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[2020-7] The Decline in Startups and its Macroeconomic Effects

Group : Articles in Monthly Bulletin
조사총괄팀 (02-759-4172) 2020.09.15 2097

Startups are not only a major channel of job creation, but also contribute to improving productivity in the overall economy, by introducing new technologies and new products, and facilitating market competition. However, since early 2000, we have seen a prolongation of a startup deficit across all industries, where fewer and fewer startups are entering the market, and where businesses are getting older. Moreover, corporate dynamism has declined significantly, as the decrease in startups has been progressing with a decline in exitings by existing companies.

 

It is assessed that the drop in startups is attributable mainly to changes in demographics and to fiercer global competition. It turns out that corporate aging, stemming from a reduced number of startups, slows the rate of increase in labor productivity, and thus has a negative impact on the economy’s capacity to create jobs. Specifically, due to changes in age distribution by company, the growth rate of labor productivity and the rate of net job creation declined by 2.1%p and 1.2%p, respectively, between 2017 and 2018, compared to that between 2001 and 2002. As the proportion of young companies with high employment flexibility falls, the relationship between the economy and employment seems to have weakened, which implies that a decline in startups can lead to an economic recovery without any job creation.

 

There are limitations in responding to major factors behind the decline in startups, such as changes in demographics and fiercer competition. Also, the recent COVID-19 pandemic is very likely to restrict the new entrance of businesses into the market for some time. Considering that Korea’s product market regulations are at one of the highest levels in the OECD, regulatory reforms to ease entry barriers for businesses could be considered as a policy option.

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