In The US, New Businesses Surge in 2009!

In the US, the Kauffman Institute claims a record surge of new business activities in 2009.
Here is an excerpt of the press release "Despite Recession US Entrepreneurial activity Rate Rises In 2009 To Highest Rate in 14 years" (hat tip: Mark Perry)

"Rather than making history for its deep recession and record unemployment, 2009 might instead be remembered as the year business startups reached their highest level in 14 years – even exceeding the number of startups during the peak 1999-2000 technology boom.

"According to the Kauffman Index of Entrepreneurial Activity, a leading indicator of new-business creation in the United States, the number of new businesses created during the 2007–2009 recession years increased steadily year to year. In 2009, the 340 out of 100,000 adults who started businesses each month represent a 4 percent increase over 2008, or 27,000 more starts per month than in 2008 and 60,000 more starts per month than in 2007.

"Challenging economic times can serve as a motivational boost to individuals who have been laid-off to become their own employers and future job creators,"said Carl Schramm, president and CEO of the Kauffman Foundation. "Because entrepreneurs drive the economy, the growth in 2009 business startups is encouraging and hopefully points to a hopeful trend in terms of our economic recovery.”

Read the rest of Kauffman's press release here.

My comment: While the Kauffman institute does provide some details over geographical distribution of entrepreneurial activities (press releases naturally provides limited info), it doesn't make a breakdown on the industries where these activities have seen the surges.

My suspicion is that they'd probably be centered on technology or technology related activities.

But the point is, it's simply wrong to write off the elan of entrepreneurs, in spite of all the troubles (aftereffects of bubbles cycles, government intervention, bailouts, prospective high taxes, growth of government relative to the economy and etc..).

The ramifications of the deepening knowledge based economy is one of the x factors that can sustain free enterprise.

Japan Exporters Rediscovers Evolving Market Realities

Mainstream economists tell us that falling aggregate demand from developed economies will cause global deflation. Hence they justify government intervention via various kinds of stimulus to replace "lost demand".

Unfortunately, such oversimplified concept mistakenly infers that markets trades based on one type of product with single class of producer and buyer, and operates on similar level of price sensitivity.

In the real world, markets are complex and respond or adjust to reflect on where the consumers are.

As marketing guru Seth Godin aptly writes, ``Your customers define what you make, how you make it, where you sell it, what you charge, who you hire and even how you fund your business. If your customer base changes over time but you fail to make changes in the rest of your organization, stress and failure will follow." (emphasis added)

That's the reality of business.

Proof?

While it may be true that consumption in developed economies have been slowing, Japan's export producers have reportedly been devising or adopting new marketing strategies that would instead cater to emerging markets and deal with "volume" than stick to old unprofitable models (based on the dynamics of the previous bubble cycle).

This from the Japan Times, (bold highlights mine)

``Although Japanese electronics enjoy a widespread reputation for high quality and stylish design, electronics makers no longer seem able to maintain their presence in the global market by simply relying on these elements.

``Until recently, many makers focused on targeting wealthy overseas consumers who were willing to pay for high quality and expensive Japanese products.

``But given the shrinking domestic market and lackluster consumption in developed countries, they have begun switching their attention to middle-class consumers in emerging nations. Accordingly, they have started making efforts to produce simpler and more affordable products for middle-class workers in those countries.

``Such consumers are often referred to as the "volume zone," and it is believed that about 1 billion people worldwide fall into this category.

``While it won't be easy due to the fierce competition from other Asian electronics makers, analysts agree that winning a leading share of emerging markets is key to the growth of Japan Inc. in the coming years."

Rediscovering the market or "seeking the money trail" is the key to any entrepreneurs or any nation's economic success.

In the Philippines, based on empirical evidence one would be astounded by packed malls last Christmas, considering that we host 4 of the 11 largest mall of the world [see A Nation Of Shoppers??!!] in defiance of the economic assumptions of experts and of self-righteous politicians that the Philippines is "poor".

Businesses or entrepreneurs more than professional economists or politicians dictate on the economic path of a nation.

As Ludwig von Mises once wrote, ``The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him."

Politicians Don't Grow The Economy

An article from the Wall Street Journal provides evidence which separates facts from fiction.

The popular myth, being that espoused by the mainstream, particularly advocated by politicians, the media, leftwing academics, or self-righteous welfare interest groups or even the Pope, is that governments “manages” the economy.

From Wall Street Journal, (all bold highlights mine)

``We witnessed that rarest of things last week—a politician's public humility. When France, along with Germany, reported an unexpected uptick in economic growth for the second quarter, French Finance Minister Christine Lagarde called the return to growth "very surprising." Imagine that—a major global economy stops shrinking, without the benefit of trillion-dollar stimulus packages or major reforms, and a politician doesn't rush to claim credit for the achievement.

``Politicians don't "grow" an economy like a vegetable garden, and the reasons behind economic growth in the global economy are at least as mysterious to our political class, if not more so, than they are to the rest of us. Ms. Lagarde, who spent decades in the private sector, is perhaps better placed than many politicians to appreciate this fact. A single quarter of 0.3% growth hardly means it's off to the races for France or Germany, and the euro zone's economy as a whole still shrank in the quarter, by 0.1% of GDP.

``But at a time when politicians around the world are desperate for any sign of a turnaround, it's refreshing to hear the minister responsible for France's economy speak the truth about growth. It is the product of literally millions of decisions made by millions of people about what to produce, buy and sell. Politicians can influence all that decision making, especially by increasing or decreasing the incentives to produce, work and innovate. But they can't control today's multi-trillion-dollar economies, no matter how much they'd like to take credit for doing so when things start looking better.

``France did pass a modest stimulus package earlier in the year, and it has joined the cash-for-clunkers craze that has swept the Western world. But France and Germany were among the countries in Europe that resisted Treasury Secretary Tim Geithner's imprecations to join the U.S. on the megastimulus bus, and on present evidence this fiscal restraint does not appear to be hurting their chances for recovery.”

Here's my take...

The fundamental reason why governments CANNOT manage an economy is because economies are vastly too diverse and too complex- from which are driven by the continuous changes in the human mind adapting to the rapidly evolving conditions or circumstances- to be accurately predicted or modeled which are the requisites of control or management.

Mario Rizzo on predictions, (emphasis added) ``This is because there are many radically unpredictable (in the lay sense) elements in human decisionmaking.

``One important argument in this regard was made by Sir Karl Popper in The Poverty of Historicism (also endorsed by economists George Shackle and Ludwig Lachmann). Adapting the argument for our current purposes:

``1. The course of economic events is strongly influenced by changes in the contents of the human mind that is, the future course of knowledge. This includes what we would call knowledge of the external world and of ourselves.

``2. We cannot predict, by rational or scientific methods, the future course of knowledge (in the sense of reasonable conjectures that we will have in the future or even in the sense of our moods – animal spirits).

``3. This is because if we could predict future knowledge it would not be future, but present. No one believes that we know now everything we will know in the future.

``4. Therefore, we cannot predict the future course of economic events.”

Hence, economic progress will always emanate from the entrepreneurs, because entrepreneurs operate on local [specialized and detailed] knowledge and values that allows for the coordination of the fulfillment of the needs and wants of a society through the marketplace.

As Ludwig von Mises wrote ``The vehicle of economic progress is the accumulation of additional capital goods by means of saving and improvement in technological methods of production the execution of which is almost always conditioned by the availability of new capital. The agents of progress are the promoting entrepreneurs, intent upon profiting by means of adjusting the conduct of affairs to the best possible satisfaction of the consumers. In the performance of their projects for the realization of progress they are bound to share the benefits derived from progress with the workers and also with a part of the capitalists and landowners and to increase the portion allotted to these people step by step until their own share melts away entirely."

Creative Destruction: Reinventing Models and Forced Entrepeneurship

Every crisis leads to a transformation.

Industries affected by malinvestments or bubbles are destroyed while new enterprises emerges or innovative business paradigms takeover. That's why crisis can always be seen as windows of opportunities as previously discussed in Entrepreneurship During Recessions: Booming Industries, Recession Babies, Reasons to Start and 999 Business Ideas.

People will always toil to look for opportunities in order to survive. And one of the options would be to put up a business. Take for example this article from the New York Times which focuses on "forced" entrepreneurship today (bold highlight mine),

``Economists say that when the economy takes a dive, it is common for people to turn to their inner entrepreneur to try to make their own work. But they say that it takes months for that mentality to sink in, and that this is about the time in the economic cycle when it really starts to happen — when the formerly employed realize that traditional job searches are not working, and that they are running out of time and money.

``Mark V. Cannice, executive director of the entrepreneurship program at the University of San Francisco, calls the phenomenon “forced entrepreneurship.”

``“If there is a silver lining, the large-scale downsizing from major companies will release a lot of new entrepreneurial talent and ideas — scientists, engineers, business folks now looking to do other things,” Mr. Cannice said. “It’s a Darwinian unleashing of talent into the entrepreneurial ecosystem.”

``Even in prosperous times, entrepreneurs have a daunting failure rate. But those who succeed could play a big role in turning the economy around because tiny companies are actually big employers. In 2008, 3.8 million companies had fewer than 10 workers, and they employed 12.4 million people, or roughly 11 percent of the private sector work force, according to the Bureau of Labor Statistics.

``Economists say there are some peculiarities to this wave of downturn start-ups. Chiefly, the Internet has given people an extraordinary tool not just to market their ideas but also to find business partners and suppliers, and to do all kinds of functions on the cheap: keeping the books, interacting with customers, even turning a small idea into a big idea.

``The goal for many entrepreneurs nowadays is not to create a company that will someday make billions but to come up with an idea that will produce revenue quickly, said Jerome S. Engel, director for the center for entrepreneurship at the Berkeley Haas School of Business. Mr. Engel said many people will focus on serving immediate needs for individuals and businesses."

As a saying go, Necessity is the mother of innovation (invention).

And as we earlier mentioned, crisis also induces change in business models.

For instance, we see accelerating signs of transitioning from the old print "newspaper" media model to one of the "online" paradigm.

Again from the New York Times (bold highlight mine),

``The Seattle Post-Intelligencer will produce its last printed edition on Tuesday and become an Internet-only news source, the Hearst Corporation said on Monday, making it by far the largest American newspaper to take that leap.

``But The P-I, as it is called, will resemble a local Huffington Post more than a traditional newspaper, with a news staff of about 20 people rather than the 165 it had, and a site with mostly commentary, advice and links to other news sites, along with some original reporting.

``Other newspapers have closed and many more are threatened. But the transition to an all-digital product for The P-I will be especially closely watched in an industry that is fast losing revenue and is casting around for a new economic model.

``For one thing, the closing may end up putting greater pressure on the surviving and financially struggling Seattle Times, because of the end of a joint operating agreement between the two papers. It may even bring closer the day when Seattle has no local paper at all.

``And the way The P-I is changing might hint at a path for future newspaper closings. To some extent, in shifting its business model, it will enter a new realm of competition. It will compete not just with the print-and-ink Times, but also with an established local news Web site, Crosscut.com, a much smaller nonprofit organization that focuses on the Northwest. The move shows how some newspapers, in the future, may not vanish but move the battle from print to the digital arena."

And this appears to be a firming trend...

chart courtesy of Pew's State of the Media

Cable and online have drawn most of audience traffic at the 'expense' of traditional media.

According to Pew Research, ``Only two platforms clearly grew: the Internet, where the gains seemed more structural, and cable, where they were more event-specific."

In short, real time or "on demand" news or opinion is on the rise, or in the fitting words of the research company, ``People increasingly want the news they want when they want it".

Of course, aside from the shift in viewership traffic preference, the other very important trigger has been no less than the flow of revenues. Ad spending has essentially shifted to cable and online. Put differently, it is basically a "follow the money" dictum.

The dramatic surge in online viewership hasn't not translated to strong flows of ad spending, though. The Pew Research suggests an explanation- strong competition. ``Even while online ad spending grew about 14% through the first three quarters of the year, most of it benefited Google and other search providers. Revenue from the sale of banners and other display ads that news websites depend on increased just 4%, and estimates are that it declined by the fourth quarter. One reason: the infinitely expanding universe of blogs and websites has forced them to cut their rates to compete for advertisers. The cost to reach 1,000 viewers fell by half in 2008 alone, to an estimated average of 26 cents."

But not all countries are incurring a decline in print media as we pointed out in Global Posttraumatic Stress Disorder (PTSD): The After Lehman Syndrome. But that is a topic for another day.

Nonetheless the last word from Internet analyst Clay Shirky who is quoted by the Research Recap, ``That is what real revolutions are like. The old stuff gets broken faster than the new stuff is put in its place. The importance of any given experiment isn’t apparent at the moment it appears; big changes stall, small changes spread. Even the revolutionaries can’t predict what will happen. Agreements on all sides that core institutions must be protected are rendered meaningless by the very people doing the agreeing.”

Entrepreneurship During Recessions: Booming Industries, Recession Babies, Reasons to Start and 999 Business Ideas

It’s not all gloom and doom despite the dire outlook emanating from a financial crisis triggered economic recession in the US.

Businessweek in a slideshow shows of 9 small business/ industries enjoying a boom which according to Stacy Perman of the Businessweek has been “giving new relevance to the old adage that one man's misfortune is another's opportunity.”

The list includes…

1. Companies specializing in credit counseling, debt and budget management, consolidation, or debt settlement.

2. Mortgage and Foreclosure Rescue Companies

3 Repair services

4. Alcohol

5. Safe

courtesy of Baumann Safe & Businessweek

6. Repossession

7. Thrift stores

8. Pawnshops

9. Private detectives

Don’t forget some of the known establishments were born during economic slumps, insidecrm.com enumerates 14 famous recession babies:

1. Hyatt Corp

2. Burger King Corp.

3. IHOP Corp.

4. The Jim Henson Company

5. LexisNexis

6. FedEx Corp.

7. Microsoft Corp.

8. CNN

9. MTV Networks

10. Trader Joe's

11. Wikipedia Foundation Inc.

12. Sports Illustrated

13. GE (General Electric Co.)

14. HP (Hewlett-Packard Development Company LP)

Nonetheless, there are reasons why recessions could be a good time to start a business. Melissa Chang, founder of Pure Incubation, an Internet incubator based in the Boston area, elaborates in thestandard.com [HT: Mark Perry].

1) A recession forces founders to be frugal.

2) Recessions force entrepreneurs to take another close look at their ideas.

3) Recessions lead to committed startup teams.

4) Startups get a head start.

5) Recessions toughen up companies.

Finally, sixmonthmba.com offers 999 business ideas (Hamster Burial Kits & 998 Other Business Ideas) [HT: Seth Godin]

Alternatively, this reminds us that we can also opt to view today's predicament as windows of opportunities for progress or as ex-US President John F. Kennedy once said ``When written in Chinese, the word "crisis" is composed of two characters-one represents danger, and the other represents opportunity.”