End of a cycle in business creation?

<a href="http://www.ie.edu/IE/php/en/profesores_medios_detalle.php?id=320">Ignacio de la Vega. Professor. IE Business School</a>

10 January 2008

Gloomy forecasts for the future are taking their toll as a lack of confidence in the economy translates into a drop in levels of entrepreneurial activity.

Between the growing general pessimism that has smothered the global economy in recent weeks and which can be seen on a daily basis in the specialised press, this week, with news of galloping inflation on both sides of the Atlantic, returns of the subprime crisis, new increases in oil prices, the weakness of the American dollar, increases in the Euribor rate, a drastic fall in mortgage transactions and a long, demoralising etcetera, one piece of information included very briefly in the economic papers has passed by more or less unnoticed: the creation of business falls by more than 10% in September.

According to Instituto Nacional de Estadística (INE), the number of new businesses created in September was down by 10.1% on the previous year; the average capital paid out fell by 20% and, another piece of bad news, the number of companies that were dissolved increased by 78.2%. The September figures are undoubtedly very revealing and show that the creation of business in Spain is slowing down in a way that is, at the very least, worrying.

For the author of this article, this is not just another piece of news in the difficult macropanorama in which we live and which, according to the forecasts of every analyst, is to worsen over the next few months (as I write these lines, I am witnessing another day of volatility on our stock exchange). The fall of the business activity rate (‘TEA’ in GEM language) is terrible news for the economic health of any society. The Global Entrepreneurship Monitor Report, drawn up in 50 countries and lead in Spain by Instituto de Empresa since it began in the year 2000, relates the TEA with economic growth (an almost direct relation with the GDP) and points to the triple equation of the social value of business creation: employment, innovation and collective wealth. Here lies the importance of the bad news given by INE.

Can we apply the September figure to the entire year of 2007 or is it an indicator that suggests a clear change in future trends in business creation in Spain? Finalising the GEM analysis of 2007 and anticipating the official conclusions of the report, which is to be presented in February 2008, the GEM methodology offers answers to both questions. On the whole, the year 2007 will still close on a positive note for business creation in Spain in comparison with the figure for 2006, whose TEA stood at 7.27%. The current figures show that the year 2007 will close with a TEA of 7.6, consolidating a healthy entrepreneurial activity rate, especially in the first half of the year, which places us among the leading OECD countries.

According to our analysis, the year 2008 will be another story, with significant drops in the TEA that indicate the percentage of the population involved in entrepreneurial activities. The answers to the future scenario on cyclical markets can be found in the past. If we were to make a detailed analysis of the evolution of the TEA given in the GEM report since 2002 and we present it as a graph, we would see a classic sawtooth figure that oscillates between minimum TEA values for Spain of 4.5% in 2000 and 2002 and maximum values of 7.78% in 2001 and 7.27 in 2006. This figure allows us to say that the creation of business is highly dependent on the general economic environment and that, when developing their investments, entrepreneurs act in accordance with Keynes’s well-known "animal spirits".

A brief look at the "past" illustrates this idea: 2001, which was a year of maximum values in Spain, represents the crucial moment of the Internet bubble; 2002, a year of minimum values, represents the explosion of the said bubble, with tension on the stock exchange, the 11th September terrorist attack and its consequences; 2004 and the fall of the TEA, problems on the energy market, a change of government, macroeconomic tension, the 11th March terrorist attack in Spain. I consider that this can be used to relate the importance of the environmental conditions as far as entrepreneurial activity is concerned. In these circumstances of uncertainty, the efforts of all the players involved in providing the development of new entrepreneurial activities and the growth and consolidation of existing activities gain in importance, since, we must not forget, they represent the true driving force behind employment in any advanced society.


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