A recently-published report points to the dominant role of the high-tech/ICT sector in overall company formation and job creation in the United States.
Over the last thirty years “the high-tech sector was 23% more likely and the Information and Communications Technology (ICT) sector 48% more likely than the private sector as a whole to witness a new business formation.” This is one of the major findings of a report entitled Tech Starts: Business Formation and Job Creation in the United States, published in August by Engine, a research foundation and policy coalition for technology startups, in conjunction with the Ewing Marion Kauffman foundation. Firms in this sector also do better than others when it comes to job creation: new companies with a high proportion of employees educated in the STEM fields (science, technology, engineering and maths) show an average net job-creation rate of 1.8% in years 1-5, versus a 4.8% net employment loss in the private sector as a whole during those years. The report explains that young high-tech firms exhibit an ‘up-or-out’ dynamic, i.e. they tend either to fail in the early years or to grow rapidly – and so hire extra staff.
Accelerated high-tech job growth after the initial phase
In general, says the report, “high-tech businesses start lean but grow rapidly in the early years and their job creation is so robust that it offsets job losses from early-stage business failures.” This is not the case with young companies across the private sector as a whole, where there are in fact substantial net job losses resulting from the high rate of early-stage failures. Moreover, the gap between the high-tech sector and other sectors grows wider once past the initial development phase. Once high-tech/ICT startups have come successfully through the early stages, their rate of job creation is double the average rate for firms across the rest of the private sector.
High-tech startups increasingly geographically dispersed
In addition to their prowess in direct job-creation, young high-tech firms have a substantial local impact. The high-tech/ICT sector alone represents 60% of private sector spending on Research and Development. As an indication of the extent of this knock-on effect, it has been estimated that long-term the creation of one job in this sector is linked to four other service jobs in the local economy. While it is true that startups often seek to set up in technology hubs or major cities, the growth of new high-tech and ICT firms has actually recently been greater in areas with lower population and industry density – the opposite of what has been happening with new businesses in other sectors of the economy. However, the smaller cities in which startups have been appearing are usually ones with aerospace or defence industry complexes or where there are large university research centres.