New Business Start-ups: The More The Better?

The importance of new ventures in the economic process is well established and many governments embark on programs designed to stimulate new businesses start-ups in the belief that increasing the number of new businesses will have a positive impact. Much effort is expended in trying to reduce the failure rate of businesses, usually based on the belief that failure is the result of rectifiable shortcomings within a business, particularly a failure in management. This paper looks at start-up businesses in New Zealand for the period 1987 to 1994. It shows that during the period studied, 5.75 times as many new businesses started up as the economy was able to absorb, and argues that this large oversupply is the underlying cause of the high rate of business failure. Conventional methods aimed at reducing business failure are therefore incapable of reducing the failure rate, they merely help decide who the survivors will be. The paper argues that, in New Zealand, programs aimed at increasing the volume of new business start-ups are misguided and that it is impossible for the economy to absorb the volume of new firms entering the market. It seems likely that a similar situation exists in other western countries and that public policy efforts would be better directed at improving the quality of start-ups rather than the quantity.