Understanding Business Dynamics An Integrated Data System for America's Future (2007) / Chapter Skim
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2 What Is a Business?
2 What Is a Business?
Pages 28-46
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From page 28... ...
U.S. statistical agencies typically define a business as an entity that is active in terms of having either positive payroll or positive gross revenue, but many other possibilities exist.1 As will become clear, even seemingly straightforward criteria involve a variety of issues associated with the measurement and interpretation of business activity and business units.2 Realizing that businesses are the major source of jobs in the economy, 1For example, the Current Population Survey program states that "a business exists when one or more of the following conditions is met: (1)
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From page 29... ...
2.1 DEFINING BUSINESS UNITS AND IDENTIFYING BIRTHS AND DEATHS Any procedure for identifying and counting businesses or for providing reliable statistics on business activities is more useful if it begins with a precise conceptualization of a business entity. However, as alluded to above, a number of alternative definitional or conceptual approaches are possible, and they vary in terms of relevance to the production of timely, accurate data on new and young businesses.
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From page 30... ...
. This delineating concept typically lies between the firm and the establishment levels.
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From page 31... ...
However, if one collects detailed information on both the geographic location of production and the products and services produced at each location, then the analyst has flexibility in defining markets and hence in constructing measures of producer dynamics. This also relates to the point that a one-size-fits-all definition of business births and deaths will not provide adequate information over the full range of applications.
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From page 32... ...
A strict application of such criteria would indicate the presence of a productive organization only when an external economic exchange takes place, such as an initial payment for supplies, wages paid to an employee, or the receipt of financial support for business purposes. For example, a personal investment of $1,000 from an owner, placed in a firm checking account, might qualify as a market transaction.
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From page 33... ...
The implication is that some flexibility is required conceptually, as well as in terms of measurement, for defining business existence, entry, and exit. 2.1.2 Administrative Definitions There are two main administrative systems in the United States that define basic business units -- the tax system and the unemployment systems.
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From page 34... ...
This is particularly true in the case of complex business organizations whose EIN-based data may span a range of geographic and product markets.5 In order to produce detailed statistics of economic activity by geographic location and by industry, company-based data represented by the EIN unit must be disaggregated into finer units of analysis that make both economic and accounting sense. Two units of analysis have typically been used to measure economic activity below the company level -- the establishment concept and the line-of-business concept.
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From page 35... ...
For example, the Annual Capital Expenditures Survey of the Census Bureau surveys firms regarding capital expenditures, but it requires firms to break out the expenditures by industry. 2.2 DEFINING BUSINESS UNITS FOR THE PURPOSE OF MEASURING DYNAMICS The key challenges for a data system intended to have the capacity to measure producer dynamics involve accurately tracking (1)
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From page 36... ...
A second approach to defining business units takes an industrial organization perspective and focuses on measuring producer participation in a given market or industry. In this approach, participation in a specific product market by a firm is key to defining the business unit.
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From page 37... ...
Under the product market definition proposed above, one would not want to count such establishments as two independent business units if they are under common ownership. Therefore, each business unit must be identified with the parent firm that owns the unit.
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From page 38... ...
These definitions of entry and exit require that the ownership of business units is tracked accurately, that industry and product coding is uniform, that the output is measured consistently and, sometimes, that the location of business units is tracked. Regarding the ownership issues, each business unit must be identified with the firm that owns it at any given point in time, and changes in ownership must be accurately tracked.
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From page 39... ...
Many applications require that longitudinal data on the locations of a firm's business activities correspond to the existing definition of an establishment used in current business registers. Given the market-oriented emphasis in our conceptual definitions of business units, it is clear that high-quality, consistent industry and product coding are also required.
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From page 40... ...
However, this process is quite different for new business units that are owned by older firms compared with de novo firms created to enter the market. New businesses owned by older firms are typically larger and have less volatile growth rates and lower failure rates than de novo entrants.
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. It may be that modest adjustments to the Current Population Survey or other ongoing householdbased surveys, such as the American Community Survey program, would provide a basis for estimating the participation of U.S.
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In each case, when dealing with small multiestablishment firms, it may be difficult to measure producer dynamics at the establishment level, especially at high frequencies. 9Even in the economic census, a significant number of smaller establishments are not sent survey forms and their data come from administrative record sources.
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From page 43... ...
The design of these surveys focuses on larger units and is not geared to produce dynamics statistics, which require high-quality information on smaller firms and accurate tracking of individual business units over time.11 The administrative data generated through the UI system measure employment and payroll systematically for a large number of sectors, at a high frequency (quarterly) , and at the establishment level, but they do not contain information on output.
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From page 44... ...
The capability to track both employers and employees allows for more detailed data to be constructed on job creation and destruction. It also allows for the development of measurement algorithms to improve identification of the entry and exit of business units and to relate these new or closing business units to continuing business units by tracking the flow of workers across them.12 These data have the potential to better describe the entry and exit process of multiindustry and multilocation firms.13 Moreover, by linking these data to the Census Bureau business register, comprehensive ownership links across establishments can often be constructed.14 This will generally allow data users to distinguish between de novo and experienced firm entry and exit.
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From page 45... ...
2.4 CONCLUSIONS In this chapter, we discuss a number of different definitions of businesses and how the definition must be appropriate for the use to which it is being applied. If a business frame is maintained with detailed information on the geographic location of production, the products and services produced at each location, the ownership structure of the firm, and the ability to track production units over time, then the measures of producer dynamics outlined above can be constructed.
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From page 46... ...
Furthermore, calling mainly for use of the establishment concept in defining a business is a practical statement that aligns with what the statistical agencies can reasonably collect: data on location, industries of operation, ownership links, and economic activity. The framework is already used to generate statistics on producer dynamics; its full development requires that what is already measured (surveyed)
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