Enterprise society

Start-up nation: Australia’s rebound from the GFC

An important indicator of the general health of entrepreneurship within an economy is the number of new business start-ups that occur each year. The creation of new business ventures is matched against the number of businesses that cease trading in a given year in order to track the overall growth of the business community.

In my previous column in “The Conversation” (see: “Leaking jobs in the Great Recession”) I noted a study by the Kauffman Foundation of business start-ups and their relationship with job creation. That article noted that Australia had experienced a substantial net increase in the number of large firms within the Australian economy during the period 2007-2009. However, in that same period Australia lost a significant number of businesses, mostly from the employing small and medium sized firms.

This suggested that the Global Financial Crisis (GFC) had impacted negatively on the Australian small to medium enterprise (SME) sector. Yet while this loss of businesses and their jobs is of concern, recent data from the Organisation for Economic Co-operation and Development (OECD) suggests that Australia has recovered strongly.

New business start-ups rebound in Australia

A study by the OECD of business bankruptcies and new business start-ups across the 34 countries that comprise its membership suggests that Australia has rebounded well from the GFC. As shown in the following graph, the number of new businesses created fell significantly as a result of the GFC, reaching a low point in 2008. Bankruptcies also rose significantly in the 2008-2009 period and continued to plague many economies well into 2011. Australia was not immune from this either.

Number of new enterprises trend cycle 2006-2011. OECD 2012

However, compared to other OECD countries Australia did quite well. Australia did much better than Germany, Finland and Denmark, but not as well as France, which significantly increased the number of business start-ups. For other countries the number of new businesses created since the GFC has been fairly modest.

The dramatic rise in the number of new businesses created within France has been attributed by the OECD to the introduction in that country of a simplified process for the establishment of new firms “regime de l’auto-entrepreneur”. This suggests that compliance costs and associated red tape may serve as an impediment to new venture creation.

As shown in the following graph, only the United Kingdom has seen any significant growth in the number of new business start-ups since 2008. Even the United States has been little better than European countries such as the Netherlands and Norway. Of course for a country like Spain the situation has been even worse, which will do little to assist that struggling economy and its massively high unemployment rate.

Number of new enterprises trend cycle 2006-2011. OECD 2012

By comparison Australia has once again proven itself to be the lucky country. As shown in the bar chart below, in 2008 at the height of the GFC there was a net decline in the number of new businesses created in the order of 9.3%. This was down from the rise of 9.2% over the period 2006 to 2007. Since then the trend has been positive, with strong growth in 2010 and weaker growth in 2011.

Percentage change in new business creation - Australia 2007-2011. OECD 2012

Employing firms still taking the hit and women less engaged

According to the OECD analysis of this trend data, the worst impact of the GFC was on employing SMEs, particularly the medium sized firms. This is consistent with the pattern that occurred in Australia as I reported in my previous column.

Another interesting finding from the OECD study is that women are less likely to found new businesses than men. Only about 2% of working women own a business and employ others. Further, when women do run their own businesses they tend to be much smaller than those run by men.

According to the OECD only one out of five self-employed women employs others, compared to one in three for self-employed men. Over the past decade the proportion of women who run businesses that employ has remained stable across most OECD economies.

This may be due to the type of businesses that women tend to found. Compared to men, fewer women are likely to own and operate manufacturing businesses or other capital intensive firms. They are more likely to be found in the services sector, retailing, accommodation or the professions.

Worth noting is the additional finding that businesses created by women are just as successful as those founded by men. In countries such as New Zealand and Poland, women-owned businesses survive better than those owned by men.

Survival and growth should be the focus

This rebound by Australia in terms of new venture creation in the years since the GFC is good news. However, it is important that attention be given to the quality not just the quantity of such newly created businesses. This was a point I made in the last column.

Unless the new ventures that we see created in our economy are founded with adequate financial support and strong entrepreneurial management skills many may not survive more than their first three years. This is not to suggest that most new businesses fail, in fact data suggests that the majority of Australian business start-ups survive their first 3 to 5 years. However, the contribution of non-employing micro-firms to employment creation and overall GDP is likely to be less than for larger firms.

Research undertaken by the Productivity Commission suggests that the non-employing micro-business has a greater likelihood of ceasing to trade than its larger counterpart. Unsuccessful businesses are also less likely to engage in business planning, staff training or the use of outside advisory support services.

The immediate impact of the GFC on Australia’s SME sector appears to have been most severe on micro and medium sized firms, in particular the employing micro-businesses. As the economy has recovered strongly the number of new businesses created has also grown. What is needed now is support to growth oriented SMEs to access business support services in planning and training.

For economies floundering in the doldrums post-GFC the OECD has called for the promotion of greater levels of entrepreneurship. Here in Australia the mining and energy boom has helped keep the economy growing. However, the investment in resources projects is set to peak by around 2015. Already Australia has a two-speed economy and it is important that we foster the survival and growth of our small to medium sized firms who will help diversify and strength the economy post any future down turn in the resources sector.