State Exceeds U.S. Average for New Incorporations : Entrepreneurs: Filings for 1994 rose 7% in California versus 5% nationwide. Third year of increases mirrors mid-1980s trend.
In a sign of increasing entrepreneurial activity, the number of U.S. businesses incorporating in 1994 rose by 5% from the previous year--and California, with a 7% increase, exceeded the average, according to data compiled by Dun & Bradstreet Corp.
California’s 42,871 new incorporations were the fourth-highest total nationwide, behind Florida, New York and Delaware.
The 1994 figures marked the third year in a row of rising incorporations statewide. But the business-formation level was still significantly below the state’s peak of 59,697 new incorporations in 1987, reflecting California’s slow climb out of severe economic setbacks, said Doug Handler, a Dun & Bradstreet economist.
“New incorporations measure the extent to which new entrepreneurs can identify profitable niches,” Handler said. “The huge drop-off we saw in California [in past years] is a reflection of its perception as being a poor place to do business. To some extent, it’s improved--but only slightly.”
The report by the New York-based business information service showed increases in business incorporations last year in 33 states, including a 14.4% rise in Delaware, 13.7% in South Carolina and Tennessee, and 11.8% in Nevada and North Dakota.
Incorporations have increased nationwide by 5% to 6% annually for the past three years, mirroring a trend last seen during the mid-1980s, a period of very strong entrepreneurial activity, Handler said.
From 1983 to 1986, business incorporations nationwide rose. But from 1987 to 1991, they fell by as much as 4% a year, with California’s numbers bringing down the results for the whole country, Handler said.
“There might have been positive growth the other years if California had been omitted,” he said.
California economic analysts said the rise in the number of incorporations in the state reflects the continuing restructuring of California’s economy.
As large corporations downsize, smaller businesses are being started by workers who are laid off or lose faith in corporate stability and then venture out on their own, said Joel Kotkin, a Los Angeles-based senior fellow at the Center for the New West in Denver.
“It’s grass-roots vitality versus torpor at the top,” he said.
But such activity may simply reflect job replacement and not new growth or economic strength, cautioned Eric G. Flamholtz, a professor of entrepreneurial management at UCLA’s John E. Anderson Graduate School of Management.
New businesses generally start small on uncertain footings and take time to become employers of size, he noted. And incorporation is sometimes used to skirt tax and other regulations that are imposed on growing companies.
Still, Flamholtz said, incorporation reflects faith by individuals that the economy is strong enough to support new businesses and “usually signals a sense of longer-term horizon than someone working from their home after being laid off.”
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On the Way Back
California outpaced the national average last year in the growth rate of new incorporations, bu the state remains far below its peak year in 1987. California firms incorporating annually, in thousands:
1994: 42.9
Source: Dun & Bradstreet
