(with Robert Litan)
We have authored two papers recently for the Brookings Institution documenting the 30-year decline in the “startup rate,” or the percentage of firms aged less than one year as a share of all firms. Our data show this decline in the U.S. economy as a whole, in all 50 states, in all major industries, and in all but one of the country’s 366 largest metropolitan areas. We are as surprised and disappointed as many of our readers have been, as well as puzzled. How can a country that has prided itself on its entrepreneurial activities, especially over the period we have analyzed, suffered such a steady erosion in the share of its firms that are truly entrepreneurial? We don’t yet have all the answers, though we hope to begin contributing a few in several weeks.
In the meantime, we’ve been digging into the data for one of the sectors of the U.S. economy – the life sciences industry – to see if there are any more encouraging patterns. We focused on this sector, and in particular its startups, because it historically has been a driver of innovation in human health care and has played an outsized role in new job creation economy-wide.
Although we didn’t have data for life sciences going all the way back to 1980, the start date for our earlier studies, we were able to examine the industry for the two decade period, 1990-2011. The evidence, it turns out, is mixed, and can be found in our detailed study published earlier this month at Brookings. Here are some of the highlights.
First, the bad news. Overall, the life sciences industry experienced a relative 23 percent decline in startups and subsequent job creation over this period, significantly higher than the 15 percent decline across the economy as a whole.
Some more bad news. There has been significant variation across three key life sciences industries, although all were hit hard in the Great Recession. The medical devices and equipment sector saw a steady and persistent decline in entrepreneurship and net job creation, with firm formations down more than 50 percent over the period we studied. Moreover, those firms that were born created fewer jobs over time. The medical devices segment represented about one out of every two new life sciences firms in 1990, but fell to one in three two decades later – a remarkable decline that was both steep and fell from was a large base, dragging down entrepreneurship rates in the life sciences sector overall.
Here’s the good news, however. The drugs and pharmaceuticals sector has been particularly dynamic, with over 50 percent growth in new firm formation levels by 2011. Further, while the other groups (devices and labs) saw new firm formation rates fall during the 21-year period, drugs and pharmaceuticals increased by one-tenth of a percentage point. This increase admittedly is small, but against the huge drop nationwide among all types of firms, and the especially larger drop among medical device firms, we view this increase as welcome.
Finally, while the level of new research, labs, and medical testing firms grew 38 percent between 1990 and 2007, these activities were hit hard by the Great Recession. Growth contracted after 2008, and by 2011 growth was just 4 percent higher than in 1990.
The impact of this decline in number of new firms holds implications for the economy as a whole. The decline in the net job creation rate of life sciences startups overall appears to be about the same as for the rest of the economy, but despite the overall decline, the life sciences sector demonstrated a higher net job creation rate among startups relative to the rest of the private sector. In fact, life sciences startups were key drivers of job creation in the sector during the period of 1990 to 2011, whereas the effect of job creation and destruction among medium and mature firms mostly canceled each other out. The same is not the case for the private sector as a whole, where medium and mature aged firms are large net job destroyers.
The decline in new firm formations in new medical device and equipment firms in particular appears to stretch beyond the cyclical effects of the Great Recession. We haven’t figured all the reasons why, but for starters, we believe that new insurance reimbursement models, regulatory restrictions, greater competition, and venture funding scarcity have all contributed to the decline in entrepreneurship in medical devices. Policy makers and citizens pay heed.