Academic journal article Journal of Small Business Management

Barriers to Small Business Formation

Academic journal article Journal of Small Business Management

Barriers to Small Business Formation

Article excerpt

Every year a large number of new businesses are formed in the United States. For the most part, these enterprises are small businesses formed by a single entrepreneur or a group of entrepreneurs. Considerable information has been collected and made available about the number of new jobs, the gross revenues, and the increase in the tax base generated by new businesses. Various state and federal programs have been designed to encourage business formation, and a number of studies have been conducted which track new businesses from their inception through the ultimate success or failure of the enterprise. Another type of research has profiled the entrepreneur and identified the qualities necessary for success in forming a new business.

Relatively little information is available, however, on the businesses that were considered but never formed. Little is known about the individuals who have a desire to form a new business but who are deterred from doing so -- or about the barriers that prevent would-be entrepreneurs from forming new business enterprises.


Obviously, a number of barriers can prevent individuals from pursuing their desire to form a new business. The general market environment, the financial and tax climate, personal objectives and responsibilities, and family security, well-being, and commitments are all possible deterrents. An understanding of why some people do not go into business could be useful to policy makers whose objective is to promote business formation.

It is appropriate, therefore, to study individuals who want to form a new business. This group of would-be entrepreneurs "self-selects" into two groups: those who form new businesses and those who do not. A comparison of the characteristics and beliefs of these two groups should provide some insight into the entrepreneurial process.

Furthermore, it is important to identify actual or perceived barriers to the formation of new businesses in order to remove or lower entry barriers. It is impossible to arrive at an accurate calculation of the economic losses that result from businesses not being formed. These losses may, however, be considerable, and the removal or lowering of barriers could lead to economic gains from new business formation.

The research reported in this article considered five questions:

1. What factors are important to an individual who is considering forming a business?

2. What barriers prevent prospective entrepreneurs from forming new businesses?

3. Do those who actually start new businesses and those who become discouraged perceive obstacles to business formation differently?

4. What are the demographic differences between individuals who start new businesses and those who become discouraged and do not?

5. Do discouraged entrepreneurs maintain a desire to form a new business?


The data base for the study consisted of 630 individuals who received at leasat five hours of consultation from the Massachusetts Small Business Development Center (MSBD) in 1982-1983. The MSBD consists of nine centers in Massachusetts that were formed and supported with federal and state funding to encourage the growth of small business.

A survey questionnaire was sent to the 630 new business candidates. Usable questionnaires were received from 161 respondents (26 percent). As with most studies based on survey data, the findings of this research depend upon the characteristics and opinions of those who responded, and may reflect some degree of self-selection bias. The responses were divided into two groups: those of individuals (112) who had actually formed and were operating businesses when they received the questionnaire, and those of individuals (49) who had not formed a business when they received the questionnaire.

The questionnaire was designed to obtain three types of information. …

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