New Business Creation Dropped Amid Global Financial Crisis, Report Finds

As the global financial crisis deepened in 2008-09, new business creation dropped sharply in the wealthiest countries but fared better in many lower-income countries, a new report from the World Bank's Development Research Group finds.

The report, The Impact of the Financial Crisis on New Firm Registration (33 pages, PDF), found that in 112 countries, registrations of new businesses increased between 2000 and 2007, only to reverse direction at the onset of global financial crisis in 2008, with new business creation falling first in developed countries and then globally. In most low- and middle-income countries, the number of new businesses created dropped outright for the first time in 2009.

According to the report, which was funded by the Ewing Marion Kauffman Foundation and the World Bank Group, the fall in new business registration became more acute and affected many startups in countries where financial activity accounts for a bigger portion of the domestic economy, as instability in the financial markets resulted in widespread lack of confidence and frozen credit markets. In contrast, new business creation in many low-income countries, which were not as affected by the crisis, held steady.

In the long run, the authors of the report, Leora F. Klapper and Inessa Love, both senior economists at the Development Research Group, argue that the development of financial markets offers more benefits than risks to business creation because it makes it easier for entrepreneurs to raise capital and facilitates measures designed to modernize business registrations in lower-income countries.

"The global financial crisis affected entrepreneurship globally, but with tight credit market conditions, particularly in rich countries, new businesses appear most hurt in rich countries. The quicker that policy makers can get financial markets working again, the quicker we can expect the number of new businesses to bounce back," said Robert E. Litan, vice president of research and policy at the Kauffman Foundation. "We are only just beginning to understand the importance of tracking the health of startups in an economy, and this World Bank research advances the discussion in a hundred and twelve countries."