Do start-ups help create a healthy economy?

Despite the UK having been in and out of recession in the last couple of years, the Office for National Statics (ONS) report that, new business creations have been on the increase. This is usually seen as a good sign of growth and recovery.  New business formation is being encouraged by everyone from the Prime Minister to the EU and is regularly celebrated in the media.

In January, the BBC reported that an extra £30m is being made available by the Government over the next three years to help young entrepreneurs in England start new businesses.  Similarly, they also reported that the EU’s industry commissioner, Antonio Tajani, is preparing plans for a new drive to boost business start-ups across the continent.

But can start-ups or business births as the ONS calls them, be the only indicator of economic performance?  The ONS has suggested that the number of business deaths relative to the number of business births is a clearer indicator of economic health.  Business death is not necessarily the failure of a business; they may close because they have been taken over by a larger firm or merged to create a whole new enterprise.

Startup Business Statistics

Business birth and death rates. Source: Office for National Statistics

The graph shows the birth and death rates of businesses in the UK over a 10 year period.  Before the recession began in 2008, the business birth and death rates generally followed a similar pattern, with birth rates always higher than the death rates.  During the downturn, business birth rates dropped, while the death rate spiked significantly.  However, since 2010 they appear to be returning to their traditional pattern.

This supports the idea that the state of the economy is not based solely on the number of start-ups, but on the relationship between business birth and death rates.

A relatively high churn rate of businesses can be seen as desirable, as new firms entering the market are considered to bring innovative processes and technologies that drive up productivity.  They can also force unproductive enterprises to leave the market or be taken over by those who are more successful.  A new business means fresh innovation, creativity, and enthusiasm is being pumped into its sector.

So how important are business start-up to the UK’s economic recovery.  As business start-ups increase other factors affecting the economy, such as employment, will also improve.  According to the Federation of Small Businesses (FSB), small business accounted for 47 per cent of private sector employment and 34.4 per cent of turnover at the beginning of 2012.  So can we expect that if the number of start-ups continues to increase we’ll see wider improvements to the economy?  Considering how much government funding is currently on offer to entrepreneurs it seems that some key people think that this is the case.

But do you have what it takes to be successful?

If you need help or advice starting your new company, contact our Business Consultants who will be happy to talk you through the process.  If you have already registered your company, our Business Consultants can help you make sure it’s compliant and you have everything in order.Contact us now on 0800 0828 727 or visit www.thecompanywarehouse.co.uk/ to find out more about the services we offer new and existing companies.

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