Local Entrepreneurship Appears to Have Slipped, But Appearances Can Be Deceiving

by Dr. Patrick Jones

Entrepreneurship is rightly celebrated in the U.S. Every large company began as a small one. And every small company started as the gleam in the eye of its founder(s). Yet, economic success can be precarious, as the fate of companies often changes dramatically.  

Consider the Dow Jones Industrial Average (DJIA), composed of 30 of the nation’s largest businesses. Out of the total in the DJIA in 1982, only four are now still part of it: 3M, IBM, Merck and Proctor & Gamble. (Two more, Dow and Honeywell, contain parts of companies in the DJIA in the early eighties.) The remainder from 1982? Largely a shadow of their former selves, such as Eastman Kodak, General Motors, Exxon. And some have disappeared completely, such as Bethlehem Steel, Sears Roebuck and Woolworth. 

Since there are no guarantees that a company will thrive for decades, it is critical for a national and regional economy that promising companies are incubating the pipeline. This is easier said than done, as anyone who has started a firm or run a start-up can attest to. So an ideal measure of the level of entrepreneurship in an economy is the number of companies formed or “birthed” in any given year.  

At the local level, however, that information is hard to come by. Ideally, one would track only the entrants into the local economy. Chelan Douglas Trends offers the best approximation that data currently allow in Indicator 2.2.5 Net Firms Created. Net in this case refers to the number of firms in the two counties each month, then averaged over the entire year. As such, it captures companies that enter into as well as those that exit from the two counties over the course of a year. The numbers come from administrative records of Washington State’s Employment Security Department (ESD), based on firms that have at least one employee and therefore contribute to the Washington State Unemployment Insurance Fund. 

What does this measure of the local economy tell us?  Essentially, that there has not been much gain in the total firm count since 2013. For four of the last six years (through 2019) the number has shrunk from the prior year. The last decent year for this measure of entrepreneurship was 2013, when 187 new companies, on balance, joined the local economy. In sum, there were 62 fewer firms, or about 1% fewer, in the two counties than there were in 2013. Over the same period, population has grown by over 7,000, as Indicator 0.1.1 reveals. 

Before reaching any quick conclusion about local entrepreneurship, it helps to look at the community’s neighbors. A glance at the other Trends sites in Eastern Washington, accessible through the homepage of this one, shows that the experience in Chelan and Douglas Counties hasn’t been unique.  During the same interval, the Greater Tri Cities lost 12 firms, Walla Walla 249, Yakima 262 and Grant 353 firms. Only Spokane County managed to show a net gain of companies, with 82.  

Totals obscure important detail, just as averages mask distributions.   A comparison of changes of firm count by sector is revealing for Chelan and Douglas Counties. Most of the 19 sectors in the two counties actually chalked up gains in net firms. Construction demonstrated particularly strong growth, with a net gain of 158. The hospitality sector, composed of eating and drinking establishments as well as accommodations, came in second, at 55. Sectors that either rest on relatively high wages or strong multiplier effects or both, such as manufacturing and professional services, also grew modestly. 

Agriculture and forestry was the one sector that experienced declining firm numbers, nearly all in crop production. This outcome likely mirrors the long-term consolidation of agricultural production here and across the U.S. Agriculture’s experience was likely repeated in all the metro areas in Eastern Washington, with the exception of Spokane which does not enjoy a large agricultural bounty. Unless the small producers of today can carve out market niches that provide for a satisfying livelihood, the sector is likely to consolidate further. 

In addition, the time interval of this review experienced a change in industry classification which affected the numbers. In particular, the number “household” firms employing anyone plummeted while the number of medical caregiving firms rose substantially. But the net effect was a loss of 250 firms.  

Without this adjustment, Chelan and Douglas counties would have experienced a total net growth of firms of more than 300. This finding is supported data from a new, experimental data record of firm births from Census: Business Formation Statistics. This dataset counted a gain of about 315 firms over the same period in the two counties. Since the number is not a net one, the total gain seems largely to buttress the findings from Indicator 2.2.5. That is, outside of the data adjustment by ESD economists and without effect of agricultural production, the two counties are likely to have experienced a net gain of firms over the 2013-2019 period. 

Unfortunately, the Business Formation Statistics series doesn’t break down the results by sector at the county level, so we don’t know where to locate the gains. But it is likely that sectoral findings would be similar, since the sources for both the experimental series and the one standing behind this indicator are much the same. 

Overall then, it appears that entrepreneurship hasn’t become a lost art in the two counties over the past few years, despite the look of the graph in Indicator 2.2.5. The local economy has shown a steady, albeit modest, pulse in entrepreneurship. Behind the aggregates, the varying sector results represent the teachings of a well-known Austrian-American economist, Joseph Schumpeter. He viewed the continual churn of companies in an economy as a positive, natural force, which he labeled “creative destruction.” In an economy as vibrant as in the U.S., we should expect both firm entrants and exits. With a growing population, Chelan and Douglas Counties should expect firms to come and go, but on balance, the count of non-agricultural businesses should grow over time.