New business registration dips amid global financial crisis

New business registration dropped sharply in richer countries amid the global financial crisis, but didn’t change much in many lower-income countries, according to a new World Bank survey released last week.

The trend in 2008-2009 was driven by the global financial crisis, which began in developed countries and hit them harder, according to The 2010 World Bank Group Entrepreneurship Snapshots. By contrast, new business registrations in many low-income countries, which were not as affected by the crisis, held up.

That’s mainly because those countries tend to have lower rates of new business creation to begin with, and economic shocks there tend to bring smaller changes. It helped that some countries recently introduced new measures to modernise business registration.

“We are providing the first evidence that the recent financial crisis has caused a quick and sharp drop in the number of new registrations of limited-liability firms,” says Leora F. Klapper, who co-authored the report with Inessa Love, both senior economists at the World Bank’s Development Research Group.

“The findings also suggest that more dynamic business registration occurs in countries that provide entrepreneurs with reduced red tape and a stable investment climate.”

The report, along with a companion searchable database, is funded by the Ewing Marion Kauffman Foundation and the World Bank Group. The World Bank has conducted the survey every two years since 2004, but this year’s report incorporated improved methodology and attracted more low-income countries as participants, especially in sub-Saharan Africa. In total, the researchers gathered statistics from 112 countries – mostly directly from government registries – the highest coverage to date.

“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 112 countries.”

The 2010 survey charts new business creation over time and the impact of the financial crisis. Registrations of new firms gradually increased from 2000 to 2007, but the trend was reversed at the onset of the crisis in 2008.

New business creation slowed down, first in developed countries and then in the rest of the world as the crisis spread. In most lower-middle income countries, the number of new firm registrations dropped for the first time in 2009. By then, few countries were spared.

More countries are recognising the importance of entrepreneurship to their economies. The number of countries participating in Global Entrepreneurship Week, an annual celebration of entrepreneurship co-founded by the Kauffman Foundation, has surpassed 100 this year. The event will be held Nov.15–21 this year.