Entrepreneurial Activity Remained Strong in 2008 with Increasing Business Startups

New business formation increased in 2008 but, in what may be a potential harbinger of the current economic recession, U.S. entrepreneurship rates increased for the lowest-income-potential and middle-income-potential types of businesses from 2007 to 2008; it decreased for the highest-income-potential types of businesses. This is one of the shifts in firm formation trends found in the annual Kauffman Index of Entrepreneurial Activity, a leading indicator of new business activity that provides the earliest documentation of new business development across the United States. Analyzing matched monthly data from the Current Population Survey since 1996, the Kauffman Index allows comparisons of new business creation over time.

"The overall pace of entrepreneurial activity did not suffer during the recession in 2008, which is great news. This is consistent with historical patterns, to the extent we understand them, which indicate that entrepreneurial activity is largely insensitive to the economic cycle," said Robert Litan, vice president, Research and Policy at the Kauffman Foundation. "So far, at least through 2008, this pattern is holding up."

Overall, the 2008 entrepreneurial activity rate increased slightly over 2007. An average of 0.32 percent of the adult population (or 320 out of 100,000 adults) created a new business each month—representing approximately 530,000 new businesses per month—as compared to 0.30 percent in 2007. While entrepreneurial activity has remained generally consistent over the past decade, the Kauffman Index points out important shifts in the demographic and geographic composition of new entrepreneurs across the country.

Key findings include:
  • The oldest age group—ages 55 to 64—experienced a big increase in business-creation rates from 2007 to 2008 and, as a result, has the highest level of business creation (0.36 percent).
  • The activity rate increased sharply for immigrants in 2008—from 0.46 percent in 2007 to 0.53 percent in 2008—further widening the gap between immigrant and native-born rates.  Although the increase in entrepreneurship rates among immigrants was driven entirely by low- and medium-income-potential types of businesses, immigrants also are more likely than U.S. natives to start high-income-potential types of businesses.
  • Latinos' entrepreneurial activity rate increased from 0.40 percent in 2007 to 0.48 percent in 2008, continuing an upward trend that began in 2005. Over the thirteen years of the study, Latinos have had the highest percentage increase in entrepreneurial activity (from 0.33 percent in 1996 to 0.48 percent in 2008).
  • Asian-Americans' entrepreneurial activity also increased sharply, from 0.29 percent in 2007 to 0.35 percent in 2008. Non-Latino white business-creation rates increased slightly, while African-American rates slightly declined.
  • Entrepreneurial activity increased from 2007 rates for both men and women (from 0.41 percent to 0.42 percent for men and from 0.20 percent to 0.24 percent for women).
  • With the exception of the Midwest, all regions saw increased entrepreneurial activity from 2007 to 2008.
  • The states with the highest 2008 entrepreneurial activity rates were Georgia, New Mexico, Montana, Arizona, Alaska and California.
  • The states with the lowest entrepreneurial activity rates were Pennsylvania, Missouri, Wisconsin, West Virginia, Iowa and Ohio.
  • Among the United States' fifteen largest metropolitan statistical areas, Atlanta had the highest entrepreneurial rate (0.74 percent) in 2008. Philadelphia had the lowest rate (0.16 percent).

"The total business creation rate increased over the past year, but this masks diverging underlying trends. Entrepreneurship rates increased only for low-income types of businesses and not for high-income types, which may be early signs of how the recession is impacting firm formation," said study author Robert Fairlie, professor of economics and the director of the Master's program in Applied Economics and Finance at the University of California, Santa Cruz. "The continuing effects of the recession on business creation are important because entrepreneurs contribute to economic growth, innovation and job creation in the United States."

Unlike other studies that capture young businesses that are more than a year old, the Kauffman Index captures all adults ages 20 to 64 when they first create their businesses, including both incorporated and unincorporated businesses, and those who are employers and non-employers. The Kauffman Index of Entrepreneurial Activity, defined as the percent of the adult U.S. population of non-business owners that start a business as their main job each month, is conducted annually.