.

But isn’t this simply optimism about the the shape and form of inevitable doom? After all, the precarious situation of the self-employed (their “precarity”) subsistence entrepreneur is a product of global trends that promote outsourcing, and heap risk on the individual to the advantage of large corporates.

The “e” word should be critically engaged in terms of not only its imprecision, but also its lack of any human, qualitative dimension: for the answers to “research translation and change management” are not simply numbers.

For instance, Bakhtiari co-authored research with Robert Breunig earlier in 2017 that found “higher education expenditure has a positive influence on firm-level R&D expenditure”, while “[d]irect government spending on research seems to crowd out private R&D expenditure”.

In other words, investment in research and development, coldly applied, does not have linear results, and it is easy to see that each of these assertions are interesting, but only useful as the starting point to a more detailed investigation of just how these effects play out in practice.

The research shows, research itself will keep creating ideas, but turning the growing pile of ideas created - particularly by universities - into fully realised human solutions is clearly a complex matter that deserves a more detailed, ethnographic attention.

References

Bakhtiari, S. (2017). Entrepreneurship Dynamics in Australia: Lessons from Micro-Data. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2940093

Bakhtiari, S., & Breunig, R. (2017). The role of spillovers in research and development expenditure in Australian industries. Economics Of Innovation And New Technology27(1), 14-38. http://dx.doi.org/10.1080/10438599.2017.1290898

Bloom, N., Jones, C., Van Reenen, J., & Webb, M. (2017). Are Ideas Getting Harder to Find?. National Bureau Of Economic Research. http://dx.doi.org/10.3386/w23782

Mokyr, J. (2014). Secular stagnation? Not in your lifeVoxeu.org. Retrieved 1 December 2017, from http://voxeu.org/article/secular-stagnation-not-your-life

Webster, B. (2017). No, we aren't running out of new ideasThe Conversation. Retrieved 1 December 2017, from https://theconversation.com/no-we-arent-running-out-of-new-ideas-87102

Webster, B. (2017). So what do we really know about entrepreneurship?The Conversation. Retrieved 1 December 2017, from https://theconversation.com/so-what-do-we-really-know-about-entrepreneurship-64005