New Businesses Fallen By 60 Per Cent: Government Report

A new report from the Department of Industry has found that the Australian entrepreneurship downturn is worse than previously thought.

Earlier this month the IPA’s new report on entrepreneurship, Reigniting Australia’s Entrepreneurial Flame, found that there were 15,000 fewer new businesses created in 2016 than in 2003 and a fall in business entry rate of 16 per cent. This finding, which was based on analysis of the ABS business counts data, is despite working age population growing by almost one-fifth in the same period.

However, a new government research report finds entrepreneurship in Australia is even worse than ABS data indicated.

Department of Industry economist Sasan Bakhtiari has found that Australia’s business entry rate has actually fallen from 15 per cent in 2003 to 9 per cent in 2015. That is, a fall in the rate of new business entry by 60 per cent in just 12 years.

This means fewer new businesses creating jobs, competing with existing firms, providing consumers with products and services, increasing productivity and growing the economy. The essential dynamic process of ‘creative destruction,’ as described by Joseph Schumpeter, in which new firms compete with older businesses to ensure that jobs and investment are allocated to the most worthwhile ventures, is lacking in the Australian economy.

Nine of Australia’s top ten largest companies were founded before 1925. In contrast, 88 per cent of the United States’ top 500 firms did not even exist fifty years ago.

Bakhtiari finds Australia’s business entry rate has fallen behind the United Kingdom, Canada and New Zealand, however remains ahead of the United States. This indicates a less dynamic economy that will threaten Australia’s living standards.

The new report makes use of micro-data from the Business Longitudinal Analysis Data Environment (BLADE), which combines Australian Bureau of Statistics surveys and Australian Taxation Office (ATO) firm data. BLADE uses a precise definition of entrepreneur, measuring only unique producing entities with productive and employment activities.

Despite correctly identifying Australia’s entrepreneurship problem, the report failed to diagnose the cause of the fall in entrepreneurship.

‘Above all, I find it quite puzzling that entrepreneurship in Australia reacted to the GFC at all and that the effect lasted for several years,’ Bakhtiari writes. ‘All of this happened despite the government putting into motion a sizable stimulus package and despite the fact that through this epoch the Australian economy out-performed almost every other advanced economy in the world in terms of growth and stability.’

The IPA has identified three major causes of Australia’s entrepreneurial woes: red tape, which is costing our economy $176 billion a year in lost economic output, Australia’s archaic industrial relations system, and high taxes, particularly corporate tax which discourages investment.

Australia must undertake serious economic reform to unleash our entrepreneurs.