Today’s Drivers to Entrepreneurship

by Tim Smith, PhD, 12 May 2004

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Entrepreneurship is an economic activity. The levels of entrepreneurship are correlated with economic factors. A growing economy, as measured by GDP growth, is correlated with increased entrepreneurial activity. Likewise, rising unemployment drives increases in entrepreneurship out of necessity. Firms established out of opportunity versus necessity are equally likely to succeed, but take on very different complexions. These facts have been established in the Global Entrepreneurship Monitor and were discussed in a prior Wiglaf Journal article.

How has entrepreneurship performed recently? While a national report is underway at Wiglaf, preliminary results for the State of Illinois can be released.

In the five years from 1999 to 2003, the Gross State Product of Illinois has been virtually flat in constant dollar terms while unemployment has increased by 52%. Based upon prior research, this would imply that many new businesses would have been initiated out of necessity. Figures from the IL Secretary of State support this conjecture, with a 44% increase in new corporations and LLCs. See the infographic to follow.

From the graph, we see that the establishment of new corporations follows the rise in unemployment. Overall, necessity is driving entrepreneurship in Illinois, and can be expected to be the same force behind entrepreneurship across the US today.

Necessity driven entrepreneurship takes on a very different character than the type of entrepreneurship that led up to the internet bubble. Necessity driven entrepreneurs are more likely to seek to establish a source of income rather than establish a source of large scale employment. They are more likely to establish a business that requires little investment rather than establish an asset intensive operation. And they are more likely to bootstrap their operations over securing venture capital.

The drivers to entrepreneurship today may be bad news for the venture capital community, but it reflects well on the resourcefulness and character of the millions of Americans that lost their jobs since 2001.

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Refernences
1. P. Reynolds, W. Bygrave, E. Autio, L. Cox, and M. Hay, Global Entrepreneurship Monitor 2002 Executive Report, Ewing Marion Kauffman Foundation, (2002).
2. A. Zacharakis, P. Reynolds, W. Bygrave, Global Entrepreneurship Monitor National Assessment: United States of America 1999 Executive Report, Babson College (1999).
3. Tim Smith, PhD, “Drivers to Entrepreneurship.” Wiglaf Journal (14 May 2003)
4. US Department of Employment, IL Department of Commerce and Economic Opportunity, and the IL Secretary of State.

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Author
Tim Smith, PhD is Editor of The Wiglaf Journal, Principal of Wiglaf LLC, and Adjunct Professor at DePaul's Kellstadt Graduate School of Business.

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