Thursday, August 6, 2009

Entrepreneurship in the OECD

. Thursday, August 6, 2009

A few days ago Krugman linked to this CEPR report (pdf) comparing the ratio of small-business employment to total employment in the OECD. It turns out that despite America's popular image as a nation of entrepreneurs, it has one of the smallest small-business sectors in the developed world (by this metric, at least). The CEPR report singles out one possible reason:

One plausible explanation for the consistently higher shares of self-employment and small-business employment in the rest of the world’s rich economies is that all have some form of universal access to health care. The high cost to self-employed workers and small businesses of the private, employer-based health care system in place in the United States may act as a significant deterrent to small start-up companies, an experience not shared by entrepreneurs in countries with universal access to health care.

That certainly is plausible, and even if it isn't the driving force it must be a contributing factor. Unsurprisingly, this is Krugman's preferred explanation. But it isn't the only possible reason. Another could be barriers to entry.

It is exceptionally easy to start a new company in the U.S., and much harder to do so in (many) other OECD countries. In Germany (say), the process of registering a new company and obtaining the proper licenses can take years. At first, this should mean that there should be more small businesses in the U.S. than in Germany. But because of the lower barriers to entry, U.S. small businesses face tougher competition and an inefficient small business will quickly go out of business. In Germany the already-established business is able to extract rents through the higher barriers to entry which discourage all but the most-dedicated new entrants. The variance in entry costs can leave the number of German small businesses relatively fixed at a high level, while the American small businesses market is more dynamic but leads to a lower overall equilibrium. In this story, the lowering of barriers to entry actually causes the number of small businesses to fall in equilibrium.

A thought experiment might be illustrative. Suppose a skilled American worker is facing two options: 1. Start a new business and face lots of competition; 2. Join a firm that is already established and has sufficient market share that it will not be replaced any time soon. Many workers would prefer the security of the second option.

I'm sort of shooting from the hip here, and I'm not sure that this story really reflects reality. In fact, I can think of several other plausible explanations, including more migration and concentrated diasporas in Europe which would lead to smaller businesses to cater to particular ethnic/religious/national segments of the community; a greater concentration of the European population in urban areas, which leads to the creation of a lot of small restaurants, corner stores, and bars in cities; different lifestyle preferences in Europe that encourage more leisure and less work, thus benefitting smaller businesses that cater to leisure; different corporate norms that encourage more merging and acquiring of small firms in America, so the successful American small businesses are quickly gobbled up by larger corporations, while the unsuccessful firms go out of existence.

And, of course, health care.


Sarah Bauerle said...

I have a feeling you were baiting me with this post, and I'll bite.

I think you present a pretty interesting counterfactual, and I'd like to see how the empirics work out. There's a lot of room for ecological fallacies in this research question because preferences do not always directly result in a particular action. For example, small firm acquisitions in the US might stem from the difficulties of keeping good employees due to the inability to provide good health care insurance (something that a large firm can do). And, both the health care and the licensing arguments are fundamentally barriers to entry arguments. So, start compiling data (that include perceptions and beliefs about the advantages and disadvantages to running and working for a small business) and show me a Stata output :)

Alex Parets said...

shhhh! we're not supposed to be using Stata. We are supposed to be slaves to the power of R. You're going to get us in trouble!

Kindred Winecoff said...

i actually wasn't baiting you at all. like i said, i was shooting from the hip, and i have no doubt that health plays at least some role.

but i doubt the full effect can be explained by health care, so i was just thinking through other possible factors.

Sarah Bauerle said...

Will - as I said before - I like your use of the counterfactual

Alex - Let me tell you, this budgets paper's analysis will be done entirely in stata

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Entrepreneurship in the OECD




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