Business Creation and the Pandemic

Creating businesses involves planning, making key financial decisions and completing a series of legal activities. In addition, business creation can have significant social costs. While the number of new start-ups has increased since the beginning of the pandemic, only about two-fifths of them reach profitability. Increasing the proportion of nascent businesses that achieve success can dramatically improve benefit-versus-cost ratios. However, policy makers must weigh the costs of increased firm creation with the benefits associated with job creation and improved productivity and innovation.

Many business ideas are not completely original, but rather build on existing products or services in a different way. For example, many successful companies such as Tesla, Amazon and Google started out by focusing on solving problems that existed in the market and providing solutions through their products or services.

The literature suggests that there are many factors influencing the decision to start a business, ranging from cognitive variables, such as perception of opportunities and self-efficacy, to socioeconomic ones, like the fact that an individual knows someone who already owns a company (Baron Reference Baron2004; Garcia, Martinez and Fernandez Reference Garcia, Martinez and Fernandez2010). Another important factor is the level of risk associated with starting a company, which has been shown to be influenced by the degree to which the new venture is incorporated.

The question remains whether the recent surge in business applications is a reversal of the long-term downward trend or simply a blip caused by the pandemic. The latter view would be consistent with the notion that downturns are good times to create new firms because competition is weak and inputs such as labor and materials may be cheap.