Saleem Bahaj, Sophie Piton and Anthony Savagar
Recessions typically discourage entrepreneurs from starting new businesses. During the Great Recession, a ‘generation’ of start-ups went missing which contributed to a slow recovery in employment. Two years after the pandemic started, evidence for the UK suggests a very different story: the pandemic inspired many entrepreneurs to start new businesses and this supported the recovery in employment.
Figure 1 shows the contrast between the Great Recession and the Covid-19 pandemic. It draws the path of cumulative applications since the start of the crisis (March 2020 for the pandemic, September 2008 for the Great Recession, both starting dates being normalized to zero), relative to a reference pre-crisis period. During the Great Recession (left panel), we see that 12 months into the crisis there were 8% fewer business registrations at Companies House than pre-crisis (than over September 2006 to 2007). By contrast, one year into the pandemic (right panel), new registrations were 8% higher than pre-pandemic (than over March 2018 to 2019). This stark contrast between the Great Recession and the Covid-19 pandemic is not specific to the UK. There are similar trends in the US and in France.
In a new Staff Working Paper we study these new entrepreneurs and analyse the growth potential of their businesses.
Figure 1: Cumulative business creation relative to pre-crisis, Global Financial Crisis (GFC) vs Pandemic for the UK, US and France
Source: authors’ calculations using Companies House, US Census and INSEE.
A start-up boom in online retail and by first-time entrepreneurs
Business registrations exhibit a sharp decline followed by a rapid rise after the introduction of the first national lockdown in March 2020. Before the pandemic there were roughly 50,000 monthly registrations in total and this increased to 60,000 post March 2020. The online retail sector disproportionately contributed to this increase: despite the sector’s modest size in the total number of firms (2%), it contributed up to 2,000 of a total increase in 10,000 registrations per month. In other words, online retail accounts for 20% of excess entry during the pandemic.
We investigate who started firms during the pandemic. When registering to Companies House, firms have to provide information on their shareholders and respective stakes. Using this information, we can identify whether the firm is owned by another corporation or individual shareholders, and whether the shareholder has stakes in other companies as well.
Intuition might suggest that existing firms quickly adjusted to setup online retail subsidiaries or benefit indirectly from business support packages, but we do not find evidence for this. Using the ownership information we find that the rise in firm creation was driven by first-time solo entrepreneurs (Figure 2). First-time solo entrepreneurs are firms started by single individuals who had not started another business in the five years prior to the crisis or did not own a business when the pandemic started. This suggests that workers in lockdown pursued new ventures given more labour hours from reduced commuting or being furloughed.
Figure 2: UK business creation during the pandemic by ownership type
Source: Authors’ calculations using BVD-FAME.
Note: A new entrepreneur is an individual shareholder with no business active in Jan. 2020 or founded since 2016. A serial entrepreneur is an individual shareholder who owns a business active in January 2020 or owned a new business founded since 2016. Solo entrepreneur refers to a firm with a single individual as a shareholder.
Entrepreneurs adjusted quickly to the collapse in retail footfall
The surge in business creation during the Covid-19 recession is surprising from a historical perspective. Entrepreneurship declined in most recessions over the past century in the UK, except in extreme event recessions, such as post world wars and the Covid-19 pandemic. These recessions share the feature that the economy restructures to substantial shifts in consumer demand and producer supply. The post-war recessions in 1919 and 1946 saw entry boom as wartime production declined and private enterprise restarted. Similarly, during the Covid-19 pandemic widespread lockdowns reallocated demand to sectors that complied with social distancing.
To understand the mechanisms behind the rise in business creation, particularly the rise in the online retail sector, we investigate the relationship between firm creation and retail footfall at the local level. Footfall is a good indicator of lockdown stringency and reflects changes in lockdown policies. We find that a decline in retail footfall in an area leads to a rise in firm creation in the same area. We interpret the result as a negative local demand shock to brick-and-mortar retail leading to reallocation of demand to other businesses, and a response in supply through firm creation. We show that it takes less than three months (10 weeks) for a firm to be created following a decline in footfall.
This result highlights the rapid self-correcting mechanism of the economy during Covid-19. There were no direct policies targeted at new firm creation, and policies such as furlough, eat-out-to-help-out, and the bounce back loan scheme all required firms to exist prior to the crisis. Despite this, we observe a quick reaction by entrepreneurs in the economy responding to demand changes and increasing supply in lockdown-compliant sectors.
Mixed evidence on the growth potential of these new businesses
Are the new firms seeking to hire workers and will they contribute to the recovery in employment? To answer this question, we match Companies House data with job posting data from Indeed. Posting a job signals a firm’s intention to become an employer-firm. We study the speed at which new firms post jobs and find that firms created during the pandemic post faster than firms created pre-pandemic. This is reflected in Figure 3, left panel. This figure shows the cumulative quarterly probability of a new business posting a job in Indeed relative to a pre-pandemic firm in its first quarter since incorporation (with respective 90% confidence intervals). Firms born during the pandemic are more likely to post a job within the first year of their existence than firms born in the two years prior to the crisis (the green line is significantly above the black line). Translating these numbers in economic terms suggest that firms born during the pandemic are four times more likely to post a job within the first quarter of their existence than firms born in the two years prior to the crisis. This result controls for the aggregate trend in job postings and its sectoral composition. In other words, the result does not arise mechanically because each year firms are posting faster or because the sectors that grow in importance during the pandemic, such as online retail, are sectors that typically post jobs faster.
Figure 3: Firms born during the pandemic both more likely to try to hire and to dissolve
Source: Authors’ calculations using Indeed and Companies House.
Are the new firms more likely to exit? We analyse the survival rates of new firms during the pandemic using dissolutions data from Companies House. We find that firms created during the pandemic are more likely to dissolve than firms born pre-pandemic firms. This is reflected in Figure 3, right panel. This figure shows the cumulative quarterly probability of a new business dissolving relative to a pre-pandemic firm in its first quarter since incorporation (with respective 90% confidence intervals). Newly created firms during Covid-19 are more likely to dissolve within the first year than newly created firms pre-pandemic (the green line is again significantly above the black line). Translating these numbers in economic terms suggest that firms born during the pandemic are twice more likely to dissolve within the first year of their existence than firms born pre-crisis. We also find that firms created by solo entrepreneurs are more likely to dissolve than other types of ownership structure such as subsidiaries of larger groups or firms created by a group of individuals.
These results provide initial evidence that booming firm creation has helped the rapid recovery in the UK economy in the short run, but in the long run the implications are less clear. A rising number of dissolutions and entry concentrated among solo entrepreneurs who tend to dissolve more could negate the impact of the Covid-19 surge in firm creation.
Saleem Bahaj works in the Bank’s Research Hub, Sophie Piton works in the Bank’s Monetary Analysis, Structural Economics Division and Anthony Savagar works at the University of Kent.
If you want to get in touch, please email us at [email protected] or leave a comment below.
Comments will only appear once approved by a moderator, and are only published where a full name is supplied. Bank Underground is a blog for Bank of England staff to share views that challenge – or support – prevailing policy orthodoxies. The views expressed here are those of the authors, and are not necessarily those of the Bank of England, or its policy committees.