America’s Businesses Are Getting Old and Fat, and Why That’s a Problem

“Like the aging that is well-known among the population, the business sector of the United States also appears to be getting ‘old and fat,’” write Robert Litan and Ian Hathaway in their new paper, “The Other Aging of America: The Increasing Dominance of Older Firms.” Litan, a nonresident senior fellow, and Ian Hathaway of Ennsyte Economics, add that “it appears that it is getting fat because it is getting old—not the other way around. This is an important point for public policy.”

As the authors’ chart below demonstrates, the share of firms 16 years or older was 34 percent of all firms in 2011, an increase of 50 percent over a 20 year period.


Additionally, the authors find that the distribution of private-sector employment by firm age shows a similar trend, with a growing share of workers in older firms, and a falling share in firms of all other age categories. 


A major reason for these trends, say the authors, is a decline in the rate of new firm formations plus an increase in business failures for younger firms. “Taken together,” the authors write:

the data presented here clearly show
a private sector where economic activity is sharply
concentrating in older firms—a trend that is occurring
in a nearly universal fashion across sectors, firm sizes,
and geographies. This begs the question of whether
a shift towards older firms matters. We discuss this in
more detail later, but the implication based on what we
know from previous research is that an economy that
is saturated with older firms is one that is likely to be
less flexible, and potentially less productive and less
innovative than an economy with a higher percentage of
new and young firms.

Download and read their paper to find out why they call the decline in the firm startup rate plus the rise of mature firms “especially disturbing” and what policy recommendations they suggest to better facilitate the kind of innovative entrepreneurship that brought us such things as the automobile, air conditioning, and Internet search. 

Litan and Hathaway also authored an earlier paper on the decline in business dynamism in the United States.