Factors That Encourage Entrepreneurial Start-Ups and Existing Firm Expansion: A Longitudinal Study Comparing Recession and Expansion Periods

Abstract

INTRODUCTION Small business start-ups created the groundwork for the Massachusetts miracle and the New England turnaround in the 1980s. It was the willingness of small businesses to form and expand that kept the economy strong (Lamp, 1988). Birch (1987) found that the keys to job creation are entrepreneurial firms. Economies that provide the proper environment for startups, and existing firms to expand, grow and flourish whereas those that fail to provide such an environment languish. Porter (1991) contended that the economic imperative is the need to create vast numbers of jobs. With large businesses downsizing, rightsizing, and reengineering, many people are looking to small business as a means of economic expansion. Dun & Bradstreet (1994a) predicted that 3.1 million new jobs would be created in 1994 with 72.4 percent coming from firms with fewer than 100 employees. In contrast, companies with at least 25,000 employees will have a net drop in employment. New small firms with fewer than 20 employees have been recognized as the nation's job creators and creators of new markets for large firms (Phillips, 1993). During the last two quarters of 1990 and the first quarter of 1991 the United States was in a period of recession. At about the same time, the Massachusetts miracle crashed to a halt. Between January 1989 and February 1991, the Massachusetts employment rate fell by 7.6 percent. Overall, the state lost roughly 300,000 jobs making this the worst recession since the Great Depression (Stein, 1991). Unemployment in the Commonwealth reached 9.7 percent in March 1991, the highest level since 1982. Business failures more than tripled during 1990. The overall increase in failure rates outpaced the nation in every major sector (Porter, 1991). To make matters worse, between 1988 and 1989 and 1989 and 1990, new business incorporations declined by 14 and 11 percent, the third highest in the nation (U.S. Small Business Administration, 1990). According to Dun & Bradstreet (1994b), business failures fell 19.9 percent in the first-half of 1994 reflecting a widespread recovery for business. Failures declined in all nine census regions, with the New England states reporting the greatest decrease. According to an editorial in the Boston Globe (1994), things have changed in Massachusetts: The unemployment rate has dropped by nearly a third and employment is finally back on the rise. The commonwealth's business confidence index, as measured quarterly by Associated Industries of Massachusetts, is at a five-year high. PURPOSE The researchers' purpose in conducting this study was to identify the factors considered to be of major importance in the encouragement of new business formation and existing firm expansion, and to compare differences from recession and expansion periods. The identification of these factors and differences will help public policy makers enhance the potential for economic expansion through job growth. The study was designed to answer four questions: 1. What factors do small business owners consider to be most important in encouraging new business start-ups and existing firm expansion? 2. What is the level of satisfaction of small business owners with these important factors? 3. Is there a significant difference between the importance of these factors and business owners' satisfaction with them? 4. Is there a difference between small business owners' responses during the recession and their responses during the expansion period. SELECTED LITERATURE REVIEW To conserve space, only the four most relevant studies relating to the first three research questions are discussed. In addition, four other less relevant studies are presented in a summary list of factors in Table 1. Matz (1979) prepared a report for the Joint Economic Committee of Congress entitled Central City Businesses--Plans and Problems, that examined what differentiates economically successful cities from depressed cities, what inner-city businesses require to become and remain healthy, and what determines the quality of a city's business environment. …

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