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Business creation and employment

Tuesday 17 May 2011, by Bernard Zimmern

In the late 70s, an MIT researcher shook the whole world of economists by showing that large firms, those that make the media buzz, those who made the Fortune Magazine cover page, does not create jobs but lose them and that employment is created primarily by small companies and even the very small.

When David Birch invented the new discipline of business demography, he was not arguing that large companies do not create jobs but as a category, they destroy more jobs than they create.

Since Birch, statisticians interested in describing the economy do not limit themselves to global figures, the employment growth or decline, but they use a «Birch cloud» which takes into account births and deaths of businesses by size.

That discipline has made a quantum leap with the joint discovery by the Kauffman Foundation of Kansas City and the U.S. Census Bureau that jobs are created by new businesses births and lost by existing ones.

This seminal study («the importance of Startups in Job Creation and Job Destruction» in July 2010) shows, in fact, from the longitudinal series from the Census Bureau that new firms create jobs in the year of birth, create as many as they lose the following year and then begin to lose jobs in subsequent years.

This pattern seems to be similar in France where a longitudinal serie for 2002 gives the same pattern as in the U.S. but with a time lag, to the extent that the ceiling for jobs is reached after Year 2 and then starts to decrease (Year 0 being company birth).

This model is formidable to France as the U.S. figures mean that job creation by employer start-ups (at least one employee) represent about 3% of total U.S. employment per year, job losses by existing firms about 1,2%; this leaves a net balance of 1.8% , meaning approximately 2 million additional jobs every year for a total of US employment around 120 million jobs.

In France, job creation the first year by employer businesses is around 115,000 for a private jobs of 19 million or 0.6% («France falls») while job destruction would be 3% / year (see longitudinal series on the year 2002). This leaves a deficit of -2.4%. The figure of -3% is confirmed by a study on the Medium Size Companies. France would thus be in full jobs implosion. Nevertheless, when taking into consideration firms born without employees, it appears that the net creation of private jobs in France for the period 2000-2009 is 0,2%. Hence, the growth rate is quite below the one seen in the US and shows that France is not creating long term jobs.

The Kauffman model, though attractive, is not absolutely convincing: a research on jobs created by firms with no employee at birth (paper by Ying Lowrey from the Small Business Administration) seems to prove that they would be decisive. Another paper from Small Business Trends shows that many firms see their employment grow only after 25 years (Birch had noted that fact after 14 years). This shows that research on the employment impact of high growth companies is far from over.

High Growth firms

Job creation is highly dependent on the number of high growth companies. A statistical study based on Census figures shows that the fall in employment is much slower in firms that are born larger than in those born small (company size and employment).

A Small Size Firms (<50 employees) research showed that companies that are born with assets per employee in the high range are much more likely to move quickly in the higher category of SMEs (50 to 250 employees) than those born with an average capital of 20,000 € / employee.

The importance of High Growth Firms seems confirmed by a 2004 Bain & Co paper showing that for businesses aged 10 years in 2003 and having a turnover that exceeds 15 million euros accounted for 0.3% of companies in France, 2.2% in Great Britain, 7 times more. This is in line with the results obtained by iFRAP in 2007 in a research on “gazelles” in which capital investments are 2 times higher in France than in Britain at birth and 4 times after 7 years with a complete proportionality between invested capital and jobs.

This is backed up by a comparative study of companies having more than doubled their assets in one year. A study comparing the authorized capital and equity in both countries allows to shift from one to the other, except for English firms of which the turnover is less than 11,2 millions £ as those firms have no obligation to publish their balance sheet and are not well represented in statistics.

«Innovative» firms

An expression that has completely distorted public policies is the expression «an innovative company». A successful business is necessarily innovative, but this is seen only afterwards. In the French psyche, it has enabled state agencies to be king makers of who is innovative and who is not.

Now, it is already very difficult to decide whether a technical innovation is innovative, if it is likely to emerge and that its price in view of its benefits would enable it to make inroads into the market.

The task becomes almost impossible with innovations that are marketing innovations; they are the ones that created the most jobs (the largest companies are department stores like Carrefour, Auchan or Walmart). The prototype of these companies innovative by marketing is Federal Express (one of the success of the SBIC program): FedEx did not invent the cell phone, computers and aircraft, but used those technical innovations to fill a need: deliver a letter overnight with safety.

According to the OECD, 57% of German innovations were marketing like against 23% for France, while Germany makes 25% of its GDP from manufacturing against only 10% for France. Forecasts of the US Department of Labor show that the jobs created in the high tech sector will represent about 10% of new jobs created in the USA over the 2008-2018 period.

Chaos: businesses that create jobs are unpredictable

(This to be written demonstrates that innovation that create the most jobs are unpredictable).