NEW YORK – As policymakers address the economic damage from the coronavirus pandemic, new research warns that entrepreneurship is in peril and needs immediate support to accelerate new business creation. According to a new study by Jorge Guzman, Assistant Professor of Management at Columbia Business School, the business formation rate is collapsing in the wake of lockdown policies and targeted assistance will be needed to encourage entrepreneurship that can lead to new growth and jobs. The study’s findings show that an absence of new firms will damage the US economy’s chance to recover and adapt, fundamentally destroying what we know is the essence of our cities today.
The new research is the first analysis of the impact of the coronavirus pandemic on the number of new rather than existing firms. An example in the study reports that since Washington State’s March 16 decision to close businesses and restaurants, new business registrations in the state have fallen by more than 75 percent, and the gap appears to be growing. Although the Paycheck Protection Program has provided nearly $700 billion to support to small- and medium-sized businesses, the program supports existing businesses and does not allocate funding for entrepreneurs. Guzman and fellow researchers argue that policymakers should create a Main Street Fund to provide low-interest loans of up to $500,000 to launch new local businesses, complementing the Small Business Administration’s existing micro loan program.
“The COVID-19 pandemic has severely reduced startup formation, but federal aid can make a significant impact in helping the economy recover,” said Guzman. “As we head into a recession, future rounds of economic stimulus should set aside funding that can enable entrepreneurs to start new businesses that provide jobs, create local growth, and revitalize cities across the United States.”
Guzman and co-authors Professor Catherine Fazio of Boston University’s Questrom School of Business and Professor Scott Stern of the MIT Sloan School of Management, compare COVID-19’s impact on new business to past crises that caused financial distress, including the September 11 attacks in 2001, Hurricane Katrina in 2005, and the 2008 collapse of Lehman Brothers, which each caused significant drops in new business registrations. In each case, registrations rebounded when large amounts of federal assistance catalyzed new growth. Following Hurricane Katrina, new business registrations in Louisiana fell effectively to zero. In response, the federal government provided $9 billion to support residents as they rebuilt homes as part of the “Road Home” program, administered by state officials. Researchers argue this funding contributed to the recovery of new business creation and the later economic performance of the state.
“It’s not enough to have a relief program just focused on saving existing businesses and streamlining bankruptcies,” said Guzman. “A real recovery will be spurred by entrepreneurship, the essence of U.S. growth and dynamism. Without it, I worry about a bleak picture for the recovery and follow-on growth.”
The study, For Main Street Firms to Remain a Mainstay of the Economy, We Need to Save New Businesses Too, can be found here.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
About the researcher
Dr. Jorge Guzman is an assistant professor at the Management Division in Columbia Business School. Jorge received his PhD from the Sloan School of...Read more.