Tuesday, January 4, 2011

New Businesses Not Small Businesses

Entrepreneurship.org has published a post (New Businesses Not Small Businesses) about a new study by Ying Lowrey, an economist with the Small Business Administration, who "estimates that on average, each new startup is responsible for 5.6 jobs created".

To put it in perspective, my company was founded in May 2008, as a one-man shop operated in a home office. Today, we employ 7, have an office building downtown Racine, and are projected to bring on an additional four staff members in 2011.

I recently heard a story on Wisconsin Public Radio that our new Governor Scott Walker is ready to issue a multimillion dollar tax incentive to some company to create around 300 jobs in Madison over the next few years. As I calculated at the time, the incentive translates to about $45,000 in cost to the state per job created.

What if, we offered $45,000 in grants or tax incentives to entrepreneurs for creating new businesses in the state (perhaps with a signed contract that the new business must remain in the state for say three years). Now, if Lowrey's study is accurate, each new business on average would translate to 5.6 jobs created (all of which would have to remain in the state for the period of time agreed to), meaning the cost to the state per new job created would be a mere $8,035.71.

What a bargain! Somehow it sounds more efficient to me for the state to be incentivizing new business creation than simply atracting old businesses into the state. And there's no saying the same approach couldn't be applied by other states, or even the Federal Government. Let's see, if $40 billion were used in that way, rather than used to bail out "too big to fail" firms, we'd have about 5 million new jobs in the country today. I wonder how many employees AIG or GM has?