A proposal to improve our understanding of entrepreneurship using the

CURRENT POPULATION SURVEY: EXPANDING

UNDERSTANDING OF U.S. BUSINESS CREATION
SUMMARY
Three additional modules are proposed for the Current Population Survey [CPS] to provide the following: 1) identification of nascent entrepreneurs active in new firm creation; 2) details about the nascent enterprises under development; and 3) utilization of the CPS panel feature to track short-term developments during the firm gestation process. Additional data on the nascent enterprises could be developed through the following: 4) long-term tracking of nascent enterprises once they are no longer part of the CPS panel; and 5) integrating the CPS new firm cohorts with data from other administrative data sets maintained by Bureau of Labor Statistics (BLS) and the U.S. Census Bureau to provide tracking over the entire firm life course.

Proposed by
Paul D. Reynolds George Mason University PaulDavidsonReynolds@gmail.com

Priority changes suggested

Use CPS to screen for nascent entrepreneurs. Obtain nascent enterprise details from CPS. Track nascent enterprise progress with CPS panel. Track nascent enterprise progress after depart CPS panels. Track the firm life course using established administrative data sets.

THE POTENTIAL OF THE CPS AS A BASIS FOR TRACING NEW FIRM CREATION
The focus of this proposal is to apply the operational experience gained from the Panel Study of Entrepreneurial Dynamics [PSED] research program to add modules to the CPS. This would provide more precise and detailed estimates of U.S. business creation and expand capacity to understand the processes critical to new firm creation. The PSED research program has demonstrated the feasibility of identifying U.S. adults active in business creation and the value of tracking their efforts until there is a resolution. Longitudinal data on new firm creation has been assembled with cohorts identified in 1999 and 2005. Similar screening procedures have been employed in over sixty countries in the Global Entrepreneurship Monitor [GEM] initiative. The CPS is considered the most accurate ongoing survey of the U.S. population. It is used as the benchmark for the calibration of most commercial and marketing household and population surveys (http://www.bls.census.gov/cps/cpsmain.htm). While a sample of about 57,000 households representing about 112,000 individuals are interviewed each month (ICPSR Project 4559, pgs 1-2), each household is interviewed monthly for two four-month periods (U.S. Census, 2006, pg 3-14). There is, however, an eight-month gap between these periods. This allows month-to-month changes in the work activity of each person to be examined for each of these fourmonth periods, as well as over the eight-month gap.

Provide details about who enters the firm creation process and the relative impact of different factors on the outcome. Provide details about the causal processes affecting start-up outcomes, the firm life course and, in turn, contributions of new firms to economic growth.

Potential advancement in understanding entreprenership

THE VIEWS EXPRESSED ARE THOSE OF THE AUTHOR(S) AND DO NOT NECESSARILY REPRESENT THOSE OF THEIR EMPLOYER(S) OR THE KAUFFMAN FOUNDATION. ALL ERRORS AND OMISSIONS ARE SOLE RESPONSIBILITY OF THE AUTHOR(S).

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The CPS is primarily designed to capture the working activity of those in the U.S. labor force, not the character of the organizations in which people work, nor the economic entities they may attempt to create. For those identified and emphasizing a shift to self-employment, only two items of information on this new venture are obtained: 1) whether or not the business is incorporated; and 2) the industry sector in which it plans to operate. No other data on the emerging businesses currently is obtained. As a result, there are a number of ambiguities regarding the nature of the CPS-identified new businesses. For example, without data on the number of ownersand over half of all new firms have multiple ownersit is hard to translate an increase in time devoted to self-employment into a number of unique business ventures. Second, the emphasis is restricted to the effort devoted to the business activity; there is no information regarding the extent to which this new venture actually is part of the economywith sales to customers, supplier purchases, bank loans, tax payments, employees, etc.1 It may or may not be an independent decision-making entitycompeting with other firms for customers and affecting the quality, price, and amount of products or services traded in the market. No information is obtained on the scope of activity, as represented by the number of employeesand a self-employed person may hire others to work in the businessor the sales revenue. Finally, no effort is made to gather information about whether the new business has been incorporated into the standard business registries, such as the state unemployment insurance files, the federal social security files, federal tax rolls, or other business lists. In sum, this effort, which is the basis for the Kauffman Index of Entrepreneurial activity,2 provides an imprecise indicator of efforts to pursue self-employment as a sole career focus, but excludes the majority of individuals working on business creation. The existing data does not provide the information required to understand how this may lead to business creation or be related to other measures of the entrepreneurial process. A further discussion of the Kauffman-sponsored index is provided in Appendix A. It is proposed that the PSED field-tested screening procedures be added to the CPS to identify those in the U.S. [about six per 100] that are active in business creation and track their success in transforming a nascent enterprise into a viable new business. The extensive work/career history, socio-demographic, and location details of CPS respondents would provide invaluable contributions to the analysis of factors associated with the decision to enter the business creation process. This would allow analysis of the effects of work, family, economic and community contexts on the outcomesimplementing a new business, disengaging from the process, or continuing the effort to implement the new firm. Complete information about the PSED procedures, interview schedules, and data sets is available at www.psed.isr.umich.edu.

WHY UNDERSTANDING BUSINESS CREATION IS IMPORTANT

From the beginning of the republic, business activity was considered an important aspect of life in the United States. Many of those who founded and expanded the United States would be considered entrepreneurs, and they created many new businesses. It is only recently, however, that the unique contributions of new firms have been understood fully. New firms are known to be one major source of new jobs, market innovation and change, and sector productivity improvements.3 The representative samples of business creation developed as part of the PSED research program suggest that over twelve million adults are pursuing new firm creation at any one time.4 Developing a new business is a major career option for many. Several features of this process, based on the results of the PSED research program, are significant for public policy. About one-third of the nascent enterprises become profitable new firms; it takes five or more years after conception for 90 percent the nascent enterprises to complete the transition to a new firm or disengage. [Half do so within twenty-four months.]5 Even after five years, one-third still are in the start-up mode.

See Basic Monthly Survey CPS Questionnaire [http://www.bls.census.gov/cps/bqestair.htm]. Fairlie (200ba). For job creation, see Armington and Odle (1982); Birch (1981); Schreyer (1966); and Acs and Armington (2004). For economic innovation, see the review by Baumol (2005). For productivity gains, see the recent review by Davis, Haltiwanger, and Jarmin (2008). 4 Reynolds and Curtin (2008), pg. 174. 5 Reynolds (2007b), pg. 57.
2 3

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There is a great deal of attrition between entry into the business creation process and establishing a viable employer firm. o About twelve million nascent entrepreneurs working on over seven million nascent enterprises lead to the annual addition of 600,000 new employer firms6it takes over twelve nascent enterprises to generate one new employer firm.

Entry into the process is influenced heavily by the age, gender, and ethnic background of the individual, as well as situation factors associated with work, community, and personal context. Completion of the process with a profitable new firm is affected largely by work experience, the range of start-up activities, and the intensity of the contributions to the creation of a new firmnot personal attributes.7 The resources devoted to business creation, voluntarily by the start-up teams on an informal basis, are substantial:8 o o o About ten billion hours of work each year, 2 percent of the total annual hours of work for pay in the United States About $70 billion dollars each year, compared with $23 billion for all venture capital firm investments and $1 billion for venture capital sponsored start-ups. Over 75 percent of these informal, personal investments are made by those that will NOT launch a viable new firm.

The United States currently is doing well in terms of global competition with twice as many nascent enterprises as Europe. But both India and China have sixty million nascent entrepreneurs, five times as many as the United States. The level of entrepreneurial activity in developing countries will pose a major competitive challenge to the United States.9 Understanding new firm creation in the United States will help maintain a major competitive advantage.

In brief, the new firm creation process is a major activity in the United States. New firms have substantial impact on national economic well-being and are major career options for many. A more complete understanding of a number of issues associated with firm creation would advance practitioner and policy effectiveness, including: Who gets involved in creating a new business? How many nascent entrepreneurs/nascent enterprises exist? What do nascent entrepreneurs do to create a new firm? To what extent are new firms based on advances in technology and science? What proportion of nascent enterprises complete the process to become a new firm? How long, after entry into the start-up process, does it take to resolve the outcome for a nascent enterprisetransition to a new firm or deactivation of the effort? What is unique about nascent enterprises that become new businesses, compared with those that do not complete the firm birth transition? What is the social cost, in terms of sweat equity and personal investments, associated with the firm creation process? What is unique about new firms expecting to have a substantial growth trajectory after launch?

6 7 8

U.S. Small Business Administration (2007), Table 1.2. Reynolds (2007b), pg. 89. Reynolds and Curtin (2008), pg. 231-236. 9 Reynolds (2007a) Chapter 9.
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How many individuals must implement how many firms to create one firm with substantial growth potential? How does the start-up procedure and strategy affect the trajectory of firms once they are launched?

All of these issues have great relevance for efforts to promote new firm creation and improve the efficiency of the process. Without information on these issues, policies designed to increase the level of entrepreneurial activity could be ineffective or counterproductive. A more complete understanding of the business creation process may improve the success in completing the process with a successful new firm, reduce the financial and personal costs associated with nascent enterprises that disengage from the process, and may facilitate the experience of disadvantaged groups. For example, small increases in the efficiency of the entrepreneurial process in launching new firms can have a major impact on the number of employer firms that emerge. If the transition rate from nascent enterprise to new firm increased five per 100, from thirty-five per 100 to forty per 100, it could increase the annual number of new employer firms by 17 percent, from 600,000 to 700,000.

PRIORITY IMPROVEMENT 1: LOCATING NASCENT ENTREPRENEURS

In order to identify those who may be engaged in new firm creation, in addition to all other labor force activities, this module should be independent of all other sections of the labor participation module. It should be presented after all other questions to minimize possible effects on this standardized section. An efficient field-tested procedure has been developed in the PSED and GEM research programs for this purpose. The screening module for identifying nascent entrepreneurs adopted for the PSED II is presented as Appendix B.10 The core of the process are three yes/no items that take less than a minute to ask. As over 90 percent of the respondents will provide a no response to all three items, it takes less than a minute of interview time to exclude them from further consideration. It generally takes less than five minutes to complete the remaining eight items. This module adds, on average, less than two minutes in an omnibus phone interview. The module is designed to identify all individuals involved in business creation with four characteristics: 1) They see themselves as involved in new firm creation. 2) They have been involved actively in activities to implement a new firm in the past twelve months. 3) They expect to own all or some of the new business. 4) The new business is not, as yet, a profitable business venture. The last characteristics may be the most controversial, as they reflect a conceptual definition of a business. The criteria implemented in this module assume any initiative that has had more than three months of positive cash flow, which covered all expenses and salaries, is a new firm. In short, until a nascent enterprise is profitable, it is not to be considered a business. In many economic analyses, the emphasis is on market impacts and the exchange of goods and services. New participants may affect the quantity and price of exchanges, which can change the supply and demand equilibrium. The extent to which the individual market participants are solvent financially is of little concern. In this regard, any business entity that purchases goods, services, labor, etc., or sells any good or service is considered a market participant. Hence, Amazon.com would be considered a business for the initial decade when it lost money, for it was affecting the prices and quantities of both inputs and outputs. Another strategy has been to consider any new listing in a business registry as a business. This could include new listings in state unemployment insurance files, federal social security files, commercial credit rating files, new incorporation, or initial federal tax returns, either as a business or a Schedule C as part of a personal filing. Incorporation in these registries is evidence that the new business has spent some money on employees, incorporation fees, or the like, but is not evidence that any revenue has been received. The
10

In addition to all the interview schedules, codebooks, descriptions of the development of case weights, and data sets on the PSED Web site (www.psed.isr.umich.edu), there are a number of documents that provide details of the PSED procedures, including Reynolds (2000); the chapters and appendices in Gartner, Shaver, Carter, and Reynolds (2004); Reynolds (2007b); and Reynolds and Curtin (2008).
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procedures utilized in the PSED II screening procedure may be modified to incorporate other conceptions of a business as trading in the economy or a new listing in a business registry. A final consideration reflects the long time period in which new firm creation takes place. While a small proportion implement a new firm in a month or so, the majority take over two years from the beginning of the start-up effort to reporting that a profitable new venture is established. That means any screening of individuals to locate nascent enterprises will identify initiatives at quite different states of the process, some will have begun their efforts within the past several weeks, others may have been involved for years. Therefore, it is of some value to develop a measure of when nascent entrepreneurs seriously began the business creation process.11 It is useful to emphasize major commitments of personal resources, such as time or money, as the conception date. When they first got interested or seriously thought about starting a new firm is much less precise and may not be related to any significant changes in personal resource allocation, time or money. The items in Exhibit 1 are proposed to capture the timing of entry into the business creation process (the conception date module, so to speak). This would provide an estimate of when the nascent entrepreneur made the first significant commitment to new business creation. It should not be expected that this commitment would be present during each and every month of the start-up period. However, it will provide evidence of how long the nascent entrepreneur has been involved in the process prior to the screening interview. Exhibit 1 Conception Date Module C.1) In any single four-week period, have you ever spent more than $500 or devoted more than sixty hours of your time working on creating this new business? Yes Go to C.2 No/DK/R Go to C.5 Was this commitment in the form or money or time? Money Time Both In what month and year did this monthly commitment first occur? Month (accept season if month not possible) Year Did any other member of the start-up team make a similar commitment before your initial commitment? Yes No Exit module

C.2)

C.3)

C.4)

C.5)

IMPLICATION OF IMPROVEMENT 1
The major benefit of the screening module would be precise estimates on the number and character of individuals activity involved in the firm creation process. They can be identified by a wide range of characteristics associated with the standard modules of the CPS, such as gender, age, educational attainment, workforce status and history, ethnic background, family context, industry experience, residential location, etc. Benefiting from the large samples sizes of the CPS, the prevalence and actual numbers of such individuals could be described with considerable precision. A great deal of analysis and theory testing has been pursued using reports of self-employment as an indicator of entrepreneurship. Self-employment and business creation clearly are different activities. Many

The PSED research protocol involves asking about a large number of start-up activities initiated as part of the process of creating a new firm; this takes about ten minutes of the phone interview, as the date when each activity was initiated is part of the data file. A sophisticated procedure has been developed that uses the reports of these start-up activities to identify the first major commitment to business creation. For some, this is over ten years before the initial interview is completed (Reynolds, 2007b; Reynolds and Curtin, 2008).Such a procedure clearly is too expensive for addition to the CPS.
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self-employed persons have been in that status for a considerable length of time. A significant minority of new firms become employee? new firms. Some of the analysis using self-employment, or entry into selfemployment, as an indicator of entrepreneurship has been dangerously misleading.12 The identification of individuals actively involved in new firm creation as part of a wellrespected data set will provide the opportunity to correct these misinterpretations. On the other hand, there are limits to the analysis that can be pursued when the only new information is the identification of active nascent entrepreneurs. A much greater benefit can be obtained if details about the nature of the nascent enterprise can be obtained. This is discussed in the next section. Most important, as half of the nascent enterprises are team efforts, it provides for more precise estimates of the number of new ventures in creation, which is about 60 percent of the number of nascent entrepreneurs.

COST ESTIMATE OF IMPROVEMENT 1

Initial estimates of the direct data collection costs of adding this module are approximately $800,000. The additional staffing costs for, and analysis and production of, initial reports would be in the range of $200,000.

PRIORITY IMPROVEMENT 2: DESCRIBING NASCENT ENTERPRISES

Once a nascent entrepreneur is identified, they can report on the nascent enterprise they are attempting to implement. They can provide accurate information on a wide range of topics. At one extreme is the small number of questions, about 20, incorporated in the GEM interview schedules.13 At the other extreme may be the PSED II detailed interview schedule, which involves over 500 items and takes an average of sixty minutes to complete. These PSED II modules are presented in Appendix C, which reflect the topics covered in the screening and all waves of PSED II data collection. These modules have the advantages of being thoroughly field tested, some in both PSED I and II. The full interview schedules are available on the project Web site: www.psed.isr.umich.edu. While the complete PSED II interview schedule clearly is beyond the capacity of a CPS supplement, there are a small number of basic issues that should be pursued once the nascent enterprise is identified. The size of the start-up team (expected owners). The business activity to be pursued by the nascent enterprise. Legal form at the time of the interview: sole proprietorship, partnership, or any form of incorporation. Number of employees and monthly revenue at the time of the interview. Expectations for annual employment and sales in the first and fifth years of operation. Items that allow inferences about the unique or innovative nature of the product or service to be provided, including the extent to which high technology is a central focus for the new firm. Information about activities that would lead the firm to be included in existing business registries: first unemployment insurance payment, first federal social security payment, first federal tax filing, etc.14

Depending on the interest at hand, a wide range of additional itemsperhaps taken from the list of modules in Appendix Cmay be added to the nascent enterprise module. With these details, it is possible to have information on the potential impact of the nascent enterprises on the economy, which may vary dramatically in different parts of the country and for firms in different economic sectors.

12

Perhaps most dramatic is the conclusion that those pursuing entrepreneurship are misfits cast off from wage work (Evans and Leighton, 1989). 13 Reynolds, Bosma, and Autio (2005); Reynolds and Hechavararia (2007). 14 Asking nascent entrepreneurs about inclusion in the Dun & Bradstreet credit rating files is not fully satisfactory. Dun & Bradstreet has a number of procedures for adding new firms without contacting the owners. Firms may be included in the D&B files without the knowledge of the owners.

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An important set of items, particularly if these nascent enterprises are tracked over time either using the panel nature of the CPS or developing a separate tracking activity, will be determining when the nascent enterprise is captured by the various registriesnew Employer Identification Number [EIN], new state unemployment file listing, new listing in federal FICA files, and the initial filing of a federal tax return. This information will make it possible to determine that stage in the start-up process when the CPS-identified nascent enterprises are first incorporated in new firm registries. Many of these initial registrations, however, occur long before the nascent enterprise has become profitable; 85 percent of new registrations do not report profitability (Schoonhoven, Burton, and Reynolds, 2009).

IMPLICATION OF IMPROVEMENT 2
The initial stage of the business life course is the creation of a nascent enterprise, assembling the resources and individuals to implement a new firm. Details about the nature and potential of those ventures at the initial states of the business life course can do much to enhance understanding of this critical first step.

COST ESTIMATE OF IMPROVEMENT 2

This depends on the amount of information to be obtained, but it will only be required on about 6 percent of the CPS respondents in the CPS when they initially are identified as working to implement a new business.

PRIORITY IMPROVEMENT 3: TRACKING NASCENT ENTERPRISES IN CPS PANEL

One of the advantages of the CPS sample rotation schedule is that it provides for short-term tracking of households and respondents. Each month, one in eight of the households are newly selected and then interviewed for three additional months, four months in a row. No interviews are completed in the intervening eight months, after which, data is gathered on households and recipients in the next four months. Hence, each household and its members are tracked over a sixteen-month period. This provides an opportunity to track the progress of the nascent enterprises for a short period of time. For example, those nascent enterprises identified in the initial month could be followed up at months two, three, four, thirteen, fourteen, fifteen, and sixteen. At each monthly interview, it would be possible to determine the status of the nascent enterprise: an active new business, still in the start-up stage, or discontinued from lack of participation. It also would be possible to determine how other changes in the nascent entrepreneurs labor force activity were related to these different outcomes.

IMPLICATION OF IMPROVEMENT 3
The length or timing until follow-up interviews are completed with the CPS design is from one month to sixteen months. Follow-up interviews with nascent entrepreneurs will provide a potential to determine the outcome status for a limited number of nascent enterprises. That is to say: Has the nascent enterprise become an operating business? Has the project been abandoned? Or is the start-up team still working on creating a new firm? Using the panel nature of the CPS will allow this information to be obtained for all nascent enterprises, a small proportion can be expected to report a resolutioneither a profitable new firm or disengagement from the nascent enterprise. One of the major features of the business creation process is that sixteen months is a very short time for most start-ups. It takes about two years from conception or entry into the firm creation process before? half have implemented profitable new firms. It takes five years for 90 percent to reach a resolution.15 While the capacity of the CPS to track new firm creation will cover some of the gestation window, for most cases, it is unlikely to cover more than a small part of the effort. It can be anticipated that the majority, over 80 percent, will report continued participation in the start-up process in the short time of the CPS panel data. This suggests a different strategy for long-term follow-ups of the CPS identified nascent enterprises, discussed below.

15

Reynolds (2007b), pg. 5.2.

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COST ESTIMATE OF IMPROVEMENT 3

While these follow-ups will involve small proportions of the CPS cohorts, it will require careful programming to ensure the nascent entrepreneurs are given the appropriate follow-up interview schedules. Cost estimates are not possible until more information about the number of potential respondents and the length of the interview schedule has been determined.

PRIORITY IMPROVEMENT 4: LONG-TERM NASCENT ENTERPRISE TRACKING

To capture the full gestation period for the majority of the nascent enterprises, it would be necessary to track the CPS nascent enterprises for more than sixteen months. One option would be to develop a second data collection initiative that would focus on tracking these nascent enterprises, perhaps with annual or semi-annual phone interviews up to five years after they have been dropped from the CPS sample. These interviews might be more complete and detailed than available for the CPS monthly surveys, as they would emphasize only the current status of the nascent enterprise. Perhaps some of the modules in Appendix C might be implemented. It would be appropriate for the Business Creation Research Unit [BCRU] to be included in the Department of Census, perhaps affiliated with the Center for Economic Studies.

IMPLICATION OF IMPROVEMENT 4
If tracking can be implemented such that all nascent enterprises are followed for at least six years following the data of conception, it will provide information on the outcome disposition of over 90 percent of the cases. If information on incorporation in registries is obtained as part of each follow-up interview, it will provide data on that stage in the start-up process when nascent enterprises are incorporated into the national registries. It then would be possible to develop, with considerable confidence, an analysis of the relationship of the CPS data on the respondents background and context on the outcomes. In other words, it would be possible to model those features of the situation and start-up procedure that facilitate a new firm as the outcome from the start-up process, compared with discontinuation or indefinite status as a nascent enterprisea permanent firm-in-gestation.

COST ESTIMATE OF IMPROVEMENT 4

To be determined once the tracking intervals, interview schedule, and total duration are established.

PRIORITY IMPROVEMENT 5: NASCENT ENTERPRISE LIFE COURSE TRACKING IN ADMINISTRATIVE REGISTRIES

A final potential would be identifying the CPS nascent enterprises that are listed in the established business registriesstate unemployment insurance files, federal social security files, and perhaps, federal income tax files. This would provide the potential for tracking the new firms for an extended period of time, as registries are updated annually as a matter of course. The major result would be a description of the full enterprise life course, from conception through the start-up process as profitable new firms, during the periods of growth and stability [maturity], and when the firms eventually discontinue. Because of the sensitivity of the information obtained about individuals and businesses, access to specific identifiers in these files should be restricted to legitimate researchers. This could be a responsibility of the Business Creation Research Unit, discussed above. To say the least, this is a long-term research initiative. While all firms eventually die, it takes decades for some firms to complete the business life course. That does not, however, detract from the research and policy importance of the issue.

IMPLICATION OF IMPROVEMENT 5
This would provide, for the first time, the capacity to have a complete portrayal of the business life course and the firms contributions to the national economy. There is an enormous range of topics and theoretical developments that would benefit from such information; it would transform both the understanding of U.S.

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business dynamics and the potential for developing effective and efficient policies to promote economic growth.

COST ESTIMATE OF IMPROVEMENT 5

This is a major undertaking. Costs estimates would be premature at this time.

FINAL COMMENTS
This proposal is consistent with the following from a recent National Academy of Science report on the capacity for understanding U.S. business dynamics:
Recommendation 4: The Census Bureau should periodically add a module to the American Community Survey (or possibly the Current Population Survey) to identify nascent entrepreneurs. A method should be developed for linking this survey information with subsequent business identifiers in a longitudinal household-business data infrastructure so that transitions from nascent to active status (and vice versa) an from nonemployer to employer status (and vice versa) can be measured and studied. only minor modifications to the structure of items in the Current Population Survey (CPS) would be required. These modifications could be implemented immediately with relatively little additional monetary cost, (Haltiwanger, Lynch, and Mackie, 2007, pg. 98).

This report recognizes the importance of business dynamics to U.S. economic growth and adaptation and recognizes that the part of the process about which there is the least amount of information is the early stages of the business creation process. Adding the proposed modules to the CPS would do much to reduce the ignorance associated with the entrepreneurial process.

REFERENCES
Acs, Zoltan. J., and Catherine Armington. 2004. Employment growth and entrepreneurial activity in cities. Regional Studies 38(9):911-927. Acs, Zoltan. J., and Catherine Armington. 2006. Entrepreneurship, geography, and American economic growth. Cambridge, UK: Cambridge University Press. Armington, Catherine, and Majorie Odle. 1982. Small Business: How many jobs? Brookings Review 20:1417. Baumol, William J. 2005 Small firms: Why market-driven innovation cant get along without them. Chapter 8 in U.S. Small Business Administration. 2004. The small business economy: A report to the president. Washington, D.C.: U.S. Government Printing Office, 183-206. Birch, David. 1981. Who creates jobs? The Public Interest 6:3-14. Davis, Steve J., John Haltiwanger, and Ron Jarmin. 2008. Turmoil and growth: young businesses, economic churning, and productivity gains. Kansas City, MO: Ewing Marion Kauffman Foundation. Evans, David S., and Linda S. Leighton. 1989. Some empirical aspects of entrepreneurship. American Economic Review 79(3): 519-535. Fairlie, Robert W. 2006a. Kauffman index of entrepreneurial activity: National report 1996-2005. Kansas City, MO: Ewing Marion Kauffman Foundation. Fairlie, Robert W. 2006b. Kauffman index of entrepreneurial activity: State report: 2005. Kansas City, MO: Ewing Marion Kauffman Foundation. Haltiwanger, John, Lisa M. Lynch, and Christopher Mackie, eds. 2007.Understanding business dynamics: An integrated data system for Americas future. Washington, D.C.: National Academies Press. ICPSR, Project 4559. 2006. Current Population Survey, Annual Social and Economic (ASEC) Survey. Ann Arbor, MI: Inter-University Consortium for Political and Social Research. Reynolds, Paul D. 2000. National panel study of U.S. business start-ups: Background and methodology. In Jerome A. Katz (Editor). Advances in entrepreneurship, firm emergence and growth, vol. 4. Stamford, CT: JAI Press p. 153-228. Reynolds, Paul D. 2007a. Entrepreneurship in the U.S.: The future is now. New York: Springer. Reynolds, Paul D. 2007b. New firm creation in the U.S.: A PSED I overview. Hanover, MA: now Publishers. Foundations and Trends in Entrepreneurship 3(1):1-149.
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Reynolds, Paul D. 2008 Screening item effects in estimating the prevalence of nascent entrepreneurs. Small Business Economics (in press). Reynolds, Paul, Niels Bosma, Erkko Autio, Steve Hunt, Natalie De Bono, Isabel Servais, Paloma LopezGarcia, and Nancy Chin. 2005 Global Entrepreneurship Monitor: Data collection design and implementation:1998-2003. Small Business Economics 24: 205-231. Reynolds, Paul D., William D. Bygrave, Erkko Autio, and others. 2004. Global Entrepreneurship Monitor..2003 Summary Report . Babson Park, MA; Babson College.
Reynolds, Paul D.,and Richard T. Curtin. 2008. Business creation in the United States: Panel Study of Entrepreneurial Dynamics II first wave results. Hanover, MA: now Publishers: Foundations and Trends in Entrepreneurship (in press). Reynolds, P.D., Carter, N.M., Gartner, W.B., and Greene, P.G. 2004. The prevalence of nascent entrepreneurs in the United States: Evidence from the Panel Study of Entrepreneurial Dynamics. Small Business Economics 23(4), 263-284. Reynolds, Paul D., and Diana Hechavarria. 2008. Global Entrepreneurship Monitor [GEM]: Adult population survey data sets: 1998-2003. Ann Arbor, MI: ICPSR Project 20320. Reynolds, Paul D., Brenda Miller, and Wilbur Maki. 1995. Explaining regional variation in business births and deaths: U.S. 1976-88. Small Business Economics 7:389-407. Reynolds, Paul D., David J. Storey, and Paul Westhead. 1994. Cross-national comparisons of the variation in new firm formation rates. Regional Studies 28(4):443-456. Schreyer, Paul. 1996. SMEs and employment creation: Overview of selected quantitative studies in OECD member countries. Paris, France: Organization for economic co-operation and development. STI Working Papers 1996/4. Schoonhoven, Kaye, Diane Burton, and Paul Reynolds. 2009. Reconceiving the gestation window: The consequences of competing definitions of firm conception and birth. In P. Reynolds and R. Curtin. eds. New firm creation in the U.S.: Initial explorations with the PSED II data set. New York: Springer (in press). U.S. Census Bureau. 2006. Current Population Survey design and methodology. Technical paper 66. U.S. Department of Commerce. 2002. Current Population Survey: Design and methodology. Technical paper 63RV. www.bls.census.gov/cps/tp/tp63/htm. March. U.S. Small Business Administration. 2007. The small business economy: A report to the president. Washington, D.C.: U.S. Government Printing Office.

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APPENDIX A: OVERVIEW OF CPS-BASED ENTREPRENEURIAL INDEX

A considerable effort has been made to use the existing CPS data set to identify those reporting an effort to become self-employed as an indicator of entrepreneurial activity. Identifying those entering into selfemployment has been utilized to create an indicator of new firm creation, one which can be considered a societal measure of entrepreneurial activity. The CPS currently is used to develop an index of entrepreneurial activity.16 Individuals are considered to emphasize business creation and included in the index under the following conditions.17 In the first month of each two-month panel, individuals are identified who do not indicate business ownership (or self-employment) as their primary work activitythey may have a regular joband they are not devoting any time to any business ownership indicated as a secondary activity.18 If, when interviewed in the second month, the same individuals report that: 1) business ownership (or self-employment) is their primary work activity; 2) they are devoting fifteen or more hours a week to this self-owned business; and 3) this represents a change since the last interview (within the last month), they are considered entrepreneurs. That is, they are counted as entrepreneurs for that month, and only that month. Several types of activity would cause individuals to be excluded from this count of business creation. For example: 1) those who never devote more than fifteen hours a week to the business ownership/selfemployment activity; 2) those who devote more than fifteen hours a week to the business ownership/selfemployment, but it is less than time devoted to any other wage or salaried work; and 3) those with full-time jobs, over thirty-five hours per week, who may spend an additional twenty to thirty hours a week to a new business ventures.19 These criteria, adopted to minimize inclusion of those not making a major commitment to a self-owned business, may also exclude efforts that have substantial revenue, but require little time to manage, as isthe case, for example, with some Internet marketing businesses or owners of rental property, for example. In addition, about 20 percent of those identified as nascent entrepreneurs in PSED II household surveys also report they are managing a business they own; hence, the start-up initiative is a second workforce activity. It is unclear how such individuals would be classified using these criteria. The size of the samples provided by the CPS and the care given to data collection and processing to provide annual estimates of increases in time devoted to business ownership do allow for some estimates of the numbers of individuals engaged in increases in business management activity. For 1996 through 2005, the annual rate of entry into self-employment is about 3.5 per 100 persons twenty to sixty-four years old, with little variation or temporal changes over the ten-year period. This is consistent with three other time series of activities related to new firm creation, although the different measures have different prevalence rates.20 In sum, the CPS-based entrepreneurial measure is best considered an indicator of one type of firm creation activity; the focus is too narrow to be considered a general index of participation.

Fairlie (2006a, 2006b). Fairlie (2006a, 2006b). Those working from one to fourteen hours per week on self-owned businesses in the first months are dropped from the sample. [Robert Fairlie, personal communications, 19 Jan 2006]. This is unlikely to have a major effect on the results. 19 Those working full- or part-time or managing another business are more likely to be involved and are 80 percent of the nascent entrepreneur population, Reynolds, et al (2004) page 276. 20 Reynolds (2007a), Chapter 2 and Reynolds (2008). These are the data on new employer firms using new entries into the federal social security files, new employer establishments using new entries into the state unemployment insurance files, and annual prevalence of nascent entrepreneurs based on individuals in household samples that meet the PSED criteria for nascent entrepreneurs.
17 18

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APPENDIX B: PSED II SCREENING MODULE FF1a Which of the following would apply to you? Are you, alone or with others, currently trying to start a new business, including any self-employment or selling any goods or services to others? Does this apply to you? 01 02 98 99 FF1b YES NO DONT KNOW REFUSED

Are you, alone or with others, currently trying to start a new business or a new venture for your employer, an effort that is part of your normal work. Does this apply to you? 01 02 98 99 YES NO DONT KNOW REFUSED

FF1c

Are you, alone or with others, currently the owner of a business you help manage, including selfemployment or selling any goods or services to others. Does this apply to you? 01 02 98 99 YES NO DONT KNOW REFUSED INTERVIEWER CHECKPOINT 1 IF yes, dont know, refused to any FF1a, FF1b, or FF1c ALL OTHERS GOT TO FF2

GO TO NEXT SECTION*

*Program leaves the screening module and goes to next topic in the interview schedule. FF2 (IF YES TO FF1a, FF1b, FF1c: You mentioned that you are trying to start a new business. /ALL OTHER RESPONSES: Perhaps we were not clear on a previous question.) Over the past twelve months have you done anything to help start a new business, such as looking for equipment or a location, organizing a start-up team, working on a business plan, beginning to save money, or any other activity that would help launch a business? 01 02 98 99 FF3 YES NO DONT KNOW REFUSED

GO TO NEXT SECTION

Will you personally own all, part, or none of this new business? 01 02 03 98 99 ALL PART NONE DONT KNOW REFUSED

GO TO NEXT SECTION GO TO NEXT SECTION GO TO NEXT SECTION

FF4

Has this business received any money, income, or fees for more than six of the past twelve months? 01 02 98 99 YES NO DONT KNOW REFUSED

GO TO FF10

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FF5

Has monthly revenue been more than monthly expenses for more than six of the past twelve months? 01 02 98 99 YES, REVENUE GREATER THAN EXPENSES NO, EXPENSES GREATER THAN REVENUE? DONT KNOW REFUSED

GO TO FF10

FF6

Did the monthly expenses include salaries and wages for the owners active in managing the business for more than six of the past twelve months? 01 02 98 99 YES NO DONT KNOW REFUSED GO TO NEXT SECTION

FF10

A national study of the work and career patterns of all Americans, including those not currently working, is being conducted by the University of Michigan. They would like your permission to allow them to contact you for the study. We would provide the University of Michigan with your telephone number and demographic information. This is completely voluntary and all your information will remain confidential. Those who participate will receive a payment of $25. May they contact you? 01 02 98 99 YES NO DONT KNOW REFUSED GO TO FF12

FF11

Of course, your participation in the study is voluntary, but it is an interview that many people find very interesting. Can the University of Michigan researchers contact you and tell you what is involved? You can change your mind at any time. 01 02 98 99 YES NO DONT KNOW REFUSED

GO TO NEXT SECTION GO TO NEXT SECTION GO TO NEXT SECTION

FF12

Thank you. May I have your first name only please? ENTER FIRST NAME:___________________________ 9. REFUSED

END OF MODULE: GO TO NEXT SECTION

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APPENDIX C: OVERVIEW OF PSED II INTERVIEW SCHEDULE MODULES

Topic Modules Screening questions Assessment of criteria for nascent entrepreneur Socio-demographic Screening All All All Wave A Wave B (1,2) Wave C, D, E, F (1,2)

A.1: Why involved, business opportunity (open-ended) All A.2: Confirm same business activity All All A.3: Determine status: new firm, quit, continue All All B: Type of business, location All NF,SU NF,SU C: Legal form All All All D: Start-up activities All All All E.1: Start-up finances, entry into firm registries (3) All All All E.2: Confirm quit, exit interview Quits Quits F: Orientations toward competition All NF NF G: Owners, key nonowners, & helpers inventory All NF,SU NF,SU H: Owner demographics All NF,SU NF,SU J: Relationships among owners All NF,SU NF,SU K: Juristic (legal entity) owners All NF,SU NF,SU M: Key nonowner demographics All NF,SU NF,SU N: Helper demographics All NF,SU NF,SU P: Community resources, support for new firms All NF NF Q: Informal start-up financial support All NF,SU NF,SU R: Legal entity start-up investments, debts, net worth All NF,SU NF,SU S: Competitive strategy and target markets All NF NF T: Growth expectations All NF NF U.1: Respondents motivation All U.2: Employment structure (3) NF NF V.1: Expense structure: summary (3) NF V.2: Expense structure: detailed (3) NF X: Respondents career background All SU SU Y: Respondents self-descriptions All Z: Respondent & household socio-demographics All NF,SU NF,SU NOTES: (1) After wave A, modules are provided to All respondents, only those that Quit, or those with a new firm (NF), or still active in the start-up process (SU). (2) After initial interview, modules are repeated to capture changes or new information about the activity or details on the current status. (3) Based on Kauffman Firm Survey interview schedule (Mathematica Policy Research, 2007).

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