By Sonja Pippin, Professor, Department of Accounting, UNR
As we are entering the second (and possibly third) wave of the COVID-19 pandemic worldwide we realize that many of its social and economic effects are unexpected and will need to be studied in years to come. Of course, the public health impacts are scary and serious and the continuous efforts by first responders and the healthcare community in general cannot be overstated. In addition to that, we know that many individuals are struggling economically because their businesses had to shut down or seriously restrict their activities. In order to illustrate that the proverbial silver lining also exists in this crisis, this business blog focuses on one of the (possibly) happier outcomes of the pandemic: new business activities and start-ups.
One might assume that since the entire economy contracted worldwide in the second and third quarter of 2020, start-up activity must have decreased as well. Yet, this is not necessarily true. In fact, information about new business applications in the United States and start-up activity in Switzerland paint a different picture.
Interestingly, while traditional business activities suffered significantly because of required shut-downs, various other restrictions, and people’s hesitation to spend or invest, start-up activity in the United States and in Switzerland during the first nine months of 2020 exceeded last year’s numbers. Why is this the case? At this point nobody knows for sure – not until we know more about the entire economic fallout of the pandemic. But the numbers do show some interesting behavior.
Let’s look first at the United States where total new business applications for the first three quarters of 2020 amounted to approximately 3.37 million which is 21% more than in the same time period in 2019. This difference is even more pronounced when just looking at the second and third quarter of 2020 with 31% more new business applications compared to the same time in 2019. The geographic picture is also quite interesting. Ignoring Delaware as potential outlier state (due to its well-known attraction for “P.O. box businesses”) and adjusting for population the most entrepreneurial activities happened in Wyoming, Mississippi, Louisiana, Georgia and Florida. The highest increase in start-up activities comparing second and third quarter of 2020 with the same timeframe in 2019 happened in Mississippi, Louisiana, and Georgia.
In Switzerland, a similar picture emerges although the differences between 2019 and 2020 are not quite as striking. There were more start-ups registered in the first nine months of 2020 than in 2019 with a decrease in the second quarter and an increase in July, August and September of 2020. Similar to the U.S., cantons with the highest increases were more rural (Obwalden, Appenzell Innerrhoden, Appenzell Ausserrhoden, and Thurgau). Note that the data in Switzerland refers to actual business formations while the U.S. data includes all applications to potentially start a business.
One possible reason for this increase in start-up activity could be that people who were laid off decided that this was the time to start something new. This hypothesis may hold in the United States where the September 2020 unemployment rates are positively correlated with new business activities in 2020 and the increase in new business applications from 2019 to 2020. However, in Switzerland this is not true: the correlation between unemployment and entrepreneurial activities is negative. Another reason therefore could be that some entrepreneurs (who may have toyed with the idea of starting a business for some time) used government stimulus money as start-up funds.
The U.S. data unfortunately does not include industry information. In Switzerland the highest increase in start-up activities was observed in personal services such as cosmetology, consulting, education, engineering, and marketing. Manufacturing had the highest numbers in 2019 and 2020 (similar to prior “normal” business years) followed by consulting and retail services.
One open question now is how sustainable these increases in entrepreneurial activities are. Even during “normal” times, start-ups struggle in their first year(s) of business. This is likely to be exacerbated during the Pandemic. What will be interesting to evaluate is whether the success rate for different industries will be affected – considering that many people have changed their behavior considerably in the past months.
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