Tuesday, December 4, 2012

Atlanta Fed: "Gazelles, and Why They Matter"

From the Federal Reserve Bank of Atlanta's Macroblog:
A gazelle, as you may recall from your favorite wildlife show, is one of those antelope-like animals that run around in herds across the plains and are known for their speed. Sheltered by the herd at birth, their youth is short-lived. In no time flat, gazelles are expected to be up and running or they will be easily devoured by hungry lions.

Probably because of that imagery, the word gazelle is also used in the business literature to represent a young firm that grows very quickly in a relatively short period of time. According to Kauffman Foundation research, the fastest-growing 1 percent of firms typically account for about 40 percent of job creation in the United States. Of that 1 percent, three-quarters are less than six years old. Research also shows that these high-growth young firms are more likely to provide solutions to other businesses than directly to consumers, have some form of intellectual or technological property, and tend to be started by entrepreneurs with business startup experience.

To learn more about the role of gazelles and the challenges they face, the Federal Reserve Bank of Atlanta recently hosted Amy Wilkinson, a senior fellow at Harvard University and a policy scholar at the Woodrow Wilson Center. Wilkinson is a leading entrepreneurship scholar. Her current research focuses on entrepreneurs who scale their company to reach $100 million in revenue in less than five years. (You can see her discussing the topic here.) She has shown that these "founders" tend to drive innovation, and ultimately job creation, in the U.S. economy. These young, high-growth firms are typically driven forward by entrepreneurs with high aspirations, novel ideas, and a strong support system. This support system is analogous to the gazelle's herd—it is a network of financial and human capital providers that help the businesses grow to potential....MORE 
We've looked at the question of who creates jobs in the American economy a few times, most recently in September's "The Death of IPO's and What it Means for You and The Country":
With today's jobs report this topic is going to get spun like a top.
(96,000 jobs 38 months after the recession ended? Come on)

Let's state what should be obvious right up front: Small business is no better at job creation than big business and because of the churn of bankruptcies and closures probably worse on a net basis.

Most small businesses don't grow very fast and can't create jobs.

The key variable, as even a cursory review* of the literature makes clear, is the age of the business.
In particular firm births are correlated with both net and gross job creation and it is only because most new firms are small that small business is credited with job creation.

Because of the facts of who creates jobs, a policy initiative that focuses only on size without taking age of the enterprise into consideration will have little effect other than redistributing wealth to the wrong group of companies....MUCH MORE