How the pandemic powered a boom in UK entrepreneurship

The coronavirus pandemic led to a rapid increase in new businesses and helped with the short term recovery of the UK economy, but the implications for the long run are less clear.

That's the conclusion of a new research paper by the Bank of England which said that the first lockdown in March 2000 led to a sharp increase in new business registrations at Companies House.

Unlike 12 months into the 2008 global financial crisis when there was an 8% decline in new firms, new registrations were 8% higher one year into the pandemic than before COVID-19, the study said.

Cumulative business creation relative to pre-crisis, Global Financial Crisis (GFC) vs Pandemic for the UK, US and France:

Source: Authors' calculations using Companies House, US Census and INSEE.

Boom in online retail and first-time entrepreneurs

Before the pandemic there were around 50,000 monthly new company registrations. This increased to 60,000 after March 2020. Around 2,000 of the 10,000 increase were online retail businesses as founders responded to locked down shops and hospitality firms.

The rise in start-ups was driven by first-time solo entrepreneurs, the study said, suggesting that many furloughed employees and those looking for extra income pursued new ventures.

UK business creation during the pandemic by ownership type:

Source: Authors' calculations using BVD-FAME.

New businesses reacted to decline in retail footfall

The paper said that the increase in online retail businesses during the pandemic can be directly linked to the decline in physical footfall in locked down shopping areas.

Researchers found that a fall in retail footfall in an area led to a rise in firm creation in the same area. It took less than three months for a new business to be set up following a decrease in footfall.

The study pointed about that although there were no direct government policies targeted at the creation of new businesses during the pandemic (schemes like furlough, Eat Out to Help Out and Bounce Back Loans required firms to exist prior to the crisis), quick thinking entrepreneurs responded to changes in demand in sectors forced to closed.

The growth potential of pandemic businesses

The paper analysed whether new firms created during the pandemic are seeking to hire workers and whether they are contributing to a recovery in employment.

Matching Companies House data with job postings on career website Indeed, the study found that firms born during the pandemic are more likely to post a job within the first year of their existence than those set up in the two years before the crisis.

"Translating these numbers in economic terms suggest that firms born during the pandemic are four times more likely to post a job within the first quarter of their existence than firms born in the two years prior to the crisis," it said.

On the downside, the paper found that companies created in the pandemic are also more likely to shut down during their first year than pre-COVID firms.

It also found that firms created by solo entrepreneurs are more likely to dissolve than other types of ownership structure such as subsidiaries of larger groups or businesses created by a group of individuals.

The paper concluded:

"This provides initial evidence that booming firm creation has helped the rapid recovery in the UK economy in the short run, but in the long run the implications are less clear.

"A rising number of dissolutions and entry concentrated among solo entrepreneurs who tend to hire less and dissolve more could negate the impact of the COVID-19 surge in firm creation."