COMPARATIVE PATTERNS OF BUSINESS FAILURES
IN MICHIGAN AND THE UNITED STATES
Thesis for the Degree of Ph.D.

MICHIGAN STATE UNIVERSITY

A. Coskun SamIi
1962

./

 

This is to certify that the

thesis entitled

 

COMPARATIVE PATTERNS OF
BUSINESS FAILURES IN MICHIGAN
AND THE UNITED STATES

presented by
A. Coskun Samli

has been accepted towards fulfillment
of the requirements for

Doctor of Philosophy degree in_Bu.s.1'.ne.s.s Administration

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Date August 29, 1962

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Copyright by
A . COSKUN SAMLI

1963

COMPARATIVE PATTERNS OF
BUSINESS FAILURES IN MICHIGAN
AND THE UNITED STATES

By

A. Coskun Samli

AN ABSTRACT

of a thesis submitted to
Michigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of Marketing and Transportation
Administration

1962

Business failures and their interrelationships with
the economy as a whole are a neglected subject. Most of the
available studies of business failures analyze the internal
but not the external causes of failure. It is, however, the
changes in business conditions, producing different results
in different economic structures, that is the determinant
factor in explaining fluctuations in business failure
statistics. There are always vulnerable marginal firms in
existence; their failure or success, nonetheless, is
dependent upon business conditions and the economic
structure.

In this study an attempt was made to explain why and
how the business failure pattern in Michigan differed from
the national. First the relevancy of a study of external
causes of business failures was discussed. Then failure
statistics for Michigan and the nation were analyzed both in
terms of industrial composition, age, and size of firms, and
in terms of cyclical characteristics of the economy. Next,
the pertinent dissimilarities between Michigan and the
national economies were considered. The analyses here were
based on employment, income, and value added in different
segments of the two economies. Investigation of the
influence of the dissimilarities on the failure pattern was

the next step. At this stage correlation analyses proved

(1)

that it is not the number of new entries but income that
correlates more readily with failure figures, thus ruling
out the proposition that failures are a function of entries.
While the structure of Michigan's economy makes it rela-
tively more dependent on durable goods production, the
national economy proved to be relatively more dependent on
the production of nondurable goods. Hence, as correlation
analyses showed, when business conditions in durable goods
industries were better, i.e., the ratio of inventories to
new plus unfilled orders was going down, or the industrial
productivity index of durable goods was soaring, Michigan's
economy prospered and the failure rate in the state declined.
Similarly, when nondurable goods industries showed favorable
conditions, the national economy prospered and the U. 8.
failure rate declined.

A discussion of other pertinent factors that might
have important influence on business failures, e.g., credit
availability, the mood of consumers, wholesale prices,
demographic changes, etc. were presented in the fifth
chapter. In an additional chapter devoted to summary, con-
clusions, and welfare implications, advantages and dis-
advantages of having business failures in the economy, and
the future avenues of further study, were discussed.

Three findings of this study are of major importance:

1. The characteristics of the business population

is one of the major determinants of the basic

(2)

 

failure pattern.

2. Economic structure, which is a major determinant
of income, and changing business conditions,
play a very conspicuous role in the formation of
the failure pattern. This was ascertained from
the part they played in the creation of the
differences between the national and Michigan
failure scene.

3. There is still much remaining to be explored in
the area of business failures, their causes,
their interrelationships with the rest of the
economy, their advantages and disadvantages.

This study may be especially useful in that: it

released certain pertinent statistics not previously dis-
closed; it may attract further attention to failure analyses,
which may then shed more light on this comparatively
neglected topic; its approach and method could be used for
further comparative studies in different states; and lastly,
it may be regarded as providing a better understanding of an

economy's overall performance and structural changes.

(3)

COMPARATIVE PATTERNS OF
BUSINESS FAILURES IN MICHIGAN
AND‘THE UNITED STATES

By

A. Coskun Samli

A THESIS

Submitted to
Hichigan State University
in partial fulfillment of the requirements
for the degree of

DOCTOR OF PHILOSOPHY

Department of’larketing and Transportation
Administration

1962

TABLE OF CONTENTS

Page

PREFACE . . . . . . . . . . . . . . . . . . . . . . . . iii

LIST OF TABLES . . . . . . . . . . . . . . . . . . . . vii

LIST OF ILLUSTRATIONS . . . . . . . . . . . . . . . . . xii
Chapter

I. THE PROBLEM AND THE METHOD OF APPROACH . . . . 1

II. THE COMPOSITION AND CHARACTERISTICS OF BUSINESS
FAILURES IN MICHIGAN AND THE UNITED STATES . 40

Appendix to Chapter II, NUMBER OF BUSINESS
FAILURES IN MICHIGAN . . . . . . . . . . . 103

III. DIFFERENCES IN INDUSTRIAL PATTERNS AND THEIR
. IMPACT ON INCOME GENERATION . . . . . . . . . 105

Iv. BUSINESS FAILURES AND THE ECONOMY . . . . . . . 146

v. OTHER FACTORS . . . . . . . . . . . . . . . . . 171

v1. SUMMARY CONCLUSIONS AND WELFARE IMPLICATIONS . 189
APPENDIX I . . . . . . .‘. . . . . . . . . . . . . . . 208
APPENDIX II . . . . . . . . . . . . . . . . . . . . . . 209
APPENDIX III . . . . . . . . . . . . . . . . . . . . . 210
APPENDIX IV . . . . . . . . . . . . . . . . . . . . . . 211
BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . . . . 212

11

PREFACE

In this study an attempt was made to find out why
and how the business failure pattern in Michigan is differ-
ent from its national counterpart. In the process of
searching for an answer (or answers) four different steps
were taken. First, the relevancy of a study of external
causes of failure was examined. Second, business failure
statistics for Michigan and the nation as a whole were ana-
lyzed in terms of industrial composition, age and size of
firms, and cyclical characteristics. Third, the pertinent
dissimilarities between the two economic structures were
noted. And lastly the influence of these dissimilarities
upon the failure pattern was investigated.

while the first two steps are relatively separate
entities, the latter two are integrated. One could not
associate disparities in the failure rates with differences
in the economies without knowing what these differences are.
Thus, this study is composed of four major chapters.
Chapter One consists of a detailed statement of the problem
and a description of the analytical approaches used.
Chapter Two delves into the failure pictures of the two
economies. Here an investigation of similarities and dis-
similarities between the components of the total failure
statistics is presented for four selected years. In the

111

same chapter the industrial composition of the failure
pattern and the size and age of firms at the time of failure
are emphasized. Included here also is the analysis of the
cyclical differences between the two failure patterns.
Chapter Three sets forth a structural analysis of the
Michigan and national economies. This analysis is based on
employment, income, and value added in different segments of
the two economies in an effort to bring out the disparities
between the two structures. Chapter Four examines the
associations among the failure statistics, economic struc-
ture and business conditions. Here a partial answer is
given to the question: "Why is thefailure pattern in
Michigan different from the national picture?"

Due to the existence of numerous variables playing a
role in the formation of the general failure pattern,
Chapter Four has only a partial answer to the problem. As a
supplement to this chapter, the fifth one points out the
presence of other pertinent factors and suggests the
possible roles that they may be playing in the formation of
the total failure pattern. Lastly, in the sixth chapter, a
discussion of the findings and their implications is

presented.

Significance of the Study
There have been numerous studies of business

failures. Most of these studies analyzed the failure

1V

pattern at one point in time, and attributed the cause of
failure to internal weaknesses in the firms. This study
represented a different approach to the same problem by
emphasizing external causes of failure. Instead of studying
failures in one particular field or in a restricted geo-
graphic area, such as a city or a county, at a given point
in time, an attempt was made to analyze failures as aggre-
gates, either in different selected years or as a continuum
in the flow of time. A macro rather than a micro approach
is taken and failures were analyzed in the light of economic
structure and business conditions. The major analyses in
Chapter Two were restricted to four selected years. This
facilitated comparisons between failure statistics for pros-
perous and recession years. Analyses, on the other hand, in
Chapter Four pertained to a period of at least fourteen
years which made it possible to analyze failures as a
continuum in time.

The significance of this study may be fourfold: it,
first of all, releases certain statistics never before dis-
closed. The basic data of the second chapter are the result
of special compilations, which the author requested from Dun
and Bradstreet, Inc. Second, the study may attract further
attention to failure analyses, which may then shed more
light on this relatively neglected topic. Third, its
approach and method may be used for further comparative

studies of the same nature in different states. Fourth,

work of this sort may give a better understanding of an
economy's overall performances and of structural changes in

that economy.

Acknowledgments

This dissertation could not have been written with-
out the help, encouragement, and advice of many people.
First of all Dean B. F. Landuyt of the University of Detroit
and Dean E. J. Kelley of New York University should be
acknowledged for their encouragement of the author at the
beginning of graduate study. Dr. Eli P. Cox of Michigan
State University aided the author in getting the project
started. The study matured slowly under the very careful
and constructive criticisms of Professor Stanley C.
Hollander who assumed chairmanship of the advisory com-
mittee. Professors H. Zwarensteyn, J. L. Hazard, and T. A.
Staudt served on the committee. Professor 0. F. Healy of
Sacramento State College made a number of criticisms which
improved the manuscript. Last, but most of all, Marcqueta H.
Samli painstakingly went through each and every word and
sentence in the manuscript and offered advice to improve the
style. The author is deeply indebted to all of these and to
many others who helped directly or indirectly in the prepa-
ration of this manuscript. Needless to say, responsibility
for all the ommissions and commissions rests solely with the

author.

vi

LIST OF’TABLES

Chapter I

1.

2.

Annual Average Number of F rms, Failures, and
Failure Rate. (19’45-1959 e e a e e e e e e e

Cidssification of Causes of Business Failures in
Michigan and the U. 8., 1959 . . . . . . . . .

Chapter II

1.

2.

9.

10.

Number and Percent Distribution of Business
Failures in Major Industrial and Commercial
Categories, Michigan and the United States . .

Distribution of Michigan and United States
Manufacturing Failures . . . . . . . . . . . .

Number of Manufacturing Establishments and Their
Percent Distribution in Michigan and the
United StaDeS, 1958 e e e e e e a e e e e e a

Number of Manufacturing Failures Expressed as a
Percent of Number of Establishments in
Manufacturing in Michigan and the United
States: 1953, 195A, 1958, and 1959 . . . . .

Liability-Size Distribution of Michigan and
United States Manufacturing Failures . . . . .

A Comparison of the Ages of Michigan and United
States Manufacturing Failures . . . . . . . .

Distribution of‘Michigan and United States
Wholesaling Failures . . . . . . . . . . . . .

Number of Wholesaling Failures Expressed as a
Percent of Number of Establishments in
Michigan and the United States, 1958, 1959 .

Wholesaling Failures as a Percent of Total, in
Michigan and the United States . . . . . . . .

Liability-Size Distribution of Michigan and
United States Wholesale Failures . . . . . . .

vii

Page

12

43

.45

46

49
54
56

59

60

61

62

Chapter II

11.

12.

13.

1h.

15.

16.

17.

18.

19.

20.

21.

22.

23.

2h.

Age of Wholesaling Failures in Michigan and
the United States . . . . . . . . . . . . . .

Percent Distribution of Business Failures by
Life Span, Michigan and the United States . .

Life Expectency for Business Population in
Different Industry Division, Percent of Firms
Surviving to Specified Age . . . . . . . . . .

Retailing Failures as a Percent of Total in
Michigan and United States . . . . . . . . . .

Distribution of Michigan and United States
Retailing Failures O O O O O O O O O O O O O I

Percent Distribution of Retailing Establishments
in Michigan and United States, 1954, 1958 . .

Number of Retailing Failures Expressed as a
Percent of the Number of Establishments in
Retailing in Michigan and the United States,
195“ and 1958 e e e e e e e e e e e e e e e e

Liability-Size Distribution of Michigan and
United States Retailing Failures . . . . . . .

A Comparison of the Ages of Michigan and United
States Retailing Failures . . . . . . . . . .

Rate of Construction Failures in Michigan and
united States 0 O O O O O O O O O O O O O O O

Liability-Size Distribution of Michigan and
United States Construction Failures . . . . .

Distribution of Selected Service Establishments
in Michigan and United States, 1958 . . . . .

Number of Failures in Selected Services
Expressed as a Percent of the Number of
Establishments in Selected Services in
Michigan and the United States . . . . . . . .

Liability-Size Distribution of Commercial

Services Failures in Michigan and the United
States 0 O O O O O O O I O O O O O O O O O O 0

viii

Page

62

63

64

68

69

7O

71

75

76

77

78

81

83

87

Chapter II

25. Three Postwar Recessions: Michigan and the
United States . . . . . . . . . . . . . . . .
26. Indexes of Sensitivity . . . . . . . . . . . . .
27. Percent Distribution of Business Failures in
Michigan and the United States for Selected
Years 0 O O O 0 0 O O O O O O O O O O O O O O
28. Failures in Selected Industrial Categories as a
Percent of Total Failures in Michigan and the
United States . . . . . . . . . . . . . . . .
29. Liability-Size Distribution of Total Michigan
and the United States Business Failures . . .
30. A Comparison of the Ages of Michigan and the
United States Business Failures . . . . . . .
Chapter III
1. The Distribution of Michigan's Total Nonfarm
Employment . . . . . . . . . . . . . . . . . .
2. The Distribution of United States Total Nonfarm
Employment . . . . . . . . . . . . . . . . . .
3. Industrial Sources of Civilian Income Received
by Persons for Participation in Production in
Michigan and the United States . . . . . . . .
4. Percent Distribution of Civilian Income Received
by Persons for Participation in Production . .
5. Percent Distribution of value Added by
Manufacturing in Michigan and the United
States 0 O O O 0 O 0 O O O O 0 O O 0 O O O 0 0
6. Value Added by Manufacture in Michigan and the
United States 0 O O O O O O O O O O O O O C O
7. Trends in the Auto Industry . . . . . . . . . .

Wage and Salary Workers Employed in the
Manufacture of Motor Vehicles and Equipment
and Value Added in Transportation Equipment
Industries, Michigan and United States . . . .

1X

Page

88
91

93

9A

100

101

107

109

11h

115

118

120
122

126

Chapter III Page

9. Department of Defense Expenditures for Fiscal
Year81953and1959eeeeeeeeeeeee129

10. Defense Employment in Michigan, 1951-1958 . . . 132

ll. Unemployment as Percent of the Total Labor Force
in Michigan and the United States . . . . . . 133

12. Concentration of the Economic Power in
ManufaCtuI‘ing, 195)" e e e e e e e e o e e e e 139

13. Concentration of the Economic Power in
Wholesaling, 1954 . . . . . . . . . . . . . . 140

14. Concentration of the Economic Power in Selected
Services, 1958 . . . . . ._. . . . . . . . . . 141

15. Concentration of the Economic Power in
Retailing, 1958 I O O O O O O O O I O O O O O 1A2

Chapter IV

1. Net Increase or Decrease in Michigan's Personal
Income and in Failures, 1947-1959 . . . . . . 149

2. Net Increase or Decrease in Personal Income and
in Failures of the U. 8., 1947-1959 . . . . . 150

3. Net Change in the Number of Firms in Michigan
and the United States, 1947-1959 . . . . . . . 153

4. Names Added in the Dun and Bradstreet Reference
Book, Michigan and the United States . . . . . 155

5. Indexes of Industrial Production and Business
Failures O O O O O O O O ' I O O O O 0 O O O O O 163

6. The Ratio of Inventories to New Plus Unfilled
Orders O O O O O O O O C C O O C O O C O O O 0 165
Chapter V

1. Employee Size of Michigan and the National
Establishments, 1956 . . . . . . . . . . . . . 186

2. Number of Establishments Per 1,000 of Population
in Retailing and Selected Services . . . . . . 188

Chapter VI Page

1. Number of Failures Expressed as a Percent of
Number of Establishments in Different
Economic Sectors in Michigan and the United
Stat°8,195u’1958000000eeeeeeee 194

xi

LIST OF ILLUSTRATIONS

Chapter I Page
Figure
1. Number of Business Failures in Michigan and the
United States, 1945-1959 . . . . . . . . . . . 3

2. Business Failures as a Percent of the Total
Nmnber Of Finns O O O O O O O O O O O O O O O Ll,

3. Business Failures and Business Discontinuances
in the U. S. as a Percent of Total Business
Population 0 o 0 O O O O O O O O O C O O O O O 33
4. U. S. Wholesaling Failures and Discontinuances . 37
5. U. S. Retailing Failures and Discontinuances . . 38

6. U. 8. Manufacturing Failures and Discontinuances 39

Chapter II
Figure
1. Michigan's Percent Share of Military
Procurements . . . . . . . . . . . . . . . . . 131

2. Per Capita Personal Income in Michigan and the
United States, 1947-1959 . . . . . . . . . . . 132

xii

CHAPTER I
THE PROBLEM AND THE METHOD OF APPROACH

The Problem

A comparison of business failures in Michigan and
the United States revealed significant differences as
presented in Table l. The table brings forth the fact that
the postwar trend in business failures has been an upward
one in both economies. During the immediate postwar period
the average failure rate in the U. S. was a little higher
than in Michigan. In the second five-year period (1950-1954)
this rate doubled in the nation, but Michigan's figure

TABLE 1

ANNUAL AVERAGE NUMBER OF FIRMS, FAILURES
AND FAILURE RATE, 1945-1959

“1— n: __L-
J— __—

Average Number of Average Number of Failures as

 

 

 

 

 

Years Firms“ Failures Percent of Firms
‘ U. s. Michigan U. s. Michigan U. s. Michigan
19h5-19h9 2,337,000 89,000 3,982 1&0 .17 .16
1950-195h 2,6h6,200 100,200 8,956 191 .3A .19
1955-1959 2,659,600 102,800 13,282 A36 .50 .h2

 

“Firms as defined by Dun and Bradstreet, Inc. are not exactly
comparable to the census term of establishments. The difference
between the two will be explained elsewhere in this chapter.

SOURCE: Computed from Dun and Bradstreet, Inc. data as
appeared in the Statistical Abstract of the U. 8., U. 8. Department of
Commerce, Bureau of the Census (Hashingtcn: U. S. Government Printing
0ffice,11946-1960).

remained relatively low. However, during 1955-1959 the
Michigan failure rate increased much more sharply than the
national rate. It is noteworthy that throughout this 15-
year period the average failure rate for Michigan was con-
sistently lower than the national average.

Figure 1 shows total failures in Michigan and the
United States for the period of 1945-1959, divided for
purposes of comparison into three parts. The first includes
the years 1945-1949, the second 1950-1953, and the third
1954-1959. In the first period it can be noted that
failures in the national economy had a sharper increase.
Between 1949 and 1953 failures declined in both, with
Michigan displaying the obviously better picture of the two.
In the last period failures increased in Michigan at an
appreciably faster rate. Differences between the two
failure patterns can be depicted more easily from the
failure rates. Figure 2 portrays the number of failures
expressed as a percent of total existing firms in Michigan
and the United States. While the overall picture had
improved in Michigan between 1949 and 1953, this trend has
since reversed itself noticeably. Michigan's failure rate,
nevertheless, has been below that of the nation since 1947.

The problem which confronted us here was Just what
causes this obvious dissimilarity between the two patterns.
The present study undertook the task of exploring the con-
ditions underlying this dissimilarity. Some maJor

Figure 1

NUMBER OF BUSINESS FAILURES IN MICHIGAN
AND THE UNITED STATES, 1945-1959

 

 

 

13‘5

    

United States (Left Scale)

 

Michigan (Rich's Bed.)

888%"

 

1.

i n i L l I 1 l I L4 if
'46 '57 we '49 '50 '51 '52 '53 '5'; '55 '56 '57 '58 '59

SOURCE: Dun and Bradstreet, Inc., as reported in

the Statistical Abstract 2; the 31. _S_., 92. cit.

Figure 2

BUSINESS FAILURES AS A PERCENT OF THE TOTAL NUMBER OF FIRMS

 

 

 

 

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United States //
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O 1 1 1 1 1 1 L ' 1 1 1 l
1947 19119 1951 1953 1955 1957 1959
SOURCE: Inc., as reported in

the Statistical Abstract 9; the Q.

.Dun and Bradstreeté

., 2p, git.

subquestions were: in which commercial and industrial
fields are businesses likely to experience higher failure
rates? What is the size distribution of the firms that
failed? Is there a significant pattern in so far as life
span is concerned? What is the interrelationship between
the economic structures and the failure pattern? What are
some of the major changes in the economy reflecting on the
business failure picture? How do these affect the begetting

of business casualties?

Failures Defined

It is a truism that failure is caused by losses in
business transactions. Two classes of losses may be dis-
tinguished. Economic logs comes about whenever receipts are
short of the sum of contractual obligations, depreciation
charges, and implicit interest, wage, and rent costs. If on
the other hand receipts are not large enough to cover even
the contractual obligations plus depreciation, the situation
may be described as a business logs in an accounting sense.1

Businesses experiencing economic losses may liqui-
date because of the lack of desirable return on original
investments.v Many firms incurring business losses may dis-

continue business activities without causing a loss to

creditors, but nevertheless depleting their own assets.

 

1John F. Due Intermediate Economic Anal sis
(Homewood: Richard D. IrwIn, Inc., I955}, p. 445.

Either one of these two groups might resort to a merger also
as an avenue of exit. When broadly defined, failures can
include these two cases; however, in this study, a much more
limited definition of failure was utilized. A failure
throughout the present study was defined as any,business
discontinuance M causes 3 _l_9_s_s_ to _i_t_§ creditors.
According to this definition incurring economic or business
losses is not enough to be included in failure statistics; a
firm must also entail a loss to its creditors. Failure,
then, in this thesis includes more than bankruptcies as it
also includes firms that did not go bankrupt but yet
entailed losses to creditors. A firm can cause losses to
its creditors without resorting to bankruptcy in two basic
ways: voluntary arrangements with its creditors outside the
court or involuntary arrangements with its creditors through
court action.2

In summarizing, while our definition of failure goes
beyond its common usage which emphasizes only bankruptcy, it
must be stressed that its scope still is very limited. This
limitation is due to the exclusion of firms closing shop
because of economic or business losses but not entailing a

loss to their creditors. For instance, of 347,000 firms in

 

2For a detailed description of the mechanics of
these avenues of exit see Francis J. Calkins, "Liquidation
and Bankruptcy" and "Involuntary Reorganization," in Karl A.
Boedecker _e;_t_ $1., Essa s 9_n_ Business Finance (Ann Arbor:
Masterco Press, 19 , pp. 359-385.

the U. S. which ceased existence in 1959, approximately half
were considered to be discontinuances due to unsatisfactory
results and other types of failures.3 However, in the same
year only 14,053 firms, or 4 percent of all the discontinued
firms, failed in the strict sense of causing a loss to credi-
tors. The reason for using the limited definition obviously
is the absence of detailed statistics on the broader concept.
Elsewhere in this chapter, when the data are discussed,
special reference will be made to the contents of the

failure statistics to point out what specific cases are

included.

Two Approaches to Analysis

Two different methods may be used in studying busi-
ness failures. At any given time a number of failures can
be analyzed through interviews and by compiling opinions of
their creditors as to why the failure took place. The
second method involves accumulation of statistical data and
their analyses in terms of their characteristics (type,
size, and age) and in reapect to the particularities of the
economy in which they occurred.

In the complexity of the business world where many

variables interact quite inseparably, it is almost impossible

 

3See Melville J. Ulmer and Alice Nielson, "Business
Turnover and Causes of Failure," Surve of Current Business,
April, 1947, p. 10. The authors Here estTmaEed tfiat
approximately half of total discontinuances are involuntary.

to single out one certain cause which is solely responsible
for the failure.“ There are actually as many difficulties
to which failure is attributed as there are problems of
business.5 Nonetheless, it has been customary to give a
reason for failure. The following are general factors that
are commonly accepted as the major causes of failures. The
factors listed here are in the main internal and derived
through the first method cited above.

Deficiencies ig,management: Managerial deficiency
is generally claimed to be the most important among all

factors.6 This involves an ineptness of the management

 

“A. M. Woodruff and T. 0. Alexander, Success and
r lure in s 11 Manufacturin (Pittsburgh: UHIVEFEiEE‘or
PI§ts5ur§E'Press, 1955}, p. I2.

5U. 3. Congress, Temporary National Economic Com-
mittee, Problems of Small Business Monograph No. 17, 76th
Cong., 33 Secs. (WEsRington: . . Government Printing
Office, 1941). p. 81.

6See, for instance, U. 3. Congress, Report to the

Committee on Banking and Currency and Select Committees,
Financin Small Business Parts 1 and 2, 85th Cong., 2d

ess. asfiington: . . Government Printing Office, 1958),
especially p. 7. Kaplan said: ". . . the determining
factor in discontinuances of very small business enterprises
is not the business cycle so much as it is the personality,
experience, and ability of the enterpriser." A. D. R.
Kaplan, S 11 Business (New Yerk: Redraw-Hill Book Company,
Inc., 19 , p. 58. Sanzo stated: More than 50 percent of
all failures are among relatively new concerns whose primary
lack is experience and business know-how. Richard Sanzo,
"What is Behind the Rise in Business Failures," Dunflg
Review December, 1957, p. 40. Sadd and wiiiiemE'In their
study wrote: "The methods of production and of distribution
undergo frequent revolutionary changes, and the consequent
affects are disastrous to many businessmen who are slow to
heed and to conform to inevitable economic transition. The
business executive whose training and experience give him a

 

which may reflect on the general product, sales, adminis-
trative, and financial policies and strategies. Both
inability to cope with competitors' policies and inability
to satisfy market needs are considered the basis for failure.

Insufficient capital: Most studies have considered
inadequate capital as one of the most important causes of
failure, ". . . if an enterprise is established on a 'shoe-
string' it may logically be classified as lacking economic
reason for existence."7 In fact it has been established
that "there is a negative correlation between capital

invested and rate of reiiure."8

 

static conception of business problems, can have but little
hope of success. The slightest misjudgment of the actual
course of events often means for the business but one out-
come, failure." Victor Sadd and Robert T. Williams, Causes
of Commercial nkru tcies U. S. Department of Commerce,
IEhmetIc Commerce SerIes No. 69 (Washington: 'U. S. Govern-
ment Printing Office, 1932), p. 7. See also Emmet E.
Barbee, "Reason for Failure," Credit gnQ.Financial Manage-
ment, November, 1941, 9ff.

7T.N.E.C., Monograph No. 17, 22, cit., p. 87.

81bid., p. 92. An opposing hypothesis asserts that
insufficient capital is not a cause but a symptom or an
effect of some other inadequacies in the management.
Woodruff and Alexander had the following to say on this
aspect: ". . . the early general feeling that a shortage of
working capital was the underlying reason for most bankrupt-
cies was strengthened by much published material. As the
study progressed, however, this hypothesis was disproved"
(Woodruff and Alexander, 22, 213,, p. 4). Sanzo said: "it
is difficult to make a case for . . . the lack of capital as
an important cause of failure. Here and there failures
occur among small concerns which borrowed money heavily at
the start and were unable to repay or renew loans. By and
large, however, failures result from lack of know-how, not
from lack of capital" (Sanzo, o . cit., p. 47). A study of
business failures concluded: cEIEf capital was not an
important cause of failure in the cases studied. In most

10

Increased eggpetition: This factor refers in part
to incompetency in management since many failures occur
because of inability to cope with increased competition.
However, apart from managerial incompetence this concept
also pertains to a declining market share for the individual
firm.9 It is claimed that increasing competition arising
from a growing number of new firms creates an ever difficult
and growing cost-price squeeze in which all businesses find
themselves.10 Furthermore increased competition enhances
the changing patterns in demand and corrollary changes in
methods of approaching business problems.11 These changes
are, in some cases, almost impossible for some firms to keep

up with; thus, they have an increased failure susceptibility.

of these cases where failure was attributed to lack of
capital, something else was the cause." U. S. Department of
Commerce, Domestic Commerce Seriesz Causes of Business
Failures New J rec in 12-i7_,zpongton:as2 U. S.
Havernmen rI nt ng quze, p.
9Sadd and Williams about 30 years ago, wrote: "The
existence of surplus producing and distributing facilities
is evident through the whole of our economic system. Conse-
quently, the consumer's dollar is being sought by a larger
number of business units, and with much greater zeal and
effort than ever before" (Sadd and Williams, 0 . cit., p.
6). Thirty years later Sylvia Porter wrote: E—Tunda—
mental reason . . . for excessive failures . . . is that our
economy has entered the toughest, roughest phase of compe-
tégion in modern times," Detroit Free Pages, February 22,
up. 7.

1°Sanzo, 22, cit.
1libid.

11

Adverse domestic ang'personal factors: Sanzo said
that "nearly all failures reflect some element of personal
weakness, human, moral, physical frailty, etc."12 Similarly
Barbee attributed 80 to 90 percent of failures directly to
the man who fails.13 Extravagance, intemperance, indolence,
gambling, and other habits are shown as important causes of
failures. Family problems, dishonesty, and fraud, and
lastly "acts of God" are all factors causing many commercial
failures.1u

There is no one commonly accepted list of factors.

A classification of causes of failure bearing some resem-
blance to the above is used by Dun and Bradstreet, Incorpo-
rated (D. & B.) which is shown in Table 2. This agency
lists as the "underlying causes" of failures such factors as
neglect, fraud, lack of experience, and disaster. As the
"apparent causes" such factors as poor health, irregular
disposal of assets, competitive weaknesses, and others are
listed. The table is derived from the annual surveys of the
agency's credit reports and the opinions of informed
creditors. The D. & B. analyses illustrate the tendency to
ascribe a single cause for the failure of any given firm.

Probably the one cited is most readily detectable among the

 

12Ibid.
13Barbee, 22, cit.

luSadd and Williams, 22, cit., p. 25, 26 and Kaplan,
22, cit., p. 68.

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14

many complex forces resulting in failure. Besides the
difficulty of determining the cause of failure, another
shortcoming to this type of study is the extreme subjec-
tivity involved. Some people, for instance, may attribute
the failure of a concern to lack of managerial skills
whereas others may hold economic conditions responsible. 0r
again heavy operating expenses may be simply a reflection of
inadequate sales, or inventory difficulties. Similarly,
excessive fixed assets can come about because of inadequate
sales, for if sales volume is satisfactory, fixed assets may
not seem excessive. The picture, therefore, is not at all
clearcut.

In the table managerial inability is given primary
importance as the cause of failure. If survival is considenmi
to be a test of managerial superiority, it logically follows
that managerial incompetence is the major cause of failure.
Contrariwise it is reasonable to assume that the supply of
managerial ability in a society does not vary erratically
from one year to the next. Assuming that the total supply
of potentially good or bad managers does not vary sub-
stantially, then among numerous entrants each year there is
an equal probability of having an average number of quali-
fied or nonqualified managers. Claiming that failures are
mainly due to a lack of managerial skills, therefore, is far
from being the best approach. Since human weaknesses are

ever existent they are not very useful in explaining ups and

 

15

downs in the aggregate failure statistics.15 What causes,
then, the wide variations in failure rates?

Because of lack of managerial ability, knowledge,
inadequate records, poor location, etc. some firms are
particularly vulnerable to failure when adverse conditions
appear in their environment. These are basically high cost,
inefficient, or otherwise handicapped concerns. There are
always many of these in existence, and from this point of
view the basic causes of failure are ever-present.16 How-
ever, basically changes in the economy trigger failure,17
causing ups and downs in aggregate failure statistics. Most
failures occurring in prosperous years take place among
submarginal firms. However, when business conditions at

large worsen additional troubles arise and factors beyond

 

15Victor Zarnowitz and Lionel J. Lerner, "Cyclical
Changes in Business Failures and Corporate Profits,
Geoffrey H. Moore (ed. ), Business C cle Indicators, V01. I
(Princeton: Princeton UnW vers y Press,W , p. 364.

16Ulmer and Nielson, 22, cit.

17This statement emerges from assuming that the
managerial factor is not an erratically changing cause of
failure. Naturally, however, the managerial supply is not
homogeneous; hence, there might be certain disadvantages
involved in this approach. These disadvantages, nonethe-
less, are minimized by using business entry data. There are
always a number of failures due to obvious lack of mana-
gerial and other properties necessary to compete; absence of
these qualities cause almost immediate withdrawal. Every-
thing being the same, the number of these casualties would
stay the same unless the number of entries fluctuates
appreciably, in which case casualties will follow suit.
Thus, by including the entry data in our analyses as an
external factor, the shortcoming of analyzing changes in
failure number caused by a lack of managerial ability is
minimized.

 

16

the firms' control force them out.18 If let us say, the
economy were in equilibrium with no immediate tendency to
change, it could be assumed that a certain minimum.number of
failures would take place, but probably there would be no
drastic change in this number from one year to the next. In
the event of disequilibrium, there would still be a certain
number of failures, but changes from one year to the next
would vary at times rather drastically. These changes are
basically external or environmental and beyond the reach of
individual firms.

The impacts of economic changes differ from one
economy to another, which ultimately lead to differences in
the overall failure patterns, not only in terms of rate but
also with respect to composition.19 It is then clear that
not the absolute number of failures per se but the relative
failure rate and its variations provide the sound basis for
study. We must see the changes in failure rate in time so
that certain associations can be made with other significant
changes in the economy.

These facts justified the use of the second method:

analyses of aggregate failure statistics within their

 

18wes1ey Mitchell, Business 0 cles Part II
(Berkeley: University of CaIITornIa Press, 1913), p. 438.

19Throughout the present study the pattern of
failures refers to changes in the failure rate as well as to
age, size, and the composition of failure statistics.
Patterns of failures and the failure picture are used in the
study interchangeably.

17

respective economic sectors, not however at a given point in
time, but as a continuum or at least in a number of points
in time. This method basically was employed throughout the
present study. The analyses of the failure patterns were
made in terms of their composition, size groups, age, and
cyclical characteristics. Also total failure rates were
analyzed as a continuum in time and divergencies between
this pattern and other major changes in the economy are

brought forth.

Some Major Causes of Failure

There are a great many factors that play pertinent
roles in the formation of the business failure patterns.
Among these, there are a few that many consider especially
important. This section presents a survey of the meanings
and workings of some of these factors.
New Entries

New entries have a twofold effect on the failure
rate; first they increase competition, thus forcing out some
competitors, and also among the new entrants are some
incompetents who soon fail. It is claimed by many that most
of the failures occur among the marginal parasitic firms who
manage to survive as long as they are not challenged by
pressure created by economic forces or by modern methods
introduced by competitors.20 These marginal parasitic firms

may be new as well as old. Newcomers in many cases

 

2°T.N.E.C., Monograph No. 17, 100. cit., p. 122.

 

 

18

introduce new and more efficient techniques or products; and
also they bid up resources and hence increase costs, making
it more and more difficult for weaker firms to continue
existence. 0n the other hand, mortality among new estab-
lishments is much greater, relatively speaking, than among
those establishments that have succeeded in fighting the
destructive diseases of youth.21 The second impact of new
entries on failures, i.e., exit of incompetent new firms,
seems to be more significant. Failure, in this case, is
caused by disillusionment concerning market opportunities or
lack of knowledge for their exploitation.22
In explaining the interrelationship between failures
and entries, many have asserted that mortality is a function
of entry.23 It is of course implied here that an increasing
number of entries beget an increasing number of failures.
Kaplan wrote: "birth rates determine mortality . . . the

rate of discontinuances is not generally far from the birth

rate of new enterprises, whether the year is a good one or a

 

21T.N.E.C. Monograph No. 17, ibid., p. 81. x. s.

Lomax stated that '. . . it is fairly WEII established that
with most types of business the early years are the most
difficult. It is then the mortality is highest. The longer
a business survives, generally, other things being equal,
the smaller becomes the probability of failure." K. S.
Lomax, "Another Example of the Analysis of Failure Data,"
Ԥ%3,Journal of the American Statistical.Association,

cemSer. 1964. pp. 837-55.

22T.N.E.C., Monograph No. 17, ibid., pp. 81-84.
231910.. p. 20.

19

bad one."2n' In practice, entry "relates to the ease or
difficulty with which a firm becomes a member of a group of
competing firms by producing a close substitute for products
they are offering."25 In this practical sense it is now
generally believed that entry into some sectors of the
economy has become "prohibitively difficult" because of
large capital requirements, patents, secret skills and
processes, monopoly over raw materials, and cartel restric-
tions.26

In certain sectors of the economy, on the other

hand, it is rather easy-—in fact too easy-.to enter. The

 

24Kaplan, Smell Business. 9p. gi_t_., p. 58.

25U. 8. Congress, Joint Economic Committee Hearings,
The Effects of’Monopolistic and si-mono olistic P ctices
agfiIngton: . . vernment Pr n ng ce, 5 , p.
119 3e

26Ibid., p. 1,978. There is a rich body of litera-
ture on thIs specific aspect. See for example: Joe S.
Bain, "Economies of Scale Concentration and the Condition of
Entry," in R. B. Heflebower and G. W. Stocking, Readi s 12.
Industrial 0r anization and Public Polic (Homewood:
NIcHara D. IrwIn, Inc., I938), pp. 45-53, where he claimed
that heavy concentration and economies of large plants
create strong barriers to entry. vatter stated: "risk
involved in the original investment, prospect of losses due
to going prices, increasing technical complexities of pro-
duction, existing product differentiation through sales
promotion, differential advantage of the existing leaders by
virtue of their plant and product diversification are all
factors hindering entry," Harold G. Vatter, Small Entegprise

5 1 PP. '

and Oligopol¥ (Oregon: Oregon State College 195
W. S

a re h wrote: ". . . in an established industry,

where the scale of production is considerable, there is no
such thing as freedom of entry," J. K. Galbraith, American

C italism (Boston: Houghton Mifflin Company, 1956), p. 35.
See aIso Wroe Alderson, M rketin Behavior and Executive
Action (Homewood: Richa . rwin, Ific., I957), especIally
Po IIE.

20

entries into these sectors offset the prevailing forces
which tend to reduce the number of existing firms.27 An
indication of this is the ratio of the numbers of establish-
ments to population, which has been quite stable for a
number of years.28
According to Scitovsky:

To establish a new firm always involves the risk of

failure: and the cost of bearing this risk may be

regarded as a cost of entry. The greater the initial

investment in the firm, the greater is the cost: and it
is to minimize this cost that businessmen prefer to

 

27The following statement by Galbraith explains the
working of these forces oriented towards reducing the number
of establishments: "Weaklings may still fail and disappear,
especially in more difficult times. Good times make it easy
to finance consolidations and tempting for the strong company
to expand and the weak to sell out" (Galbraith, 52, Elisa p.
35). See also Phillips who listed the forces re ucing the
number of small firms as: the economy of large-scale
organization, pressures of monopoly, market imperfections,
capital structure and financial needs of small firms,
Joseph D. Phillips, Little Business nIthg_American Econo
Urbana: The UniversIEy of‘IIIIfiEIs ress, I958), pp. 55-
3.

28The number of businesses per 1,000 population has
been quite steady, as the following figures show:

 

 

Estimated Number of Number of

P0 ulation Businesses Businesses per
Year 000), (000) 1,000 Population
1953 159,636 4,180 26.2
'1955 155.270 4.287 25.9
1957 171,198 u,u71 26.1
1959 177.103 4.583 25.8

SOURCE: U. S. Congress Stat s of Small Busin as in
ggtail Trade Staff Report to the SeIect-Commlttee on SmalII'
us ness (Washington: U. 8. Government Printing Office,
1960), p. 5. and Statistical Abstract g£,the United States,

$26.91 22- .19-.5.” P0 -

21

start new firm on a small scale and expand it gradu-
ally.

Some types of retailing and many service businesses,
particularly, require almost no capital; from this stand-
point their cost of bearing risk is negligible. In addition,
many of these trade groups need very little technical know-
how. Therefore, the entrepreneurial risk is not high and
entry or exist is easy. Small owner-managers in these
fields simply try their chances since there is not much to
lose. Thus, students contend that a main determinant of
death rate among retailers and service establishments is the
birth rate.30

Business Conditions

In dealing with business conditions, two groups of
movements in the economy may be distinguished: cyclical and
noncyclical. While the former deals mainly with economic
changes of relatively short duration, the latter refers
generally to structural changes.

There is a significant interrelationship between the
business failure picture and the cyclical oscillations of
the economy. Therefore, to know the state of business is
pertinent in a study of failures. However, contentions

about the interrelationship of business cycles and failures

 

29Tibor Scitovsky, Welfare and Competition (Chicago:
Richard D. Irwin, Inc., 1951), p. 333.

7 3°Status‘g£_8mall Business in Retail Trade, _2, cit.,
p. .

22

differ appreciably. At one extreme is the assertion that

". . . it is one of the truisms of the economic world that
business failures suddenly tragically expand during a
depression, like helium gas in a stratosphere balloon in the
warmth of morning sun."31 This is, of course, in full agree-
ment with the classical theory of the survival of the
fittest. When demand declines and business conditions
worsen, only the fit would remain. At the other side of the
spectrum, a reversed relationship is stated: "failures
usually increase steeply when business tides are running
high."32 This, in one sense, is a logical continuation of
the hypothesis that business failures is a function of
entries. When there is a decline in business, new proprie-
tors tend to postpone entry and closures tend to decline
also. As soon as optimism among the potential entrants is
restored, a large group of insolvent delinquents and
closures appears.33 Another line of reasoning for the same
fact was advanced by Mund:

In a period of business expansion, profits tend to rise
with rising prices. Increased borrowings occur, and the

 

31Ro A. Foulke, Behind the Scenes of Business
revised ed. New York: Dun and BFEdsEreeE,-Inc., , pp.
97-98. This opinion is also shared by Shirley Hoffman, who
found similarity between the failures and the cycles
although the two never overla . Shirley Hoffman, "Business
Failures and Business Cycles,‘ The Conference Board Business
Record, February, 1961, pp. 38-41.

32"Shaking Out the Weaklings," Business Week,
December 21, 1957, p. 38.

33T.N.E.C., Monograph No. 17, 22, cit., p. 4.

 

23

balance of outstanding debt rises rapidly. The case of
making profits tends to promote excesses in the use of
credit and in speculative investment. Finally, the rate
of earnings declines with rising costs, the security for
outstanding credits is weakened, business failures and
bankiggziigseénfizgagfi, prices fall, and widespread

qu .

Looking into the noncylical aspects of business
conditions, one must consider the wide variations among
different sectors. In a recession,for instance, certain
segments of the economy, despite the overall slump, may be
prospering. Also, there are certain changes in the total
economy that are not brought about by cyclical oscillations.
These may be either of a secular or nonsecular nature.
While, for instance, continuous dispersion of a previously
centralized industry is a secular change, period to period
changes in the federal government expenditures can be con-
sidered as a nonsecular noncyclical change. Both changes
are important because they have a direct influence on the
economic prosperity which in turn reflects on the failure
picture. .

Thg Economic Structure

As the endowment of natural resources and the
temperament of inhabitants vary, economies of different
localities vary also. There are basically ten patterns of

economic structure that can be witnessed in the process of

area development. An economy may be: predominantly

3“Vernon A. Mund, Government and Business (New York:
Harper & Brothers, 1955), p. 3.

24

manufacturing, manufacturing with little wholesaling and
retailing, predominantly retailing, significantly diversi-
fied, mainly wholesaling, relatively high on transportation
employment, mainly mining, university town, resort or
retirement town, and lastly agricultural.35 The national
economy also can be identified by its stage of development
within the framework of the above listing. If two economies
are not alike in terms of various characteristics their
particular failure patterns also are likely to be dissimilar.
Among these characteristics are: major product of the
economy, varying degrees of concentration in different
economic sectors, diverging importances of economic sectors
in income generation, total value of products in the
economy, price sensitivity of demand, etc.

A single industry economy, which may be predominantly
manufacturing, might enjoy a larger rate of growth in boom
times than an economy of a greater diversification. The
opposite will also be true when the economic conditions are
reversed. In a recession, unless it is enjoying a highly
income inelastic demand, the least diversified economy is
likely to be hardest hit. Thus, while a greater diversifi-
cation may safeguard an economy from the adverse effects of

economic slumps, it also may hinder growth in good times.

 

35Here no sequential order is implied. For a brief
description of these patterns see D. C. Miller and W. H.

Form Indust Labor gnd_Community (New York: Harper &
Brothers, I99 ).

25

In business slumps or when the level of business
activity is low, the firms in a single industry economy will
be hurt immediately, and among them the ones with less
resistence to business hazards will be eliminated. Next on
the line are their vendors who will be hurt also. Lastly,
the adverse effects of recession will be felt by the rest of
the economy as a result of the harm done to the major income
generating sector. Thus, weaklings in other sectors, namely
retailing and services, will follow suit.36 In considering
the economic structure and its impact on the failure picture,
special attention must be paid to economic concentration
because of its unique influence on the overall failure
pattern.

Economic Concentration

The concept 'economic concentration' has been used
in many different senses. It basically refers to having "a
small number of firms account for a large proportion of an
industry's output,"37 employment, net capital assets, value
added, total research, etc. It, in other words, involves

measuring inequality in the distribution of economic power.

 

36This sequential order might not necessarily hold
true in all situations: however, no matter what the sequen-
tial order is, these events are more readily detectable in a
single industry economy.

37Gideon Rosenbluth ”Measures of Concentration," in
Business Concentration and Price Polio A Report of the
a one Bureau of assassin Risearcfi, New York (Princeton:
Princeton University Press, 1955), p. 57.

26

It also means existence or increase of monopoly power.38
From this latter point of view concentration can affect the
business failure pattern in two different ways. It first of
all is a hindrance for new entries, and if the proposition
that failure is a function of entries is accepted then it
follows that failure in highly concentrated industries will
be relatively low. If a few firms handle a large majority,
if not all, of their total volume in the industry, i.e., if
it is oligopolistic in nature with high concentration and
diversification, new entries may become mainly commodity
extensions of large firms. They enter a new field by
expanding their operations.39

In highly concentrated oligopolistic markets failure
is not only curbed by the lack of numerous entries but also
because of the size and the nature of the firms involved.
Large firms in many cases are extensively diversified and

because diversification safeguards against failure, a high

 

38M. A. Adelman, "The Measurement of Industrial Con-
centration," in R. Neflebower and G. W. Stocking, 22, cit.,

pp. 3-4.

39Har01d G. Vatter, %g. cit., P. 77. See also H. H.

gowarda "Effectiveness of En £2'399A1reagy Established

irms, uarterl ournal of enemies inter, 1957, pp.
132-50, erre he cIassierd_specITIc factors that are neces-
sary for entry as: information about opportunities for
profitable entry, access to productive resources, access to
markets, and ability to overcome immobilization and other
frictions that slow the rate of adjustment; also he stated

that these factors are more readily within the scope of
large enterprises.

27

mortality rate does not exist in these industries. Failure
becomes only the unsuccessful introduction of some new
products or the discontinuance of some old ones and not
collapse of the whole firm.“0
The above two situations are true for highly concen-

trated industries where the process of concentration is more
or less completed and oligopolistic characteristics already
established, such as the automobile and steel industries.
If, on the other hand, the process of concentration is
actively going on then the large firms get larger and axio-
matically some others get smaller. The marginal firms that
cannot get any smaller will naturally be forced out.“1

The total possible amount of expansion of an economy is

not unlimited at any one time, and when the absolute

growth of a few firms becomes greater than the absolute

egrowth of the economy as a whole there must b3 a decline
and eventual elimination of some other firms. 2

 

uoThe Effects g§_Mono olistic gng_g%%si- no olistic
Practices,-U'.' 3. Congress: ear ngs, __p_. g_., p. 5.196.

41In fact, while discussing the reduction in the
number of flour mills and the growth of certain others,
vatter said: "Inability of the small firm to retain its
market in the face of the requirement of modern technology
with its concomitant large fixed plant, the superior pro-
curement and marketing facilities of the more powerful
competitor . . . are the causes of the shrinkage in the
number of plants . . . . Flour milling appears to provide a
classic illustration for those who argue that mature capi-
talism involves the numerical demise of small enterprise"
(Vatter, J. _c_i_t_;_., pp. 61, 65).

42Edith T. Penrose, The Theor .g£_the Growth g£_the
Firm (Oxford: Basil BlackweII, I959), p. 298.

28

In times of economic slump, this process may become
more visible. As a few large firms grow faster than the
economy itself, more and more participants in the same
economy become marginal and when the economic activity
slackens these may fail easily.

While concentration comes about by the growth of
certain firms in industries where there are external and
internal economies leading to a decreasing cost curve,
another method of growth is through mergers and acquisitions.
Generally speaking, the underlying factors of merger move-
ments are desires to eliminate vigorous competition, to
achieve market control or monopoly profits, to make the most
of expected favorable business conditions in early cyclical
expansions, or technical revolution leading to economies of

large scale operations.)+3

Basic Hypotheses
The basic hypothesis of this project was that the
variation in the failure rate is mainly a function of busi-
ness conditions which reflect differently on different
economic structures. The difference, then, between the
state and national business failures pattern shown in Figure
l was caused by the structural dissimilarities between the

two economies on which business conditions reflected

 

"3Ra1ph L. Nelson, Mer er Movements in American
Industry 1895-1956 (Princeton: Princeton UnIversIty Press,

29

differently. Other emerging hypotheses from this were as
follows:

1. The characteristics of the business population
is one of the major determinants of the basic
failure pattern. There will be a general
resemblance between the industrial composition
of the total business population and that of the
business failures.

2. Income and basic economic structure are also
major contributors. Thus, Michigan's dependency
on durable goods industries makes its economy
and income more erratic than the national. As a
corollary, Michigan's failure rate also is more
erratic.

3. With regard to Michigan, the prevailing extreme
importance of the durable goods industries in
the state makes its economy too dependent on the
national business conditions since these indus-
tries are engaged in the production of goods
that are mainly exported from the state. Thus,
changes in the national demand for Michigan's
products would amplify fluctuations in the
state's income as well as the total business

failures.

30

The Data

A number of statistical series compiled by D. & B.
were utilized for this study:

22221 listed concerns: These data represent enter-
prises listed in each July issue of the 2. 2 _B, Reference
2225, The scope of these listings are limited to manu-
facturers, wholesalers, retailers, building contractors and
certain types of services including public utilities.
Branches are listed separately when they act as individual
business units, although chain retail stores are not listed
individually. Obviously, this series does not cover all
businesses in the country, for it excludes financial enter-
prises, insurance and real estate companies, railroads,
terminals, amusements, and professions. It furthermore does
not include many small one-man services.

E22,ente22rises: This series includes the numbers
of the names added to the six Reference 22252_published
during each year. As soon as the first credit report is
written on a concern, it is included in the listing. This
series includes also successions which are newly listed
firms because of a change in their legal form or ownership.

Business failures: These are industrial and com-
mercial enterprises which ceased operations following
assignments, voluntary or involuntary bankruptcy, attach-
ment, execution, and other similar legal procedures. Also

included are voluntary withdrawals from business that caused

31

loss to creditors, enterprises involved in court action such
as receivership, reorganization or arrangement which may or
may not end in discontinuance, and lastly, businesses making
a voluntary compromise with creditors out of court“)4

A business failure then, as defined by D. a B.,
entails a loss to creditors. D. a B. data are composed of
cases belonging to any one of three situations. First,
enterprises which ceased operation as a result of legal
action. Second, businesses involved in court action which
does not result in a cessation of activity. Third, volun-
tary compromises with creditors, that may or may not result
in cessation of activities.

Although business failure statistics were the most
important for our purposes, the others also were used on

various occasions.

Failures vs. Discontinuances
We have already mentioned that failure statistics
are relatively limited in scope for they represent only
about 4 percent of total discontinuances, of which half are
assumed to be failures even though there is no loss entailed

to creditors. It was then important to establish the

 

1111
Statistical Abstract of the United St tes 1252,
U. S. Department of Commerce,o 22,0 cIE., p. OI. VIta
Statistics of Indust and Commerce a 3., Inc., Iuly,
I993, pp. 3:4, hurcfiIII, l(Recent Business Popu-
13:80“ Moggments," Survey_ of ngrent Business, January,
spa 1

32

similarity or dissimilarity between these two series so that
when discussing certain patterns in failure pictures it

would become possible to have a rough notion about how far
these might be from the patterns occurring in the discontinu-
ance statistics.

Despite the differences in the scope of the two
groups of data, there is a substantial resemblance between
them. The overall similarity between failure data and the
Department of Commerce discontinuance series can be observed
in Figure 3. These two series are quite alike, with the
exception of the war years during which store owners shut
down their businesses either because they were drafted or
because material and manpower were inadequate. While the
number of closures ran high during the war years, the
failure rate was very low as business conditions were
satisfactory for those who managed to stay open. The dis-
continuance pattern, however, is not as oscillatory as the
failure pattern. The more stable nature of discontinuance
figures may partly be attributed to the stable nature of the
other nonfailure factors involved in discontinuances. For
instance, there is no reason to believe that the number of
closures due to the death of owner-managers fluctuates
markedly from year to year. Another factor that makes the
discontinuance picture relatively smoother is the fact that
the timing of discontinuances may not coincide with the

timing of failures. While the failure record keeps pace

33

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chem

34

with the oscillatory movements of the economy fairly well,“5
discontinuances may noticeably depart. In the case of
failure, the firm is actually forced out because of
insolvency created by one of a host of reasons. However,
the fact that a firm is not functioning satisfactorily does
not necessitate withdrawal as long as solvency is main-
tained. Especially when the outside prospects for a better
Job is slim the owner-manager would remain in his field,
even if he were to pay himself only a subsistence salary.
Moreover, availability of unpaid family labor and the
absence of rents, in a household business, make it attractive
to continue the present work until alternative employment
opportunities become brighter.46 The fact that the pro-
prietor may pay himself much less than the going rate may

suffice to keep the concern alive.47 This picture, however,

usThe National Bureau of Economic Research studies
dealt with business failures time series as an indicator.
In these studies, failure series are considered to be lead-
ing the cycles. See, for instance, Arthur F. Burns and
Westley C. Mitchell, Measurin Business 0 cles (New York:
National Bureau of EconoEIc Research, Inc., #7). Also
Geoffrey H. Moore, Measurin Recessions, Occasional Paper
61 (New York: National Bureau of Economic Research, Inc.,
1958). Shirley S. Hoffman stated, "cyclical changes in the
number of business failures bear important resemblances to
past fluctuations, but are never precisely the same."
'Business Failures and Business Cycles," The Conference
Board Business Record, February, 1961, ppC‘EB- .

“5rh1111ps, 9g. cit., p. 61;.
47The average income of active proprietors of unin-

corporated nonagricultural businesses computed by Phillips
substantiates this point. These incomes for selected years

35

may be completely reversed in good times. Those marginal
businesses that managed to survive may decide to close if
outside prospects seem brighter.48 Because, however, of

these stabilizing factors the total discontinuance picture

 

were:
Year Income
1947 $3,414
1949 3.123
1951 3.702
1952 3.583

SOURCE: Phillips, _¥, cit., p. 51. By paying very
low salaries and by putting n 133g hours, some entrepre-
neurs manage to survive despite the undesirable economic
conditions.

uaDuring the two years from December, 1941, to
December, 1943, nearly a million enterprises (mainly in
distribution lines) closed shop. Only about half a million
new firms were started during the same period, so there was
a net drop of half a million enterprises in the business
population. Kaplan, Small Business, 22, g;£., p. 45. While
some of these were forced to do so because of the draft,
control of material supplies or explicit mandate, others
shut down their businesses and moved into more lucrative
employment existing in industry. Melville J. Ulmer, "The
Postwar Business Population," Survey 2; Current Business,
January, 1947, p. 10. In boom years, closures of tfiIs kind
can be witnessed very often as greater opportunities attract
marginal store owners whose businesses do not yield enough
to cover their reservation rice. These people usually make
much less than their counterparts working in industry. One
major exception to this, of course, is the case where the
individual proprietor is not in business on his own free
will but due to a continuous lack of o portunity to move
elsewhere. As Mabel Newcomer wrote: 'The larger part of
the little businesses in Poughkeepsie afford a very meager
living, and most of the proprietors who are willing to oper-
ate such marginal concerns indefinitely are likely to be
those of mediocre ability or those handicapped by some form
of discrimination who have difficulty in finding well-paid
employment." Mabel Newcomer, "The Little Businessman:
Study of Business Proprietors in Poughkeepsie, New Yerk,"
Business History Review, Winter, 1961, p. 511.

36

looks somewhat smoother than that of failures. Neverthe-
less, there exists a substantial resemblance between these
two series of statistics as portrayed by charts 4, 5, and 6
where comparisons of failures to discontinuances are shown
separately for the wholesaling, retailing, and manufacturing
sectors. A similar attempt to illustrate the similarity
between data relating to services was not made because of
basic discrepancies in the definition, composition, and

scope of the two sets of figures.

(00mg
20. .
180.

16.0
14.0

12.0

10.0

l J J

1946 an we '49

SOURCE:
the Statistical

l
:50

Dun and Bradstreet

AND DISCONTINUANCES

l
:51

37

Figure 4
U. S. WHOLESALING FAILURES

U. S. Wholesaling Discontinuances

it.
:52

L
'53

1
:54

l
'55

L
I56

4_/—~

l
'57

Inc., as reported in
Abstract 9_i_'_ the Q. __., 22. cit., and Busi-

ness SEaEIstIcs, 22, gi§,, p. .

  

U. S. Wholesaling Failures

J
I58

   

 

'59

38

Figure 5

U. s. RETAILING FAILURES
(000) AND DISCONTINUANCES

lSOJ.L _
135.

120. U. 8. Retailing Discontinuances
105.
we
75-

    

U. S. Retailing Failures

 

1.

 

l

1 i l 1 l 1 l I

V 1 A 1
19% W7 ":8 '49 '50 '51 '52 '53 '54 '55 '56 '57 '58 '59

 

SOURCE: Dun and Bradstreet, Inc., as reported in
the Statistical Abstract of the 2. _S_., _2. cit., and Business
StatIstIcs, 92. cIt., p. '8'.-

(000)

30.0

25,0.

20.°

 

I
1946 '47 '48 '49 '50 '51 '52 '53 '51: '55 '5? '57

39

Figure 6

U. 8. MANUFACTURING FAILURES
AND DISCONTINUANCES

U. S. Manufacturing Discontinuances

  

 

_J J 1. J 1 11 l l 1 1

SOURCE: Dun and Bradstreet, Inc., as reported in
the S atistical Abstract gg’the 2, §,, 0 . cit., and Busié

gees a 8 cs, op, cit., p. .

U. 8. Manufacturing Failures

I
'5

 

 

'59

CHAPTER II

THE COMPOSITION AND CHARACTERISTICS
or BUSINESS FAILURES IN MICHIGAN
AND THE UNITED STATES

In the preceding chapter, it was established that
there is a significant difference between the pattern of
failures in the state and the nation as a whole. Not only
do differences exist in the aggregates but also in the
composition. Some appreciation of the underlying causes of
differences may be obtained from an examination of the dis-
parities in the composition of casualties in different
economic sectors.

Significant points next to be brought into focus for
better understanding of the overall picture were: the kinds
of businesses more likely to fail, their relative share-of
the total mortality picture, the changes in this relative
share, the rate of failure of significant economic sectors,
the size distribution of establishments and their age at
failure, and the cyclical ramifications of the failure
pattern.

The present chapter undertakes the task of investi—
gating the failure picture in Michigan and the United States

within the framework of the above problem areas.

40

41

Manufacturing, wholesaling, conStruction, retailing, and
services sectors were considered individually. Four
selected years were chosen for study: 1953, 1954, 1958, and
1959. Of these four, 1953 and 1959 were prosperous years
for both Michigan and the nation; whereas, the other two
were recession years. Referring, once again, to Chart 2 in
Chapter One, it can be seen that 1953 was relatively the
most favorable year in Michigan, as the rate of failure was
as low as 11 casualties per 10,000 firms in existence, as
opposed to 33 per 10,000 for the nation. In 1958, on the
other hand, the rates of failure in both economies came the
closest together since 1947.

Of course, it should be remembered that four obser-
vations in a seven year period are not enough to derive
definite conclusions. Hence, all the findings and analyses
made in this chapter are more suggestive than definitive.

Throughout the chapter, Dun and Bradstreet (D. & B.)
failure statistics are used. The concern or the business
enterprise is the basic unit in these statistics. As was
noted previously, the D. & B. reports involve a highly
restrictive definition of failure. Consequently, all
failure figures used in this chapter are in a sense under-
statements of the true situation. Moreover, the use of D. &
B. figures, based upon the number of figmg failing, in con-
Junction with U. 8. Census figures consisting of the number

of establishments in operation, results in especially gross

42

understatements in the computation of failure rates. How-
ever, the resemblances found between the failure and discon-
tinuance statistics made it 1 kely that the trends and
developments presented by the failure data are duplicated by

discontinuance statistics, but upon a much larger scale.1

Who is Likely to Fail?

D. & B. has analyzed over 1,000,000 business failures
during the past 100 years. It reports that retailers made
up about 50 percent of the total casualties, and food stores,
eating and drinking places together, accounted for about one-
third of this total retail toll. The average casualty was
small in terms of liability size, the typical one being in
the $5,000 to $25,000 range. Usually, the failure was in
its second or third year of operation and almost three-
fifths were less than five years old. The average business
casualty was likely to be located in a nonmetropolitan area.2
These basic properties of the typical failures were as
relevant for Michigan as for the nation as a whole.

Table 1 shows the number and percentage breakdown of
business failures both in Michigan and the United States for
the four years considered. In both economics the largest
number of failures occurred in the retailing sector; manu-

facturing was second, followed by construction, wholesaling,

lFor definitions, description of the data and com-
parison of failure statistics with discontinuance data see
Chapter One, especially pp. 28-33.

2Rowena Wyant, "Least Likely to Succeed," Dunfis
Review and Modern Industry, November, 1957, p. 31.

43

and services.

TABLE 1

NUMBER AND PERCENT DISTRIBUTION OF BUSINESS FAILURES
IN MAJOR INDUSTRIAL AND COMMERCIAL CATEGORIES,
MICHIGAN AND THE UNITED STATESa

 

t

 

Michigan Halted States
Total Percent Total Percent

Number Distributionb Number Distributionb

 

Manufacturing 227 16.6 9,024 18.5
Wholesale Trade 144 10.5 4,883 10.0
Retail Trade 705 51.6 24,259 A9.8
Construction 205 15.0 6,555 13.5

Commercial
Services 84 6.2 3,984 8.2
Total 1,365 100.0 48,705 100.0

 

aIncludes totals of four selected years (1953, 1954,
1958, and 1959).

bDetail may not add to total because of rounding.

SOURCE: Dun and Bradstreet, Inc., special tabu-
lations and The Failure Record Through 1259.

 

Despite the resemblance between the relative magni-
tudes of failure statistics in the five major sectors, the
composition within each sector varied when Michigan was com-

pared to the nation as a whole.

Ianufacturing Failures
An examination of the composition of total manu-
facturing failures in both economies revealed certain
interesting facts. Failures in the Iron, steel and products,
and Machinery groups in Michigan, relatively Speaking, over-

whelmingly exceeded their national counterparts. The case

44

was reversed for the Food, Textile, and Lumber and products
sectors, where during the four years studied the death per-
centage, as can be observed in Table 2, was higher in the
national scene. The relative share of Textile mill products
and apparel in the nation (24.4 percent of the total) and
the share of the Machinery sector in Michigan (34.4 percent
of the whole) were striking evidences of the dissimilarity
existing in the makeup of total manufacturing failures in
the two economies.

This difference in the compositions of manufacturing
failures could be accounted for mainly by the divergencies
of the industrial structures. As can be noted in Table 3, a
large portion of the manufacturing population in Michigan is
concentrated in durable goods industries. In fact, it will
be seen in the third chapter that this sector in the state
absorbs a very substantial share of the total manufacturing
employment and generates a substantial amount of total
personal income. The total share of the Machinery and the
Iron, steel and products categories of the general industrial
population was 43.5 percent in the state as opposed to 23.2
percent in the nation as a whole. Nondurable goods pro-
ducers, on the other hand, constituted a larger share of the
total in the national economy than in Michigan. Food and
kindred products, Textile mill products and apparel, and
Lumber and lumber products, which are all nondurable indus-
tries, composed 42.0 percent of all manufacturing establish-

ments in the United States as opposed to Michigan's 25.8

45

 

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46

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47

percent.

A comparison between percentage distributions in
Tables 2 and 3 revealed striking resemblance. This
resemblance suggested that to a substantial extent the busi-
ness population plays an important role in the overall
formation of failure statistics. In Michigan a significant
percentage of failures (49.9) took place in the Iron, steel
and products, and Machinery categories which together also
accounted for 43.5 percent of the total manufacturing popu-
lation. In the United States failures in Food and kindred
products, Textile mill products and apparel, and Lumber and
lumber products categories all together accounted for 50.7
percent of the total. Forty-two percent of all manufacturing
establishments existed in these categories.3

Since the relationship between failures and popu-
lation was not one to one, it was important to analyze the
rate of failure in different manufacturing categories.
Table 4 illustrates how the rates of failure compare in

different categories in the same year and in different

 

3The coefficients of variation (V) the ratio of
standard deviation (0? and arithmetic mean I) multiplied by
100), for failure statistics and manufacturing population in
Michigan, were 30.8 percent and 23.8 percent respectively.
For the nation as a whole these figures are 21.5 percent and
16.2 percent. As can be noticed there is somewhat more
scatter among failures than among the manufacturing popu-
lation; however, the coefficients of variations were not far
apart either in Michigan or in the United States. Further-
more, the Chi Square test proved that the differences in the
coefficients of variations was insignificant at the 5 percent
confidence level. Thus, the basic resemblance between the
failure data and business population was demonstrated more
effectively.

48

years, and how these rates compare in Michigan and in the
United States. One of the most important facts that this
table brings out is that while the national failure rate
changed little (from .64 percent in 1953 to .83 percent in
1959), Michigan's rate was more than tripled. This net
increase in Michigan was mainly due to the more than pro-
portionate rise of failure rates in Lumber and lumber
products, Iron, steel and products, Machinery, and Miscel-
laneous manufacturing categories. These four categories
were more important in Michigan's failure picture for they
constituted 61 percent of the total manufacturing failures
as indicated in Table 2.

The major portion of the failure rate growth in the
national scene was attributable to Textile mill products and
apparel, Lumber and lumber products and Miscellaneous manu-
facturing categories which comprised almost 60 percent of
the total manufacturing failures. A slight increase in the
rate of failures in these categories means a substantial
Jump in the total failure number because of their large
share of the total.

A comparison between Tables 2 and 4 discloses that
most failures do not occur in the industrial categories whens
the higher failure rates prevailed. Failures in the Leather
and leather products category, for instance, accounted for
about one percent of total manufacturing failures in Michigan

although the failure rate in this category was over 2.5

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50

percent. In the economy as a whole, about 4 percent of total
manufacturing failures occurred in this category although the
failure rate was very high during the four years considered.

Michigan's relatively more failures in durable goods
manufacturing can substantially be explained, as already
discussed, by its manufacturing population structure. The
relatively greater number of durable goods manufacturing
establishments increases the probability of having more
failures in these categories. However, since the failure to
population ratio is not one to one, the industrial popu-
lation structure does not explain the increase in the total
failure rate as revealed in Table 4.

The total failure rate in Michigan went up from .16
percent in 1953 to .51 percent in 1959. A number of developf
ments in Michigan's economy were considered as contributing
to this acceleration. Among these were: a decline in the
meber ahd lumber products industry, increasing integration
in the automobile industry, the dispersion of the auto indus-
try, and a decline in the demand for durable goods.

The Lumber and lumber products industry has been
losing its relative importance. This decline is reflected
in the decrease of the number of establishments,“ as well as
the number of employees engaged in this type of work.

Furthermore, the industry's direct contribution to the total

“From 1,635 in 1953 to 1,452 in 1959, County Busi-
ness Patterns, _2. cit.

51

value added by manufactures declined during the period of
19u7 to 1958.5

In recent years the auto giants in Michigan have
been making efforts to integrate different phases of manu-
facturing under one administration, instead of subcontracting
the work to smaller firms. The major reasons for this trend
are maximizing profits, avoiding the unemployment expenses
stemming from the nature of their labor contracts, and
encouraging stability of employment within the manufacturing
operations.6 More than a fourfold increase in the Michigan
failure rate RIIIron, steel and products between 1953 and

1959 can be partially attributed to this development. Both

 

5The following table illustrates these points:

NUMBER OF EMPLOYEES AND THE VALUE ADDED
IN LUMBER AND WOOD PRODUCTS INDUSTRY
AS A PERCENT OF MANUFACTURING TOTAL

 

 

 

Michigan United States
No. of Employ- Value Added No. of Bmploy- Value Added
I ees as a $ of as a % of ees as a 5 of as a T of
ear” State Manu- State Manu- National Manu- National Manu-

facturing Total facturing Total facturing Total facturing Total

19h7 1.7 1.3 h.h 3.h
1954 1.4 .8 4.1 2.7
1958 1.3 .8 3.8 2.2

 

SOURCE: Computed from Census of Manufactures, 1947, 1954.
1958, o . cit.

 

B S 6John L. O'Donnell,g£_gl,, Economic and Population
ase tudy g; the Lansing Tri- ounty Area (East Lancing:
Bureau 0 usiness an conomic Researdh, Michigan State
University, 1960), p. 76. Although this study dealt with
only one geographic component of the state of Michigan, the
problems have been the same all over the state.

in Drop forging and the Tool and die industries, for
instance, the integration in the automobile industry has
been harmful, especially to undiversified small concerns,
for whom the large auto firms had been major customers.7

It is very likely that the tendency of the auto
industry to relocate outside Michigan also caused hardship
to hundreds of small exvendors, and probably forced a few
out of existence.8 The declining business that the local
vendors have been experiencing because of the dispersion has
been an acute problem in special cases like the drop forging
industry where about 80 percent of the total output is
destined for the auto industry.9

During the latter part of the fifties demand for
consumers' durables declined constantly. While, for
instance, the growth in this sector was 5.1% per annum in
the first part of the fifties, this growth slowed down to
0.5% per annum between 1955 to 1960.10

 

7The above statements are based upon interviews with
a few executives in the field. Also, a colleague who is
presently doing a study on the small tool and die manu-
facturers in Michigan confirmed the convictions of this
writer in an informal discussion.

8This point will be discussed in greater detail in
Chapter III.

9Economic and Population Base Studngg the Lansing
Tri-County Area, op, cit., p. 74.

10Business in Brief, The Chase Manhattan Bank, New
York (May-3une, 19615, p. 4.

Akin to this overall decline, Michigan also suffered
a great deal because of the decreased sizes of federal
defense contracts. These sizes have been below their 1951-
1953 level since l95u. Michigan's share declined partly
because of the high costs occurring in Michigan manu-
factures. However, more important were the changes in the
composition of federal contracts.11 In either case small
vendors were hurt directly or indirectly because of the
declining business.

Size Distribution 2£_Manufacturing Failures

 

 

A number of criteria may be used in determining the
size of a firm: number of employees, total assets, and
total sales. In collecting the failure data D. & B. has
found it suitable for their purposes to use liabilities as
an indicator of size.12 Ordinarily, it is likely that if a
larger firm fails it will probably have a larger liability
size. Thus, this measure could reasonably be used for the
analysis of size of failures.

Table 5 compares Michigan and United States manu-
facturing failures according to their respective liability

size group. In the years analyzed, few manufacturing

 

113ee Chapter III.

12The liabilities reported are primarily current
indebtedness. And for our purposes here "are defined as
including all accounts and notes payable, also all obli—
gations whether in a secured form or not, known to be held
by banks, officers, affiliated companies, supplying
companies, or the government." Dun and Bradstreet, Inc.,
personal correspondence.

514

TABLE 5

LIABILITY-SIZE DISTRIBUTION OF MICHIGAN AND
UNITED STATES MANUFACTURING FAILURESa

W

Michigan United States
Liability size group Number Percentb Number Percentb

Under $5,000 12 5.2 80l 8.6
5,000 - $25,000 63 27.6 3,641 39.2
25,000 - $100,000 92 40.4 3,169 34.1
100,000 and over 61 26.8 1,673 18.0

TotalC 228 100.0 9,284 100.0

 

aIncludes mining failures also. Figures here repre-
sent total of four years (1953, 1954, 1950‘. and 1959)-

bDetail may not add to total because of rounding.

CMichigan total here is 228 as opposed to 22
reported in Table 1; this is because one mining failure was
omitted in that table. Here, however, it was not possible
to separate mining and manufacturing failures to analyze
liability size group.

SOURCE: Dun and Bradstreet, Inc., Special tabu-
lations for Michigan; and U. 8. figures as reported in the
Statistical Abstract 93 the 2. §., 92. cit.
failures in Michigan were in the $5,000 or less category;
however, in the two largest groups the state had, relatively
speaking, more failures. In other words, the state's manu-
facturing failures were, on the average, larger than their
national counterparts. This difference can be attributed to
the nature of Michigan's failures: from the previous analy-
ses we know that casualties in Michigan manufacturing

occur red more often among the concerns engaged in durable

and semi-durable goods production which require relatively

\f‘.
U]

larger capital investments. Thus, it was likely that these
firms were generally larger than the average national manu-
facturing failure which is more often engaged in nondurable
goods manufacturing requiring less capital. Of the 227
Michigan failures during the four years analyzed, 120 were
in the Iron, steel and products, Machinery, and Transpor-
tation equipment categories. Of these, 75 percent were in
the two largest, and 30 percent were in the largest lia-
bility size category. On the other hand almost 50 percent
of the nondurable goods manufacturing failures were of the
two smallest liability size categories.

Life Span 2f Manufacturing Failures

 

 

An analysis of the ages of failures is presented in
Table 6. Comparison of manufacturing casualties in the two
economies discloses that the failures among Michigan con-
cerns lived longer than their national counterparts. For
instance, while 43.A percent of the Michigan failures lived
five years or less, this was true of 52.0 percent nationwide.
Similarly, 30.5 percent of the manufacturing casualties in
the state had survived over 10 years, while the national
figure was only 26.3 percent. Furthermore, in both
economies manufacturing failures outlived those in other
sectors.

The fact that manufacturing casualties in the state
survived longer may be occasioned by a number of factors.

The firus that failed, first of all, were on the average

56

larger than the national as is discussed above. This size
differential might have contributed to the longer life span

as has been conceded by many writers.13

TABLE 6

A COMPARISON OF THE AGES OF MICHIGAN AND
UNITED STATES MANUFACTURING FAILURESa

W

Percent of the Tgtal Failgzgs

 

Age in Years United States Michigan

One year or less 3.1 2.7
Two years 16.8 10.2
Three years 14.2 13.3
Total three years or less 34.1 26.2
Four years 10.3 8.8
Five years 7. 8.4
Total five years or less 52.0 43.4
Six years 6.7 8.4
Seven years 4.8 6.2
Eight years 3.9 5.8
Nine years 3.0 3.1
Ten years 3.3 2.7
Total six-ten years 21.7 26.2
Over ten years 26.3 30.5

Total 100.0 100.0

 

aMichigan figures represent the total picture of the
four years studied, whereas U. 8. figures are only for 1959.
It would have been possible to use only 1959 figures for
Michigan also but as the total failure number in the state
is not large, one year's data may present a biased picture.

SOURCE: Dun and Bradstreet, Inc., Special tabula-
tions, and The Failure Record Through 1252.

 

 

13Here the causal relationship was not very clear-
cut. Many writers assert that size is a determinant of
longevity. However, an argument can also be made by stating
that longevity causes size differentials. This implies that
as the firm for some reason manages to survive it would grow

Another possible explanation is the risk that entry
involves.lu The greater the risk the more thorough the
investigation is likely to be prior to entry. Generally
speaking, manufacturers of durable goods would need larger
capital requirements in order to function and compete ade-
quately. Since larger capital investments basically imply
greater risk, starting the business ordinarily would be only
upon the entrants' assurance of the presence of unexploited
market potentials. This better pre-entry investigation
probably reduces the risk and shortens the dangerous begin-
ning stage that newcomers commonly go through. Also having
larger sums invested in the enterprise might be an incentive
to struggle more vigorously before giving up.

Furthermore, the failure rate in Michigan being
lower, may be in part indicative of less competition or
better prevailing conditions (although they may be worsening
faster than those of the nation). In either case, the
average manufacturing concern would have a better opportunity

for longer survival.

 

bigger. Of these two propositions, the former seems to be
more plausible. In many cases, expansion would necessitate
conditions that can be attained only by large firms. Since
attainment of these conditions are beyond the reach of small
firms they would not grow. 0n the other hand, small firms
can survive in some Special markets because of certain
special advantages even though they never become large.
Penrose, pp, g;§., pp. 99—100.

1”See Chapter One, p. 20.

Lastly, in Michigan the industrial pattern is such
that there is relatively more durable goods manufacturing.
Entry here is somewhat limited because of the basic capital
requirements. This partial hindrance to entry often keeps
out some incompetents who would otherwise enter freely, but
withdraw immediately, because of the lack of certain mana-
gerial skills.15 The absence of these quick failures helps
keep the average age higher in Michigan.

Wholesaling Failures in Michigan
and the United States

The pattern of failures in wholesaling in Michigan,
on the whole, was quite like that of the nation (Table 7).
Dry goods failures in the state had a relatively lower share
of the total, whereas the Food and farm products, and the
Lumber, building materials and hardware categories had rela-
tively larger shares. Table 8 contrasts the rates of
failures in different wholesaling categories. Unfortunately,
because of the absence of Michigan total wholesaling estab-
lishment figures for 195h, a similar table could not be
produced for that year. Among the various categories it was
found that Apparel and dry goods had the highest failure

rate. This was partly because of the distorted picture

 

15Along with the capital requirements and concen-
tration there are a number of factors in Michigan claimed to
be hindering further attraction of industries and causing an
outflow of industrial concerns; in Chapter Three these will
be considered.

59

presented by the small number of total establishments in
this category. The Lumber, building materials and hardware
category had a high rate in both economies; accordingly, the
relative share of failures in this category was also high.
As a whole, the rate of casualties in Michigan wholesaling
was slightly higher than the national in 1958, but it was
lower in 1959.

TABLE 7

DISTRIBUTION OF MICHIGAN AND UNITED STATES
WHOLESALING FAILURESa

 

 

 

 

Mighigan, United States
Total Percent Total Percent

Number of Distri- Number of Distri-
Failures butionb Failures butionb

 

Food and farm

products 29 20.1 1,183 24.2
Apparel 5 3.5 188 3.9
Dry goods 2 1.4 192 3.9
Lumber, building

materials and

hardware 21 14.6 544 11.1
Chemicals and drugs 9 6.2 192 3.9
Motor vehicles and

auto equipment 11 7.6 233 4.8
Miscellaneous 67 46.5 2,351 48.1

Total 144 100.0 4,883 100.0

 

aIncludes totals of four selected years (1953, 1954,
1958. and 1959).

bDetail may not add to total because of rounding.

SOURCE: Basic data from Dun and Bradstreet, Inc.,
Special tabulations, and The Failure Record Through 1222,

60

TABLE 8

NUMBER or WHOLESALING FAILURES EXPRESSED AS
A PERCENT OF NUMBER or ESTABLISHMENTS IN
WHOLESALING IN MICHIGAN AND THE
UNITED STATES, 1958, 1959a

 

 

 

 

—:t-‘___r__ —=:
Elanisan .Qnitad_§2ates
1958 1959 1950 1959
Food and farm products .71 .33 .55 .52
Apparel, dry goods 2.73 2.50 .90 .70
Lumber, building materials
and hardware 1.03 .79 1.52 .6g
Chemicals and drugs 1.21 1.04 .49 .4
Motor vehicles and auto
equipment .36 .60 .29 .35
Miscellaneous .46 .34 .33 .49
Total .59 .44 .50 .50

8‘The note under Table 4 applies to this table also.

SOURCE: Computed from 1. 8 Census of Business
Vblume 2!, Wholesale Trade Area atIstics,-UZ S. Department
of Commerce,‘Bureau of the Census (washington: U. S.
Government Printing Office, 1961), pp. 1-5, 1-10, 22-5, and
Count Business Patterns, 1959: Dun and Bradstreet, Inc.,
special tabulations and The Failure Record Through 1222.

Akin to this decline in the failure rate, the number
of Michigan wholesaling failures declined in relative as
well as in absolute terms as Table 9 points out. The same
table reveals that variations in Michigan wholesaling
failures were more erratic than their national counterparts,
probably because of the small absolute number in Michigan in
any one year. Because of the small numbers involved,

changes in percentage figures between any two years may not

be accurate indicators of underlying conditions.

61

TABLE 9

WHOLESALING FAILURES AS A PERCENT OF TOTAL,
IN MICHIGAN AND THE UNITED STATES

W

 

 

Michigan United States

Number Number Whole- Number Number Whole-

of of saling of of saling

Total Whole- Failures Total Whole- Failures
Failures saling as a Failures saling as a
Failures Percent Failures Percent

of Total of Total
1953 114 16 14.0 8,862 933 10.5
1954 209 19 9.1 11,086 1,132 10.2
1958 547 64 11.7 14,964 1,431 9.6
1959 496 45 9.1 14,053 1,387 9.9

 

SOURCE: Basic data from Dun and Bradstreet, Inc.,
Special tabulations, and The Failure Record Through 1252.

Liability Size 23 Wholesaling Failures

 

There were relatively more wholesalers who failed in
Michigan, during the four years investigated, in the smallest
liability group, $5,000 or less. Similarly, there were
relatively more failures in the state who belonged to the
largest liability group, $100,000 and over. Thus, in both
extremes, the wholesaling casualties in Michigan outstripped
their national counterparts, as seen in Table 10.
AggHQQ’Wholesaligg_Failures

Table 11 illustrates the age pattern of failed
wholesalers in both economies. AS shown here there were
more United States failures that had not survived over three
years and also more failures that had survived over ten

years. The largest number of Michigan firms that were ten
1

62

TABLE 10

LIABILITY-SIZE DISTRIBUTION OF MICHIGAN AND
UNITED STATES WHOLESALING FAILURESa

m

 

 

1 *
J

 

 

 

 

 

Michigan United States

Liability Size Group Number Percentb Number Percentb
Under $5,000 16 11.1 413 8.5
5,000 - $25,000 53 36.8 2,054 42.1
25,000 - $100,000 48 33.3 1,785 36.6
100,000 and over 27 18.7 631 12.9
Total 144 100.0 4,883 100.0

 

aFigures here represent the total of four years
(1953, 1954, 1958, and 1959)-

bDetail may not add to total because of rounding.

SOURCE: Basic data from Dun and Bradstreet, Inc.,
special tabulations for Michigan, and U. S. figures as
reported in Statistical Abstract 2; the 2, §,, 0 . cit.

TABLE 11

AGE OF WHOLESALING FAILURES IN
MICHIGAN AND THE UNITED STATESa

Percent of the Total

 

Age in Years Michigan United States
One year or less .7 3.3
Two or three years 25.0 24.6
Four or five years 24.0 19.4
Six - ten years 26.4 24.4
Over ten years 22.9 28.3
Total 100.0 100.0

 

8See the note under Table 6 which applies here also.

SOURCE: Basic data from Dun and Bradstreet, Inc.,
special tabulations, and The Failure Record Through 1952.

63

years or older at the time of failure was in the manufactur-
ing sector with the next largest number in wholesaling. In
the national scene, however, wholesaling was ahead of even

manufacturing as indicated in Table 12.

TABLE 12

PERCENT DISTRIBUTION OF BUSINESS FAILURES BY
LIFE SPAN IN MICHIGAN AND THE UNITED STATES3

 

 

l_Year or Less 5_¥ears or Less 10 Years or Less

 

 

 

Sector Mich. U. S. Mich. U. S. Mich. U. 3.
Manufacturing 2.7 3.1 43.4 52.0 69.5 73.7
Wholesaling .7 3.3 50.7 47.3 77.1 71.7
Retailing 3.7 4.3 55.8 62.2 79.9 82.7
Construction 1.0 2.0 47.0 51.9 77.5 79.8
Services 7.3 3.6 46.0 59.0 81.7 80.6

Total 2.9 3.6 51.9 57.1 77.6 79.4

 

i
'aSee the note under Table 6 which applies here also.

SOURCE: Basic data from Dun and Bradstreet, Inc.,
Special tabulations, and The Failure Record Through 2222.

The same table indicates that although there were
almost no failures in the wholesale group at the age of one
year or younger, a substantial number did not live more than
five years. In the national scene wholesaling after the age
of one had the fewest failures of all sectors.

There are a number of reasons for the general
greater life span of wholesaling failures. Along with the
relatively larger capital requirements in many types of

wholesaling, the requirement of technical know-how also

64

hinders entry. Moreover, new entrants probably study the
prospects carefully before entering, for some types of
wholesaling are costly propositions. Thus, limited entry
coupled with preinvestigation reflects not only on the age
of wholesaling failures as Just discussed but also on the
average age of wholesaling establishments; life expectancy
as illustrated in Table 13 is the highest in this sector.
The table, however, is based on 1947-1954 experience; Since
then the tendency of the limited function wholesalers to

increase in number has become more and more noticeable. As

v“ r T‘T -‘ 1
‘t'\ub‘q A}

LIFE ELITJCTAHC‘I’ FOR 3131313533 POPUU.;‘C‘ION III DIE'FJI‘LI‘IIT
INDUSTRY DIVISION, PERCJNT OF FIRMS
SURVIVING T0 SPECIFIED AGE
(1947-1354 experience)

 

 

Age in All Contract Manufac- Hholesale Retail Service

Years Inlustrios Construction turing Trade Trade Industries
0.5 77 82 82 85 74 77
1.3 54 62 60 67 49 53
2.5 41 51 46 56 36 40
3.5 34 44 38 48 29 33
4.5 29 4O 33 43 25 20
5.5 26 37 29 40 22 25
6.5 24 33 26 37 20 23
7.5 23 33 24 35 19 22
8.5 21 31 23 34 18 21
9.5 20 3O 22 32 17 20

10.5 19 29 20 31 16 19

 

Y

Churchill, "Age and Life Expectancy of Business

’UEL:IRVJC.
Firms," durvez‘gg Current Busintss (December, 1955), p. 18.

Ox
U":

entry is often easier for many of these limited function
wholesalers, incompetents may have been entering in progres-
sive numbers which eventually may reverse the 1947-1954
experience,16 and life expectancy for the average whole-

saling establishment may become shorter.

Retailing Failures

Probably the most troubled and yet most dynamic
sector in our economy is retail trade. As seen in Tables 12
and 13, the shortest life span of failures (and shortest
life expectancy) occurred in this group. A large body of
literature is available to explain why "The average retailer
exists in an atmosphere of disaster."17 "The Wheel of
Retailing" on one hand is in action, through which "10w-
status, low-margin, low-price operators in time become high-

cost, high-price merchants vulnerable to newer types,"18

 

16Entry is easier for limited function wholesalers
because of the limited capital requirements. The number of
this type of wholesalers has been growing relatively faster
than that of the conventional type. This is especially true
for Michigan; possibly that is why Michigan had more failures
in the smallest liability-size group than the nation as a
whole.

17Victor Lebow, "The Crisis in Retailing," Journal
93; Retailing (Spring, 1957), p. 17.

18M. P. McNair, "Significant Trends and Developments

fin the Postwar Period,' in A. B. Smith (Ed.), Com etitive

istribution ig.a Free, Hi h-Level Econom gag ZEE 55 II-
cations for the Universit (Pittsburgh: University 0%
PittSburgh PreSS, I958), cited in Stanley C. Hollander, "The
Wheel of Retailing," Journal of Marketing (July, 1960), p.
37. Although Professor HoIIaHEer In deaIing with this
vulnerability concept put more emphasis on the declining

 

O\
O\

(and probably to new entries as well). The theory of
"Institutional Replacement" on the other hand emphasizes the
fact that new types of retail institutions are incessantly
entering the field and forcing the old ones out.19 Further-
more, the so-called "Cost Squeeze" in retailing stemming
from changes in population, production and merchandising,20
coupled with structural trends such as the increasing share

of larger chains?1 or increasing economic concentration,22

 

relative share of the old operators rather than failures,
this wheel action, most probably, also forces out some of
the 01d high-cost, high-price merchants.

19Lawrence Lockley, "Favorable Implications of
Inter-Firm Competition at the Retail Level," Martin L. Bell
(ed.), Marketigg: A_Maturin Discipline (Chicago: American
Marketing Association, I96I), pp. 152-I60.

 

20For a detailed discussion of the cost squeeze con-
cept, see a series of articles in Lynn H. Stockman (ed.),
Advancinngarketin Efficiengy_(Chicago: American Marketing
ASSOCiation, I958), pp. 215-234.

21 PERCENT OF TOTAL RETAIL SALES ACCOUNTED
FOR BY SINGLE AND MULTIPLE
STORE RETAILERS

ML _—__ *— Lm
m M

Percent of Total Retail Sales

 

 

 

1948 1954 1958
Single Units Total 70.4 69.9 66.3
Multi-Units Totala 29.6 30.1 33.7

 

aMulti-Units include two or more units.

SOURCE: Status 9; SmalquuSineggwig Retail Trade,
92, Egg. Table shows {he deClining afiére of single uni?
retail establishments, a situation which would increase
pressure and force the weaker ones out.

 

22Victor Lebow remarked that supermarkets, for
instance, which represent only 7.2 percent of all stores,

67

is making it harder for the little men in retailing to sur-
vive.23 These small men in the field operating without
employees constituted almost half of all the establishments.
This fact may be accounted for by the comparatively low
investment requirements and relative ease of entry attracting
new competitors, who in most cases are very vulnerable.24
All these factors, plus the fact that in retailing there are
more establishments than any other sector, contribute toward
making the failure record in this category the largest of
all.

Between 1953 and 1959, Michigan retailing failures

increased in absolute as well as in relative terms. This

 

account for close to 60 percent of total sales volume.
Lebow, 22, cit.

23See Wall Street Journal, "Businesses Wanted"
(March 28, 19627, p. I: AlSo see Mabel Newcomer, "The
Little Businessman," o . g;§., p. 502. The relatively con-
stant position of sma retailers in the total retailing
population, it may be said, refutes this statement. But,
although the relative number of small firms have been growing
proportionately to the total, there are two facts that sub-
stantiate our point of view. First, is the increasing
number of multi-unit retail stores, which implies a relative
security on the part of the chain members despite their
small size. And secondly, the short life span of retailers
which is indicative of a high replacement rate. As the
small firms cease existence equally weak and vulnerable new-
comers come into being. For a discussion of the constant
position of small firms see Eugene C. McKean, The Per-
sistence of Small Business (Kalamazoo: Upjohn—IHSEIIUte for
CommunItyIResearch, 1958). The second point will be dis-
cussed in greater detail in the final chapter of this study.

 

2“Lockley, 22, cit., p. 154.

68

increase was not only more than fourfold in size, but the
relative share of retailing failures went up from 46.5 per-
cent in 1953 to 55.4 percent in 1959, as seen in Table 14.
In the meantime, United States failures in this category
increased in absolute terms with no change in their relative
position as revealed by their stable percent share of the

total (Table 14).

TABLE 14

RETAILING FAILURES AS A PERCENT OF TOTAL
IN MICHIGAN AND UNITED STATES

 

 

Michigan United States
No. of Retail Percent No. of Retail Percent
Years Failures of Total Failures of Total
1953 53 46 5 4.381 49.4
1954 106 50. 7 5, 491 49. 5
1958 271 49.5 7, 514 50. 2
1959 275 55.4 6 873 48.9

 

SOURCE: Basic data from Dun and Bradstreet, Inc.,
special tabulations, and Egg Failure Record Through-L222.

What were the categories in which failures occurred
more often? As broughtforth by Table 15, two particular
categories-—Lumber, building materials and hardware, and
Eating and drinking p1aces-—have noticeable differences
between the two economies. While relatively more failures
occurred in Michigan during the years studied in the former
category, national failures by far outstripped their
Michigan counterparts in the latter. Of all retailing

failures in Michigan, 10.5 percent belonged to the Lumber,

69

building materials and hardware category as opposed to 6.1

percent in the nation.

TABLE 15

DISTRIBUTION OF MICHIGAN AND UNITED STATES
RETAILING FAILURESa

     

Michigan United States
Total Percent Total Percent
N0. of Distri- No. of Distri-

Failures butionb Failures butionb

 

Food and liquor 130 18.4 4,132 17.0
General merchandise 25 3.5 913 3.8
Apparel and accessories 118 16.7 3,556 14.7
Furniture and home

furnishings 124 17.6 3,474 14.3
Lumber, building

materials and hardware 74 10.5 1,489 6.1
Automotive group 79 11.2 3,252 13.4
Eating and drinking

places 66 9.4 4,548 18.7
Drug stores 23 3.3 571 2.4
Miscellaneous 66 9.4 2,324 9.6

Total 705 100.0 24,259 100.0

 

aIncludes totals of four selected years (1953, 1954,
1958, and 1959).

bDetail may not add to total because of rounding.

SOURCE: Basic data from Dun and Bradstreet, Inc.,
special tabulations, and :33 Failure Record Through 2222.

This dissimilarity between the composition of
Michigan retailing failures and United States retailing
failures cannot be wholly attributed to their particular
retailing population. As can be observed in Table 16, there

is a remarkable resemblance between the composition of the

two retailing populations and also they show very similar

changes between the two census years.

TABLE 16

PERCENT DISTRIBUTION OF RETAILING
IN MICHIGAN AND UNITED STATES,

ESTABLISHMENTS
1954. 1955a

 

A
1

 

1254 lfiib
Michigan U. S. Michigan U. S.
Food and liquor 23.3 25.3 20.7 22.9
General merchandise 3.4 4.6 3.5 5.1
Apparel and accessories 7.2 7.3 6.5 6.1
Furniture and home
furnishings 6.2 5.9 6.4 6.0
Lumber, building
materials, and hardware 7.5 6.1 7.9 6.3
Automotive group 18.0 16.3 19.4 17.5
Eating and drinking places 20.7 19.5 21.5 20.1
Drug stores 3.7 3.4 3.5 3.3
Miscellaneous 10.1 11.6 10.4 11.9
Total 100.0 100.0 100.0 100.0

 

aDetail may not add to total because of rounding.

SOURCE: Computed from 1958 Census of Business,

Volume El, Retail Trade Area Statistics, U._SL Department of

 

Commerce, Bureau of the CEESus‘TWashington: U. S. Govern-
ment Printing Office, 1961), pp. 1-5, 1-6, 22-5, 22-7.
Table 17 points out that those categories which

experienced a greater relative number of failures were not
necessarily the ones that were suffering from the highest
failure rates. The Food and liquor group, for instance in
1958, in Michigan had the largest number—-18.4 percent-of
all retailing failures, but had the third lowest failure

rate. However, the second largest category in the state,

71

Furniture and home furnishings also had the highest failure

rate.

TABLE 17

NUMBER OF RETAILING FAILURES EXPRESSED AS A PERCENT
or THE NUMBER OF ESTABLISHMENTS IN RETAILING
IN MICHIGAN AND THE UNITED STATES, 1954

 

 

AND 1956a
-—: L m
1225 $223
Mich U. S Mich. U. S
Food and liquor .16 .24 .27 .29
General merchandise .13 .25 .37 .34
Apparel and accessories .26 .67 1.03 .96
Furniture and home furnishings .52 .93 1.22 1.01
Lumber, building materials, and

hardware .37 .31 .46 .47
Automotive groupb .07 .23 .22 .37
Eating and drinking places .06 .31 .22 .42
Drug stores .17 .29 .44 .29
Miscellaneous .12 .27 .36 .35
Total .16 .33 .39 .44

 

aNumber of total retailing establishments are taken
from the Census 93 Business. The census definition of
establishment is not perfectly comparable to that of "Firm"
or "Enterprise" of the Dun and Bradstreet, for the former
counts every unit as a separate entity whereas the latter
does not count units of retail chains separately; therefore,
there is a downward bias in the figures. If Dun and
Bradstreet had used the census definition of establishment,
conceivably the figures in this table would have been
greater.

bIncludes gasoline service stations.

SOURCE: Computed from Dun and Bradstreet, Inc.,
special tabulations and The Failure Record Through 1252; and
1258 Census gf Business, 92, cIt.

In both economies, the Apparel and accessories, and

the Furniture and home furnishings categories experienced

72

the highest failure rates; the increase, however, in these
rates was by far greater in Michigan. Although relatively
speaking failures in Eating and drinking places in Michigan
were much fewer than their national counterparts, the rate
grew faster (230 percent as opposed to only 35 percent). In
spite of this growth, the failure rate in this category
along with the Automotive group was the lowest in Michigan.

Table 15 illustrates that in Michigan the Lumber
category relatively had substantially more failures; Table
16 points out that one reason was simply relatively more
establishments in the state. Another cause for Michigan's
relatively more failures may have been the poor performance
of state retail sales in this category. Thirdly, Michigan
building activity has been considerably behind the national
since 1954.25

 

25ENGINEERINO CONSTRUCTION CONTRACTS AWARDEDa

W

 

Years Michigan United States
1953 $ 672,626 $15,170,893
1954 666,179 14,412,033
1956 1,132,257 21,711,981
1957 827,240 17,985,845
1958 598,017 19,164,634
1959 526,028 20,422,508

 

aFigures include both public and private building,
but exclude residential construction and some small awards.

SOURCE: Engineering News Record, as reported in The
Statistical AbstraCILQEDtheiU.:§., 22. cit.

In Michigan not only did the value of the awarded construc-
tion contracts decline as indicated in the above table, but

73

Even though still lower than the national, the
failure rate in retailing in Michigan (Table 17) increased
more than twofold between 1954 and 1958. This increase,
compared with 33 percent at the national level, is indicative
of the poorer overall performance of the total retailing

sector in the state.26 This poorer performance can be

 

also retail sales of Building Materials, lumber and hardware
have been rather stagnant (if not declining) since 1956.

RETAIL SALES OF BUILDING MATERIALS,
LUMBER AND HARDWARE IN MICHIGAN

 

 

Years Value in Millions of Dollars
1954 839
1955 926
1956 946
1957 826
13:8 '55
1959 11

 

SOURCE: Micfligan Department of Revenue, different
issues of the Monthly Bulletin.

 

26A comparison of Michigan and United States total
sales of retail stores will illustrate this point.

TOTAL RETAIL SALES AND THEIR AVERAGE GROWTH

 

 

 

—:.—

 

 

 

 

 

 

Sales of Average Annual
Retail Stores Rate of Growth
(Millions of Dollars) (Percent)
1948 1954 1958 19A8-1958 1954-1958
Michigan 5,854 8,168 8,898 u.2 2.2
United States 128,849 169,968 199,646 4.5 4.1

 

SOURCE: "Retail Trade and Use of Services," Survey

 

Qfiwgyrrent Business, May, 1961, p. 25.
It is obvious from the above table that the retailing sector
in the state had been doing quite poorly in comparison with

74

illustrated by the smaller share of the effective buying
income spent on purchases at the retail level in Michigan.
The Michigan consumer on the average spent a smaller share
of his income on retail purchases than the average American
consumer.27
Liabiiity Size

In Table 18 it is observed that casualties in
Michigan retailing were significantly larger than their
national counterparts during the years studied. Nine point
nine percent of failures in the state belonged to the
smallest liability size group as opposed to 17.3 percent
nationwide. Also, while 36.8 percent of Michigan failures
belonged to the $25,000 and over liability size group,
nationally the figure was only 28.4. This difference

stemmed from two major factors. First, the state Furniture

-.—;

V

the national performance. This especially has been the case
since 1954.

27Propensity to spend at the retail level in
Michigan and the Nation were as follows:

RETAIL SALES AS A PERCENT OF
EFFECTIVE BUYING INCOME

 
 

          

M. _ ._-. _._... ._.“- _ --—..——

Years

 

 
 

United States

 

 

Michigan
1955 70.4 69.9
1956 67.8 67.8
1957 65.7 67.1
1958 63.2 65.3
1959 61.5 64.9

 

SOURCE: Computed from Sales Management, Survey 2;
m Power data.

 

and home furnishings sector, in which failures on the average
were much larger than in other categories,28 had a larger
Share of the total. Secondly, the Eating and drinking places
group, with the smallest average failure size of all cate-
gories,29 had a smaller portion of total failures in the
state. Relatively speaking, then, fewer failures in Eating
and drinking places and numerous failures in the Furniture
and home furnishing lines of retailing in Michigan caused

the state's failures to have an average larger failure Size.

TABLE 18

LIABILITY-SIZE DISTRIBUTION OF MICHIGAN AND
UNITED STATES RETAILING FAILURESa

J

L

 

 

j

MiChigan United States
Liability-size Group Number Percentb Number Percentb

 

Under $5,000 70 9.9 4,192 17.3
5.000 - $25,000 376 53.3 13.170 54.3
25,000 - $100,000 202 28.7 5,777 23.8
100,000 and over 57 8.1 1,130 4.6

Total 705 100.0 24,259 100.0

aIncludes totals of four selected years (1953, 1954,
1956. and 1959).

bDetail may not add to total because of rounding.

SOURCE: Dun and Bradstreet, Inc., Special tabula-
tions; United States figures as reported in the Statistical
Abstract 2f the U. S.

‘_

28Almost 52 percent of Michigan failures in this
Category belonged to the $25,000 and over liability size
group.

29Sixty-seven percent of the failures occurring in
tfiis group were of less than $25,000 liability size.

Life Span

 

Michigan retailing failures generally lived longer
than their national counterparts, as is brought out by Table
19. This fact was consistent with their larger average
size, (Table 1:). It is especially interesting to note that
in those categories where the average failure size was
larger, the life span was also longer. This is basically
true for the Apparel and accessories, and Furniture and home
furnisning categories, where more than half of the failures
belonged to the $25,000 and over liability size category and

lived six years or more.

TABLE 19

A COEPARISON OF THE AGES OF MICHIGAN AND
UNITED STATES RETAILING FAILURESa

-‘ A
1

Percent of the Total Failures

 

Age in Years Michigan United States

One year or less 3.H 4.3

Two or three years 35.1 38.5

Four or five years 17.3 19.4

Six to ten years 24.1 20.5

Over ten years 20.1 17.3
Total 100.0 100.0

 

aMichigan figures represent the total picture of the
four years studied whereas United States figures are only
for 1959. It would have been possible to use only 1959
figures for Nichigan also, but as the total failure number
in the state 18.not large, one year's data may present a
biased picture.

bDetail may not add to total because of roundinT

Q.

SOURCE: Dun and FPQGStrfet. “0.. Special tabu-
lations, 80d The Failure Record ThrOU'n 1)f?.

 

77

Failures in the Construction Industry

Of all five industrial and commercial sectors
studied, the least is known about construction, a field in
which no census is taken. Relatively speaking, more
failures in this sector took place in Michigan than the
nation as a whole (Table 1). Fifteen percent of all
failures in the state belonged to this sector as opposed to
13.5 percent in the nation. This may be accounted for
partly by hichigan's having relatively more establishments
in this industry.30 Between 1953 and 1959 the national
failure rate in this sector almost doubled and Michigan had
more than a three fold increase (Table 20). This relatively

faster increase in Michigan's failure rate can be explained

TABLE 20

RATE OF CONSTRUCTION FAILURES IN
MICHIGAN AND UNITED STATES

 

 

Michiran United States

———&-—

1953 1959 1953 1959
Number of establishments 10,839 11,689 262,198 300,h23

 

 

Number of failures 17 73 1,024 2,064
Failures as a percent of
establishments .16 .62 .39 .69

 

SOURCE: County Business Patterns 1953 and 1959, 22,
cit., and Dun and Bradstreet, Inc., The‘Failure Record
Through 1259, and special tabulations.

 

 

30According to B.O.A.S.I. data appearing in County
Eusiness Batterns, 10.1 percent of all reporting firms in
MiEhigan were engaged in the construction business in 1956;
whereas, 9.4 percent was the figure for the nation as a
whole.

N?
(:1

by the fact that the construction activity in the state has
been relatively slow for at least the past four years.31

Indications are that Michigan failures in this
sector were larger than those of the nation. Not only did
6.3 percent of state casualties belong to the $5,000 or less
liability size group, as opposed to the nation's 11.1 per-
cent, but also 18.1 percent of failures here belonged to the
two largest sizes, compared to only 11.3 percent in the

nation (Table 21).

TABLE 21

LIABILITY-SIZE DISTRIBUTION OF MICHIGAN AND
UNITED STATES CONSTRUCTION FAILURESa

““—

 

w-‘- W-“

 

 

Liability Size Group Michiganb United Statesb
5,000 or less 6.3 11.1
5,000 - $25,000 ul.5 42.9
25,000 - $100,000 3u.1 34.6
100,000 - $1,000,000 16.6 11.0
1,000,000 and over 1.5 .3

8Includes totals of four selected years (1953, 195M,
1958. and 1959).

bDetail may not add to total because of rounding.

SOURCE: Basic data from Dun and Bradstreet, Inc.,
Special tabulations, and The Failure Record Through 1259.

Many state casualties in this category lived longer
than their national counterparts, as indicated in Table 12,

Which was consistent with their larger size. Throughout the

‘

318ee footnote 25 above.

analyses it has been true that in those categories where
relatively many large failures are present, average life

span also has been longer.

Commercial Services

0f the two types of business firms, i.e., those
selling goods and those selling services, the latter has
been experiencing a steady growth during the past decade,
both in Michigan and the United States. It is usually
stated that as an economy becomes wealthier service indus-
tries gain more importance.32 It is not why the service
industries are growing but the fact that they are growing
which is important for our purposes. In the American
economy as a whole, consumers devoted 34.9 percent of their
expenditures to services in 1948, 36.3 percent in 1954, 38.0
percent in 1958, and 39.3 percent in the first quarter of
1960.33

 

32This statement is consistent with the "Clark-
Fisher hypothesis." Although this hypothesis is widely
recognized and cited, there are many who disagree. For a
brief description of the hypothesis and some of the discus-
sions see Stanley C. Hollander (ed.) Ex lorations in
Retailing (East Lansing: Bureau of BusIness aha Economic
Research, Michigan State University, 1959), pp. 52-62.

 

33Roger L. Bowlby and A. Coskun Samli, "Selected
Services in Michigan," The Michigan Economic Record, July-
August, 1960. p. 3.

Although it is conceded that a rising proportion of
money is spent on services as income rises, it is also
argued that two other factors might cause a similar
reaction: (1) Certain demographic changes, and (2) the
slowed growth of consumer income. The demographic fact that

There is a huge variety of service producing indus-
tries. Of this wide selection the Pureau of the Census uses
a more or less arbitrary division of the standard industrial

classification under the title of Selected Services, which

 

includes only a part of the service industries. D. & B.
uses this selected services classification excluding the
Amusement sector and including Passenger and freight trans-
portation, and Miscellaneous public services. This classi-

fication is called commercial services by D. & P.

 

In this section, in the analysis of the failure rate
of different groups, we were concerned with the part of
selected services that D. & E. uses. Also, the concept of
commercial services was used in the analyses of life span
and size distribution.

Table 22 shows the substantial resemblance between
the general structure of selected services in Michigan and
the nation as a whole. Not only are the breakdowns of total

selected service establishments quite alike, but also the

 

population is getting both younger and older has a very
strong impact on tne demand for services. These people,
because of the nature of their age, need certain services
more than average individuals. Similarly as the growth of
the family income slows, a relatively larger proportion is
spent on services. Consumers postpone purchases which they
might have made if income had grown faster. Hence, they
might not buy a new car, but will rather pay the rent and
the doctor's bill. See, for instance, U. S. Congress, Joint
Economic Committee, Staff Report on EmplO'ment, Growth and
Price Levels, 86th Cong., lsE”Sess. (washington: U. S.—
aoverm ent Printing Of fice, 1959), pp 79- 83.

 

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changes that took place from one census to another were
somewhat parallel, e.g., a significant increase in Business
and repair services enterprises, and modest gains in the
relative share of the Hotel and motels category.

Portrayed in Table 23 is the rate of failure for
selected services and its change between the two census
years in both Michigan and the nation. The striking fact in
the table is the extremely low failure rate. The number of
failures per thousand establishments in this category was
about five times lower than in retailing, which had the
second lowest rate. In Michigan this failure rate was only
.05 percent in 1958. Although this figure had increased
since 1954, the number of failures in this sector was so
small that one or two incidental failures could make a
significant difference in the percent rate.

The unusually low rate of failure either in the
nation or in the state may be explained by a number of
factors. First and probably most important is the tre-
mendous demand for services, which provides substantial
security to even the most vulnerable participant in the
market. Whether it is a sign of increasing prosperity or
not, the demand for services in the United States during the
past decade grew about 4.1 percent a year in constant
dollars, as‘bpposed to 2.7 percent per year growth of com-

modities.3Ll The prospects in Michigan are even greater, for

 

34Joint Economic Committee, Staff Re orts on
Employment, Growth and Price Levels, 22, c t., p. 79-

TABLE 23

NUMBER OF FAILURES IN SELECTED SERVICES

EXPRESSED AS A PERCENT OF THE NUMBER OF

ESTABLISHMENTS IN SELECTED SERVICES IN
MICHIGAN AND THE UNITED STATES8

 

 

 

Michi an United States
19 958 2
Funeral services, crematories .14 -—- .03 .03
Laundries, laundry services,
dyeing .05 .19 .18 .18
Pressing alterations,
garment -—- .07 .09 .10
Other personal servicesb -—- .02 .03 .03
Business and repair services .02 .07 .10 .11
Hotels, motels, tourist
courts, and camps ——— .05 .06 .09
Total .02 .05 .08 .08

 

aFailures as a percent of total establishments.
Number of total service establishments are taken from the
Census of Business. The census definition of establishment
is not strictly comparable to that of "Firm" or "Enterprise"
of Dun and Bradstreet for the former counts every unit as a
separate entity whereas the latter does not count units of
retail chains separately. Therefore, there is a downward
bias in the figures. If Dun and Bradstreet had used census
definition of establishment conceivably the figures in this
table would have been greater.

bIncludes mainly Beauty shops, Barber shops, Photo
studios, Shoe repair, shoeshine, and Miscellaneous personal
services categories.

SOURCE: Computed from Dun and Bradstreet, Inc.,
special tabulations and The Failure Record Through 1222;
and 1958 Census 2; Business, Volume 2;, 22, c

EA

service industries here have been receiving a smaller share
of the consumer's income.35

Another reason for a low failure rate in this sector
is the prevailing ease of entry and exit. Entry into the
service industry ordinarily requires a minimum of capital
and technical know-how. Brown and Cassady, in describing
the barber trade, for instance, said ". . . in the absence
of artificial restriction, entry into the trade is fairly
easy (the practice of barbering requiring only a limited
amount of skill and training and the investment necessary to
open a barber shop being small).”36 If the business is not a
success the owner-manager probably will not lose more than

his time and original, conceivably small investment. Under

 

35 TOTAL RECEIPTS OF SELECTED SERVICE
INDUSTRIES AS A PERCENT OF
TOTAL PERSONAL INCOME

 

 

 

Years Michiganw United States
1948 5.6 6.4
1954 7.2 8.2
1958 b.l 9.1

SOURCE: Computed from Census of Business, Volume
VI, op. cit.

 

As can be seen from the above table, although
selected services have been growing faster, their total
share of personal income in Michigan is behind the national
level. This, coupled with the fact that income in Michigan
is relatively higher than the nation, establishes that
services in the state have greater potentials.

36William F. Brown and Ralph Cassady, Jr., "Guild
Pricing in the Service Industries,‘ Quarterly Journal of
Economics, February, 1947, p. 326. Also cited in Phillips,

22, 933., p. 33.

 

 

85

these circumstances his business will not be the type of
failure that causes a loss to creditors, and hence will be
excluded from D. & B. statistics. The fact that these types
of failures incur no loss to creditors is true for two
reasons. First, seldom do these little men have the oppor-
tunity to borrow for the initial investment; and secondly,
they rarely can obtain credit without collateral and a well
established business. Thus, even though there may be a high
turnover rate in this field (in fact this is the actual case
as indicated in Table 18), failures in the strict D. & B.
sense are rare.

Yet a further reason lies in the nature of D. & B.
statistics. Many one-man service businesses are not included
in these data. Since a significant portion of all service
establishments have no paid employees,37 it is likely that
if these little men go bankrupt they will be listed under

personal bankruptcies and will never enter failure data.

 

37 PERCENT SHARE OF SELECTED SERVICE
ESTABLISHMENTS wITR No PAID
EMPLOYEES IN MICHIGAN
AND THE UNITED STATES

W
Michigan United States

1954 1958 1954 1958

Number of Establishments 29,699 38,521 785,589 975,250
Number of Establishments

with no Employees 14,572 20,868 410,440 532,666
Percent Share of No-employee

Establishments in Total 49.1 54.2 52.2 54.6

 

SOURCE: Basic data from Census of Business, Volume
21, 22, cit.

86

Unfortunately, there is no readily available information
about this part of the failure picture.

The selected services failure rate in the United
States remained the same between 1954 and 1958 while it grew
in Michigan; as in other sectors already considered, except
wholesaling, Michigan's rate here also was lower despite its
faster growth (Table 23). The Laundries and laundry services
category had the highest rate in both economies. On the
other hand, other personal service categories, which
include Beauty Shops, Barber Shops and other related serv-
ices, enjoyed the lowest rate both in Michigan and the
nation.

The two categories which are included in the com-
mercial services by D. & B., but excluded from selected
services by the Bureau of the Census, both in Michigan and
the United States, proved to be the groups suffering the
largest relative mortality. The four years average shows
that failures in the Passenger car and freight transpor-
tation category were 33.4 percent of the Michigan total and
23.8 percent of the national total. The Miscellaneous
public services group had relatively few failures in both
economies. The size of failures in these two categories
were relatively larger than the other service groups, and
they had survived longer.

W £352 astribution and _I_._i__f_e_ _S_p_a_r_l_
An analysis of the liability size distribution of

the commercial services sector revealed that Michigan

failures on the whole were of larger size than on the
national level (Table 24). AS a whole, service establish-
ments in Michigan had the smallest average employee size of
all the major components of the economy. Sim larly, this
sector in the state had more failures belonging to the

smallest liability size category.

TABLE 24

LIABILITY SIZE DISTRIBUTION OF COMMERCIAL SERVICES
FAILURES IN MICHIGAN AND THE UNITED STATESa

 

 

Michiran United States
Liability Size Group Number Percentb Number Percentb

 

Under $5,000 14 16.7 759 19.1
$5,000 - $25,000 39 A6.u 1,956 49.;
$25,000 — $100,000 20 53.5 979 24.0
$100,000 she ever 3 3.6 290 7.3

Total 04 100.0 3,984 100.0

aIncludes totals of four selected years (1953, 1354,
1358, and 1959), and they include failures in Passenger and
freight transportation and Miscellaneous public service
categories.

Cf
)
(l

.a... ._ 0 .A4 1..
‘ auSu 0A rOhnuinb.

bDetail may not add to total
SOURCE: Basic data from Dun and Bradstreet, Inc.,
special tabulations, and The Failure Recond Throurh 1222,
Despite their slightly larger size, Michigan
failures had shorter life spans than their national counter-
parts (Table 12). The fact that this industry has even
greater prospects in Michigan than in the nation suggests a
possible weakness or incapacity among the Michigan operators.

Despite the prevailing potential demand, these firms were so

inefficient that they could not survive.

Cyclical Patterns of Business Failures
It has been noted by many observers that Michigan
has a greater cyclical sensitivity than the nation as a
whole. An analysis of personal income in the three postwar

recessions shows this sensitivity as presented in Table 25.

TABLE 25

THREE POSTWAR RECESSIONS: MICHIGAN
AND THE UNITED STATES

 

 

Percent Change in Personal Income

 

Michigan United States
I 1948 19u9 - 0.6 -0.9
II 1949 1950 +13.5 +9.7
III 1940 1950 +12.8 +8.7
I 1953 1954 - 2.7 +0.8
II 195a 1955 +11.7 +7.4
III 1953 1955 + 8.7 +8.3
I 195 1958 - 2.0 +2.5
II 195 1959 + 5.5 +6.5
III 1957 1959 + 3.4 +9.2

 

SOURCE: David I. Verway, "Personal Income," The
Michigan Economic Record, September, 1960, p. 2.

The Table also indicates that since 1949 Michigan's reces-
sions have become progressively deeper with corresponding
weaker recoveries.38 Although it is known that the 1958

recession was more severe and the 1959 recovery in the state

 

38David I. Verway, "Personal Income," Michigan
Economic Record, September, 1960, p. l.

89

was not as effective as could be hoped, it still is not
known whether this is due to temporary causes or is sympto-
matic of a long run grim tendency for Michigan.39

The erratic nature of Michigan's economy can be
accounted for mainly by its basically one industry economy,“0
and also by the cycle sensitivity of certain manufacturing
categories.

Strong impacts of business cycles can be detected on
Michigan's economy not solely as a result of the high con-
centration in durable good industries, but specifically on
account of the very important role of the auto industry.
Auto sales as well as production are very erratic and evi-
dently coincide with cycles. Many sectors of Michigan's
manufacturing supply mainly the needs of this industry.
Large auto producers buy from thousands of small vendors.
Hence, the impact of the health of the auto industry on the
viability of these little vendors is very obvious; they can
go out of business rather easily when automobile sales or
production slackens.

Cyclical Patterns in_Manufacturing Failures

The manufacturing sector, it has been contended, is

quite sensitive to cyclical oscillations in the economy. A

measure of this sensitivity was obtained by deriving a

 

39David I. Verway, 92, cit., p. 2.
40398 Chapter Three.

90

relationship "between the changes in number of firms in
operation in each industrial segment, and corresponding
changes in the grand total number of firms of all industries
during the years l929-hlfu1 Table 26 portrays this sensi-
tivity. If the sensitivity of the business population to
the level of business activity is high it may mean that
either*the industry's demand is very volatile or the ease of
moving in and out of the industry is exceptionally great.

The greater sensitivity of the business population
in manufacturing as compared with retail trade may, in
fact, be explained primarily in terms of two factors:
(1) 0n the whole, demand fluctuates more widely in manu-
facturing industries. The sales of the average firm in
Inanufacturing are much less diversified than the sales
of the average firm in retail trade. Moreover, for the
production of many industrial commodities such as
xnachinery, other business equipment, or the materials
used for construction, demand in a depression year may
undergo an extreme contraction. (2) The very presence
in the manufacturing industries of a number of firms of
'widely diverse size operating in the same market
.increases the average volatility of the business p0pu-
lation in these segments, for in good years many
'thousands of small manufacturers are required to
iiupplement the capacity output of the large ones, while
1J1 poor years, when demand can no longer support the
<Diperations of all, the small producer frequently is

\unable to weather the storm.

Hence, in retail trade, where neither of these two
I‘actors impinges so heavily, there is a considerably
higher degree of stability in the business population-—a
I‘elative stability which is not belied by the fact that
all-nest all closures in retail segments are publicly
gistinvuished with the well known 'Going out of Busi-

€383.’

\

Bus ulMelville J. Ulmer, "Industrial Patterns of the
p 1ness Population," Survey _c_>_i_‘_ Current Business, May, 19148,

42Melville J. Ulmer, 9p, ci ., pp. 11—12.

91

TABLE 26
INDEXES OF SENSITIVITYa

W

Percent Chan e in Group Associ-
Industry ated with 0 Percent Change
in Total Business Population

 

Major industry groups:

Manufacturing 31
Contract construction 19
Wholesale trade 10
Retail trade 8
Finance, insurance, and

real estate 8
Service industries 4

Manufacturing industries:

Lumber and lumber products 57
Stone, clay, and glass

products #5
Metals and metal products 28
Printing and publishing 26
Food and kindred products 25
Textile and textile

products 24
Leather and leather

products 24
Chemicals and allied

products 21
Paper and allied products 13

 

8Based on the linear least squares regression of the
logarithms of the number of firms in operation in each group
and the total business population and time for the years
1929-91. In the case of wholesale trade, service industries,
food and kindred products, textiles and textile products,
and chemicals and allied products, the year l9hl was omitted
from the relationship.

SOURCE: Melville J. Ulmer, "Industrial Patterns of
thEBBusiness Population," Survey pf Current Business, May,
19 , p. 11.

 

Unfortunately, there are no available data on the
sensitivity index of durable goods industries as such, but

it has been repeatedly stated that they are more sensitive

92

to cycles,“3 than nondurables mainly because of the higher
volatility of their demand. Consequently, the cyclical
fluctuations of Michigan manufacturing failures reflecting
this sensitivity should be more noticeable than those of the
national failures.

If we considered the increase in the total business
failure figures between 1953 and 1959 as the normal increase,
the 1954 and 1958 figures appear to be quite above this
trend line. Both in Michigan and the nation as a whole
casualties climbed substantially between 1953 and 1954, as
shown in the Appendix to Chapter Two and also in Figure 1 in
the first chapter. Also, the figures declined noticeably
between 1958 and 1959. Therefore in both recession years,
1954 and 1958, increase in the failure rates was more than
proportionate. In view of this fact, it was important to
analyze the percent distribution of total failures. If in
recession years the relative share of certain sectors were
higher than those of prosperous years, then it can be
claimed that these industries are relatively more cycle'
sensitive. Table 27 portrays the breakdown of failure
statistics both in Michigan and the United States. The most
obvious pattern appears among Michigan's Manufacturing
failures. In both recession years the relative share of

this sector increased even faster than the total number of

——__

43See for instance: John P. Henderson and A. Coskun
gamli, "Nondurable Goods Industries," The Michigan Economic
£0.13}, June. 1959. p. 3.

93

 

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94

failures. Manufacturing failures in the nation as a whole
do not conform to the cycles in the same manner. An
analysis of failures in particular manufacturing categories,
however, showed the same conformity. These selected cate-
gories are also those which are most important in Michigan,
i.e., Iron, steel and products, Machinery, and Transpor-
tation equipment. The relative share of total failures in
these industries was larger in the recession years as

indicated in Table 28.

TABLE 28

FAILURES IN SELECTED INDUSTRIAL CATEGORIES
AS A PERCENT OF TOTAL FAILURES IN
MICHIGAN AND THE UNITED STATESa

 

Michigan United States
Years Percent Percent
I323 13% 33
1958 10:8 3.7
1959 6.0 2.6

——

aIncludes Iron, steel and products, Machinery, and
Transportation equipment sectors.

SOURCE: Computed from Dun and Bradstreet, Inc.,
Special tabulations, and Thg_Failure Record Through $232.

0f the four categories in which most failures
occurred in Michigan, i.e., Lumber and lumber products;
Iron, steel and products; Transportation equipment; Miscel-
laneous, the second group showed the most sensitivity in
terms of the above analysis. The failure rate in this cate-

gory was higher in both recession years than the pr08perous,

as can be observed in Table 4. In the other three cate-
gories failure rates for 1958 were very high; however, 1959
rates were not lower than those of 195M. While high 1958
rates might indicate the negative impacts of the recession,
having higher rates in 1959 than 1954 might indicate the
lack of satisfactory recovery in the state economy.

In the United States as a whole the category in
which the largest share of manufacturing failures occurred,
i.e., Textile mill products and apparel, only a slight cycle
sensitivity was observed (Table 4). In both recession years
failure rates were relatively higher than the two prosperous
years. The second largest group is Lumber and lumber
products which experienced the highest failure rate, indi-
cating an upward trend and lack of cycle sensitivity. The
machinery category also seemed to be relatively cycle
sensitive and lastly the Miscellaneous category had the same
trend as the Lumber group.

Cyclical Patterns i2_9£hg£ Sectors

As was noted in Table 26, wholesale trade is not
very sensitive to cycles. Table 27 demonstrated that there
was no relative increase in the relative share of wholesaling
failures in recession years which also indicates the relative

lack of sensitivity in this sector.““ However, wholesaling

_—

“alt should be remembered that we have examined only
two cycles, and we made no lead or lag analysis. With such
a short time analyzed and only to a limited extent, it is
not possible to pass any conclusive Judgement. If it were

failure rates both in Michigan and the United States
decreased in 1959 in many categories indicating the whole-
saling sector is not completely insensitive.

It is conceivable that because of Michigan's
cyclical sensitivity as a whole, the wholesaling sector also
is more sensitive than its national counterpart. This is
due to the existence of those wholesalers whose viability is
dependent upon customers located in Michigan; they can be
harmed readily when business slackens. In other sectors as
can be observed from Table 27, there is little to discuss in

terms of cyclical patterns.

Conclusions

This chapter has presented a discussion of simi-
larities and dissimilarities of failure pictures in Michigan
and the United States. Analyses were based on D. & B.
failure statistics. Three major points of emphasis were
covered: (1) the number and kind of failures in different
major industrial and commercial sectors; (2) liability size
distribution of failures in the same categories; (3) the age
of failed businesses. Within the scope of these three
problem areas an attempt was made to compare Michigan
patterns with those of the nation. Also incorporated into

the analyses were the cyclical aspects of failures which

—_

possible to analyze in detail different lines in wholesaling
for a number of years, it could probably have been possible
to observe some cyclical sensitivity especially in durable
goods wholesaling.

97

proved eSpecially important in manufacturing.

From the analyses attention may be called to the

following points:

1.

The composition of failure statistics had a sub-
stantial resemblance to the structure of the
commercial and industrial p0pulation. The manu-
facturing sector, in particular, displayed this
tendency. In Michigan, for instance, an
important portion of the manufacturing popu-
lation was concentrated in durable goods pro-
duction, and, as expected, an important portion
of state manufacturing failures was found among
these. In other major economic sectors also, an
overall resemblance was noticed between the
business population and the composition of
business deaths.

Although failures increased in both economies in
all sectors, the rate of increase was faster in
Michigan. Manufacturing in both economies
experienced the highest rate of failure, and
services the lowest. Despite the faster growth
of the failure rates in Michigan, they were
nonetheless lower than their national counter-
parts in all but one category. It was brought
out that there are certain tendencies in the

Michigan economy that have adverse effects on

Q
U

the sectors where especially high rates of
failure prevailed. In the manufacturing sector,
for instance, there was: a decline in the
Lumber and lumber products industry, and
increasing integration in the Automobile indus-
try, a continuing dispersion of the Automobile
industry, and a decline in the demand for durable
goods. In the retailing sector, the high

failure rate in the Apparel and accessories, and
Furniture and home furnishings categories coupled
with their relatively sizeable number of failures
led to a continuous growth of failures in
Michigan. Total retail sales in the state has
been growing at a slower pace than their national
counterparts. The increase in the failure rate
in Construction over that of the United States
can be traced back to the overall performances

of the industry in both economies. Michigan's
construction business has been contracting for
the past three years or so.

There was no spectacular difference between the
composition of Michigan failures in 1953 (the
best post-war period year) and 1958 (the worst
year since 1947). The composition of 1953
failures in the state showed cbnsiderable

difference from that of 1959. The Retail trade

99

had experienced a considerable increase in its
share of the total failures. The composition of
failures in the national scene had hardly
changed between these years. The Michigan
pattern, therefore, proved to be more erratic
than that of the nation (Table 27).

The analyses of liability size distribution
revealed that manufacturing failures had a
relatively larger size in both economies. At
the other extreme is the services sector which
in Michigan proved to have failures with the
smallest liability size. In the nation on the
other hand, failures with the smallest size
occurred in retailing. As a whole, the average
liability size of business casualties in
Michigan exceeded its national counterpart
(Table 29). ‘
In all sectors where liability size, on the
average, was greater, Michigan failures lived
longer before the closure of the business. In
wholesaling and services relatively speaking,
there were more failures that were older than
ten years in the nation than in Michigan. In
other sectors, Michigan failures seemed to have
lived longer.

Consistent with their larger overall liability

size, businesses that failed in Michigan also

100

TABLE 29

LIABILITY SIZE DISTRIBUTION OF TOTAL MICHIGAN
AND UNITED STATES BUSINESS FAILURESa

W
Michigan United States
Liability Size Group Number Percentb Number Percentb

 

Under $5,000 125 9.2 6,892 14.1
5,000 - $25,000 616 45.1 23,636 u8.3
25,000 - $100,000 uuo 32.2 13,979 28.5
100,000 and over 185 13.5 4,458 9.1

Total 1,366 100.0 u8,965 100.0

aIncludes totals of four selected years (1953, 195a,
1958, and 1959).

bDetail may not add to total because of rounding.
SOURCE: Basic data from Dun and Bradstreet, Inc.,
special tabulations, and 232.Failure Record Through 1252,

lived longer than their national counterparts as
indicated in Table 30. As opposed to 57.1 per-
cent of all failures that lived no longer than
five years in the national scene, only 51.9 per-
cent of the total did so in Michigan. Further-
more, more than 24 percent of the total survived
six to ten years in the state, and 22.4 percent
over ten years; in the national scene these
figures were 22.3 and 20.6 percent respectively
(Table 30).

5. As observed in Tables 6, 11, and 30, there were

very few deaths before completion of the first

101

TABLE 30

A COMPARISON OF THE AGES OF MICHIGAN
AND UNITED STATES BUSINESS FAILURESa

W
Percent of the Total Failures

 

 

Age in Years Michigan6 United Statesb

One year or less 2.9 g.6
Two years 14.8 1 .8
Three years 15.6 15.3
Total three years or less 33.3 37.0
Four years 10.5 11.5
Five years 8.1 8.6
Total five years or less 51.9 57.1
Six years 6.9 6.9
Seven years 6.8 2.2
Eight years 5.1 .2
Nine years 3.6 3.0
Ten years 3.3 3.0
Total six - ten years 25.7 22.3
Over ten years 22.4 20.6

Total 100.0 100.0

aMichigan figures represent the total picture of the
four years studied whereas United States figures are only
for 1959. It would have been possible to use only 1959
figures for Michigan also, but as the total failure number
in the state is not large, one year's data may present a
distorted picture.

bDetail may not add to total because of rounding.

SOURCE: Dun and Bradstreet, Inc., special tabu-
lations, and The Failure Record Through.;252.

year of existence;45 however, almost 40 percent

45As was discussed in the services sector above,
this fact stemmed mainly from the definition of failure used
by D. & B. Although a large number of new entrants ceased
existence before the completion of their first year, it was
less likely that these incurred losses to their creditors;
therefore, they are not considered business failures by D. &

102

of failures occurred among those three years of
age or younger.

Manufacturing, especially the durable goods
industries, showed a high sensitivity to busi-
ness cycles. In Michigan during the recession
years the number of manufacturing failures
increased relatively as well as absolutely. The
same thing happened in the national scene among
manufacturers of durable goods. The other
sectors did not reveal any noticeable cyclical

pattern.

103

Appendix to Chapter II
NUMBER OF BUSINESS FAILURES IN MICHIGAN

 

 

 

 

 

 

 

Years
Division of Industry and Trade 1953 1954 1958 1959
Manufacturing
Food and Kindred Products - 9 2 6
Textile Mill Products and Apparel 1 - - 1
Lumber and Lumber Products 3 5 15 8
Paper, Printing, and Publishing - 2 6 5
Chemicals and Allied Products - 2 - 3
Leather and Leather Products - 1 1 -
Stone, Clay, and Glass Products 2 1 l 3
Iron, Steel and Products 1 8 l9 5
Machinery 8 13 37 20
Transportation Equipment 1 - 3 5
Miscellaneous 3 5 13 9
Total Manufacturing 19 46 97 65
Wholesale Trade
Food and Farm Products 5 4 14 6
Apparel 1 - 2 2
Dry Goods - - 1 1
Lumber, Building Materials, and
Hardware 4 2 10 5
Chemicals and Drugs - l 4 4
Motor Vehicles and Auto Equipment' - 1 4 6
Miscellaneous 6 11 29 21
Total Wholesale Trade 16 19 64 45
Retail Trade
Food and Liquor 15 24 39 52
General Merchandise 2 3 9 ll
Appliance Accessories 6 12 46 54
Furniture and Home Furnishings 5 21 54 44
Lumber, Building Materials, and
Hardware 4 18 25 27
Automotive Group 10 8 29 32
Eating and Drinking Places 3 8 32 23
Drug tores 3 4 11 5
Miscellaneous 5 8 26 27
Total Retail Trade 53 106 271 275

Construction
General Building Contractors
Building Sub-Contractors
Other Contractors
Total Construction

[.4
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1:
4::-

104

Appendix to Chapter II-—Continued

 

 

Years
Division of Industry and Trade 1953 1954 1958 1959
Commercial Service
Passenger and Freight Transpor-
tation 3 7 5 5
Miscellaneous Public Services 1 - 2 3
Hotels - - 1 -
Cleaning, Dyeing, and Repairing l 1 5 9
Laundries - - 1 3
Undertakers l l - -
Other Personal Services — - 2 4
Business and Repair Services 3 3 10 13
Total Commercial Service 9 12 26 37
Total Michigan 114 209 547 495

 

SOURCE: Dun and Bradstreet, Inc., and special tabu-
lations.

CHAPTER III

DIFFERENCES IN INDUSTRIAL PATTERNS AND
THEIR IMPACT ON INCWE GENERATION

In the preceding chapter it was concluded that there
are certain differences between the nature and composition
of’Michigan and.U. 8. failure patterns. It was established
that in 1958 manufacturing failures and in 1959 retailing
failures were exceedingly high in.Michigan. In both years
the total failure rate was almost as high as its national
counterpart. In 1953, however, the postwar year in which
the state had its lowest failure rate, the number of casual-
ties in these two above-mentioned categories were relatively
smaller. This fact suggests that the erratic nature of
manufacturing failures, which mainly caused the high overall
failure rate in 1958, coupled with the more than preportion-
ate increase in the retailing death toll, are in the main
responsible for raising Michigan's failure rate. In the
same chapter, certain basic differences in the composition
of failures (especially in manufacturing) and also in the
size distribution and life span in.major economic sectors
were brought into focus.

The objective of the present chapter is to examine

and compare the characteristics and components of the

105

106

Michigan and national economies. In the course of this
examination the employment pictures, industrial character-
istics and income generation in particular industrial
sectors will be considered. These discussions will facili-
tate the analyses of the succeeding chapter, in which an
attempt will be made to explain why the economies' failure
patterns differ.

The Composition of Employment

Analyses showed that the most important single
characteristic of Michigan's employment picture was the very
large share of manufacturing employment in durable goods
industries. As can be observed in Table 1, durable goods
industries in 1959 provided more than 33 percent of all
state employment as opposed to 17.9 percent in the nation.
In the same Year almost four out of every ten persons
employed in durable goods industries (or 13 percent of the
total) in.Michigan were engaged in the production of motor
vehicles and equipment as compared to 1.4 percent in the
national scene (Table 2). This represents what is probably
the most distinctive difference between the two overall
employment patterns.

Another important difference was in the scope of
nonmanufacturing nonfarm employment. Although its rate of
growth was greater, this portion of total employment in the
state was behind its national counterpart. Approximately 59

107

 

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108

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111

percent of all employed in the nation were engaged in some
kind of nonmanufacturing occupation as contrasted to only
58.2 percent in Michigan (Tables 1 and 2).

During the fifties certain significant changes took
place in the employment picture of both economies. while
Michigan's employment in durable goods declined in absolute
terms, the opposite was true nationally. Between 1950 and
1959, as opposed to a 15.7 percent decrease in Michigan's
durable goods employment, a 14.9 percent increase was
experienced in the national economy (Tables 1 and 2). In
both economies this sector's relative share of total employ-
ment dropped. This decline in Michigan, however, was not
large enough to change the state's dependency upon the
durable goods industries.

In one state industry, motor vehicles and equipment,
employment declined appreciably both absolutely and rela-
tively. Here a 37.6 percent decline between 1950 and 1959
was experienced, while at the national level, the industry's
loss was only 11.3 percent. In Michigan this industry in
1950 provided Jobs to 20 percent of all employed; in 1959,
however, its share of total employment was down to 13 per-
cent (Table 1).

During the fifties the most dramatic increase in
employment among all Michigan durable goods industries
occurred in the transportation equipment industry, which,

expluding motor vehicles and equipment, rose a spectacular

112

133.3 percent. Electrical machinery employment also grew
significantly both in the state and nation.

Nondurable goods industries gained in scope, expand-
ing their employment by 12 percent in Michigan, while
practically no change took place at the national level
(Table 2). The growth of employment in nonmanufacturing
industries was almost the same in both economies with
Michigan having a slight edge. Among nonmanufacturing
industries, while the Government, and Finance, real estate
and insurance sectors grew relatively faster in the state,
the growth in wholesale and retail trade and construction
industries lagged behind the nation.

By and large, then, the overall employment pictures
of the two economies, throughout the fifties, had the
tendency to become more alike; nondurable and nonmanu-
facturing employment grew faster in Michigan, and employment
in durable goods industries declined here in contrast to the
changes in the national picture. Nonetheless, all the data
indicate that manufacturing, especially durable goods
industries, and among these the motor vehicle and equipment
group, is still of the utmost importance in Michigan's
employment picture.

Income and value Added
The importance of manufacturing in Michigan's economy

becomes most obvious when the percent of personal income

113

generated in manufacturing is taken into consideration.
Tables 3 and 4 present data on industrial sources of
civilian income for participation in production. As
expected when the two economies were examined, the most
dramatic difference between the distribution of civilian
income generated by participation in production was seen in
the manufacturing sector. While in Michigan this sector's
share of income generated was as high as 45.5 percent of the
total for 1959, it was only 30.2 percent in the nation
(Table 4). Manufacturing in Michigan is the most important
economic activity, and the state can Justifiably be called a
factory state. There are only six states in the nation that
employ more people in manufacturing, and in terms of income
generated by this sector, Michigan is the number one state.1
The wholesale and retail trade was second in magnitude,
making similar contributions to the income generated in both
economies.
Changes in Income

An analysis of the changes that took place in the
generation of income, with the exception of the manufacturing
sector, revealed no significant dissimilarity between
Michigan and the nation during the fifties. The growth of
the proportion of manufacturing in the total income gener-

ated in Michigan was 47.7 percent between 1950 and 1959.

1Roger L. Bowlby, "Manufacturin in Michigan," The
Michigan Economic Record, September, 1930, p. 7.

114

 

 

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115

TABLE 4

PERCENT DISTRIBUTION OF CIVILIAN INCOME RECEIVED
BY PERSONS FOR PARIICIPATION IN PRODUCTION

M
Michigan ygited States

1950 1959 1950 1959

Total 100.0 100.0 100.0 100.0
Farms 3.6 2.2 8.9 4.8
lining .7 . 2.0 1.4
Contract construction 4.9 5.3 5.9 6.6
Hanufacturing 48.6 45.5 29.2 30.2
Hholesale and retail trade 17.9 17.1 21.0 19.6
Finance, insurance, and real

estate 2.4 3.3 3.9 5.0
Transportation 3.7 3.3 5.9 5.1
Communications and public

utilities 2.3 2.7 2.5 2.8
Services 8. 10.1 11.1 12.4
Government 7.1 9.6 9.3 11.6
Other .1 .1 .3 .3

 

SOURCE: Computed from the statistics in Table 3.

This figure indicated that the industry lagged behind in the
total growth or average income received by persons for their
participation in production, which was 57.6 percent during
the same period (Table 3). In the nation, on the other hand,
growth in income generation in this sector kept ahead of the
average with a growth of 73.6 percent as opposed to 67.9.
This led to a notable decline in Michigan's share of income
generated by manufacturing in the nation as a whole.
Michigan in 1950 had contributed 8.4 percent to the total
whereas this share dropped to 7.1 percent in 1959. On the
‘basis of percent share of the income received, a slight

116

decline (from #8.6 percent in 1950 to “5.5 in 1959) in the
contribution of state manufacturing to the total income was
experienced, though this did not lessen the sector's great
importance. At the same time there was a negligible increase
nationally (Table u). g

It should be noted that the growth of income in the
national scene exceeded Michigan's, a fact which can be
accounted for by adverse economic conditions in the state
since 1955. As will be seen in another section, total
personal and per capita income in Michigan grew faster than
that of the nation until 1955. Since then the picture has
reversed itself and the growth rate of income in the state
has fallen behind that of the nation. As a result, while
Michigan had received 5.1 percent of the total personal
income in 1950, its share went down to 4.7 in 1959 (Table 3).

Two particular categories, Government and Finance,
and Insurance and Real Estate, experienced the largest
growth in terms of total income creation. These sectors,
both in the state and the national scene, showed a spectacu-
lar growth rate of over 100 percent, as seen in Table 3. In
the other economic sectors on both levels almost the same
changes took place with similar categories gaining or losing
ground in the generation of income.
19333 M 21 Manufacturing

value added is a very useful tool in assessing the

role of different manufacturing sectors in the overall

117

income creation. This figure is arrived at by "subtracting
the cost of raw materials, parts and components, supplies,
fuels, purchased electric energy and contract work from the
value of the shipments of manufacturing establishments."2
Thus, value added measures the contribution of different
manufacturing sectors to gross product. It is composed of
two principal components-—wages and profits.

5 The most recent value added figures for'Michigan
revealed that in 1958 over 70 percent of the total value
added was generated in durable goods industries (Table 5).
The total share of these industries in the nation, on the
other hand, did not exceed 50 percent of the total (Table
5). As expected, in 1958, the transportation equipment'
industry in Michigan contributed the largest value added by
a single industry, 3h.5 percent of the total. Almost 90
percent of this 34.5 was created by the auto industry. The
scope of the transportation equipment industry in the
national scene was far less, being 10.5 percent of the
total, as seen in Table 5. Only 45 percent of this was
generated by the auto industry. Nonelectrical machinery
Producing industries placed second in terms of value added
in the state, providing 15.5 percent of the total. In the
nation this industry was third in 1959, next to the food and
kindred products which contributed 11.8 percent of total

¥

21bid., p. 7.

118

TABLE 5

PERCENT DISTRIBUTION OF VALUE ADDED BY MANUFACTURING
IN MICHIGAN AND THE UNITED STATES3

 

 

1950 1958 1950 1958

11.8
.2

Food and kindred products 4.8 7.
Apparel and related products -
Lumber and wood products 1 3
Furniture and fixtures 2 0
Pulp, paper, and products 2.9
2 h
5 u
1 3

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0 O O
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Printing and publishing

Chemicals and products

Rubber products

Leather and leather products

Stone, clay, and glass
products ‘

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Primary metal products
Fabricated metal products 1
Machinery, except electrical 1
Electrical machinery
Transportation equipment 4
Instruments and related

products .

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0
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._.:
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Total 100.

._.:

100.0

aDetails do not add to total not because of rounding
only but also because of the omission of some minor manu-
facturing categories.

SOURCE: Computed from.Annual Survey of Manufactgggs

%afigfi'U. S. Department of Commerce, Bureau of_the Census
as ington: U. 8. Government Printing Office, 1952), pp.

17. 58; and the 8 Census 93.: Manufactures, 19;. LE: 92.
cit., pp. 6, 21 g 1.11.
Value added, and the transportation equipment industry,
Which had a share of 10.5.

A substantial decline in the share of value added by

the transportation equipment industry between 1950 and 1958

119

can be seen in Table 5. In 1950, this industry generated
42.1 percent of total value added in the state whereas it
was 34.5 Percent in 1958. This decrease was not mainly due
to the growth of other industrial sectors, but rather to an
actual decline in the contribution of this industry to the
gross product. Of course it should be kept in mind that
1958 was a recession year and was especially bleak for the
auto industry. However, even by 1957 the relative share of
the industry had already started declining, which is indi-
cated by the 39.7 percent of total value added it generated
as opposed to 42.1 in 1950.

In the national scene the transportation equipment
category had gained slightly, despite the recession, in
total value added by 1958, mainly because of the soaring
demand for transportation equipment other than automobiles.
Along with this category almost all of the durable goods
industries contributed an enlarged share to the total value
added, at the expense of some of the nondurable goods indus-
tries.

On the whole, between 1950 and 1958, value added by
all the nondurable goods in the state increased slightly
whereas in the nation the opposite trend took place and the
relative share of nondurable goods industries went down.

An analysis of Michigan's share in the total value
added in the nation reveals that there was a slight tendency
to decline (Table 6), for while in 1950 Michigan had

120

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121

generated 6.8 percent of total national value added, this
figure for 1958 was no more than 5.9. The most striking
change occurred in the transportation equipment industry.
Hhile Michigan had been creating 31.8 percent of the total
value added in this particular area, by 1958 it had dropped
down to 17.6 percent. Despite the overall decrease in
Michigan's share, some industries in the state prospered
more than their national counterparts. These industries
were: the electrical and nonelectrical machinery; stone,
clay and glass products; and food and kindred products; the
relative total share of each increased slightly between 1950
and 1958 (Table 6).
2333 M2 Industry

One out of every seven Michigan workers is employed
by the auto industry. Not only does this industry absorb
about 13 percent of all employed workers, but also it gener-
ates about 25 percent of total value added by manufactures
in the state. The definition of the automobile industry
utilized here is the one that corresponds to the standard
industrial classification (3.1.6.) category 'Motor vehicles
and equipment.‘ According to the 8.1.0. it includes "firms
making passenger cars, trucks, buses, and trailers and firms
1making parts for such vehicles (except some major parts,
such as tires, batteries, glass and ignition systems, which

are classified elsewhere)."3

 

3Roger L. Bowlby, "Michigan's Position in the Auto-
mobile Industry," The Michigan Economic Record, March, 1961,

p. 3.

122

Although still by far the most important in the
state, the relative importance of the auto industry declined

as indicated in Table 7. This fact coupled with the decline

TABLE 7
TRENDS IN THE AUTO INDUSTRYa

Michigan Auto Value Added Auto Employment as

 

 

Employment as Michigan as Percent of A11

Percent of Percent of Factory Employment
Year U. S. U. S. U. S. Michigan
1947 54.4 50.3 5.0 39.6
1954 20.7 47.0 4. 36.2
1958 0.0 38. 4.1 31.

 

aEmployment figures quoted here are taken from the
Census of Manufactures. Estimates by the Bureau of Labor
Statistics and the MIchigan Employment Security Commission
differ from these, mainly because they are averages over
time while the census figures are observations at a point in
time.

SOURCE: Bowlby, "Michigan's Position in the Auto-
mobile Industry," _2, cit.
at the national level relative to the rest of the manu-
facturing segment, presents a serious problem for'Michigan's
economy. The table indicates that since 1947 the number of
people employed in this industry declined from 5.0 percent

1

to 4.1 percent of the total in the nation, and Michigan's
percentage of this declining figure dropped from 39.6 in
1947 to 31.4 in 1958. While the cyclical volatility of the

demand for automobiles is a fact,4 the three postwar

 

‘uSee for example Geoffrey H. Moore (ed.), Business
Cycle Indicators, Volume I (Princeton: National Bureau of
Economic Research, 1961), p. 174.

123

recessions did not have the same impact as indicated by the
following statement:

If the recession nationally has not been much more
severe than those experienced earlier in the postwar
period it is apparent that Michigan and the automobile
industry would have been affected quite differently.
Between 1948 and 1949 total industrial production
slipped six per cent, but auto assemblies increased by
30 per cent as bottlenecks were broke and deferred war-
time demand was satisfied. At that time the trend in
the motor industry acted as a powerful offset to the
deterioration in general business. Between 1953 and
1954, total industrial production declined seven per
cent and car assemblies dropped by somewhat more about
ten per cent. In the present situation (July 1958) the
comparison is much less favorable. Whereas total
industrial production was eleven per cent lower in the
first five months of 1958 than in the same period of
1957, auto assemblies were off 34 per cent.

Thus, in 1958 Michigan was hit much harder than the
national economy, and harder than any other industrial
state. "The slump in car sales was the main villain."6 By
mid-1959 Michigan experienced the biggest recovery in the
nation,7 as seen in the large Jump in personal income. From
the above remarks it is clear that the auto industry is
becoming more cycle-sensitive. This situation can be at
least partly explained by the return of the market to
normal. Once the unsatisfied excess demand immediately

after the war disappeared, automobiles started playing the

 

ERussel A. Swaney, "Scans Michigan's Bgsiness gon-
ditions, Michigan Manufacturer and Financial ecord, uly,
1958! p0 0

6"Michigan Makes a Fast Pickgfi as Auto Sales Spurt,"
Business Week, August 29, 1959, p. l .

7Ibid.

124

role of any other consumer hard goods, i.e., in the case of
change in income it is one of the very first to be affected.
Michigan's dependence on this industry therefore enhances
the cyclical volatility of the state‘s economy. Besides
this enhancement, there were certain noncyclical develop-
ments taking place in this industry which had adverse
effects on the Michigan economy.

The first of these was the lack of an adequate rate
of growth in the auto industry. As our analyses thus far
indicated, the auto industry is on the decline. This fact
can be inferred from the lessening share of this industry in
total value added in the nation as a whole. Furthermore,
national employment in the industry is contracting and
Michigan‘s employment is shrinking even faster.

This lack of growth in the auto industry was mainly
due to a relatively stagnant or declining aggregate demand
for automobiles. According to Stolper, the ratio of one car
for every three Americans may be Just about as many cars as
people want to buy. Future demand, then, probably would
depend mainly on replacement, additional family formation
and the growth of two-car families. He further said that
even if the average scrappage age is reduced by one-third,
if no change took place in technology, the export level
stayed the same and Michigan maintained its 1955 share of
the total production in the industry, then the state

employment in this industry could still fall to 75 percent

125

of the 1955 level. This would occur mainly because expected
annual production would be about 6 million compared to the
7.7 million of 1955. He concluded by saying ". . . it is
clear that even under the best of circumstances the industry
is not likely to provide as much employment as it has in the
past."8

The second setback that Michigan's economy experi-
enced stemmed from the dispersion of the automobile industry.
As the auto industry relocated outside of Michigan, hundreds
of small firms who used to be vendors to this industry were
damaged and many forced out of existence. Michigan's share
of total United States auto employment was declining as was
its share of the total value added by this industry. The
illustration of this dispersion was further seen in that
state employment in this sector has been declining in
absolute terms at a greater pace than the national, which
cannot be accounted for solely by increased automation.
Table 8 illustrates this: between 1950-1959 while the
nation's auto employment declined by about 100,000,
Michigan's employment shrank to almost half by losing
approximately 170,000 workers, presenting a net gain for the
rest of the nation.

Moreover, Table 7 indicates that Michigan's shares

of the national employment and value added have been

 

8Wolfgang F. Stolper, "Economic Development, Tax-
ation, and Industrial Location in Michigan’ Michigan Tax
Study, Staff Papers (Lansing: 1958) , p. 74.

126

TABLE 8

WAGE AND SALARY WORKERS EMPLOYED IN THE MANUFACTURE
OF MOTOR VEHICLES AND EQUIPMENT AND VALUE ADDED
IN TRANSPORTATION EQUIPMENT INDUSTRIES,
MICHIGAN AND UNITED STATES

 

 

Value Added in

 

 

Transportation

Michigan Equipment Indus-

In Thousands as a try, Michigan as

United Percent of a Percent of

Year Michigan States United States United States'D
1950 468.0 825.2 56.7 36.4
1951 473.0 844.5 56.0 30.8
1952 435.0 790.2 55.0 27.2
1953 503.0 928.9 54.2 25.6
1954 417.0 775.6 53.8 23.5
1955 467.0 903.8 51.7 27.1
1956 404.0 809.9 49.9 23.3
195; 395.0 786.3 20.2 22.5
195 a 278.1 630. 4.1 19.5
1959 29109 73106 3909 11.80

8Michigan and U. 8. figures prior to 1958 are not
strictly comparable because of minor differences in the
techniques of data collection.

bHere the obvious decline in Michigan's share is not
strictly attributable to the dispersion of the auto industry.
Because of the changing importance of some of the subgroups
in this industry, Michigan's declined share is dramatized
“Justifiably. For instance, the aircrafts and parts indus-
try has been gaining importance more than proportionately
and 18 already concentrated outside of Michigan. As the
1mD‘Jur‘tance of this subgroup increases, Michigan's share in
the t3<>tal value added by the transportation equipment indus-
try will decline accordingly. This decline is not to be
ac(’c’lelhted for by the dispersion of the auto industry.

SOURCE: Michi an Statistical Abstract (3rd ed.;
gist Lansing: Bureau of BusIfiess and EconomIc Research,
Co‘i‘hlgan State University, 1960), p. 124; the data for
of than four are from different editions of the Annual Survey
1'3. Llanufactures, 22. 21.3., and from the Census 9! Manu-

M. _p. cit.

127

shrinking and hence, other areas outside of Michigan have
been enjoying a net gain in their shares of this industry.
Between 1957 and 1959 Michigan's overall share of national
automobile production also declined. In 1957, 34.3 percent
of the total output of the industry in the nation was pro-
duced in Michigan, whereas in 1959 this share went down to
28.3 percent.9 As the markets expand or technology changes,
economies of scale become exhausted and profit motives per-
suade industries to expand closer to consumers.10 This
irflaerent tendency in location factors to decentralize quite
prwjbably was playing its part in Michigan also.

Along with the above factors there was also the cost
diiiferential in different locations. Freight charges, labor
costs, taxes, and raw material prices all vary from one
locality to another, impinging upon location decisions.
Manyr ex-Michigan firms which relocated elsewhere, or those
whicdl intend to relocate outside of the state, complained

about one or more of the above, or similar factors.11 The

._.—.—

9Although this share in 1960 was a little larger
than in 1959, it still lagged behind that of 1957. U. S.
Department of Commerce, Business and Defense Service
A inistration, Automotive and Transportation Division,
1utomobile Industry Outlook for l 61 and Review _q_1_“_ 1260,
i. (Washington: T. S. Governmen Printing Office, 19 1),

 

p.

10Stolper, 9p. cit., p. 78.

th 11For an interesting discussion of the impact of
Guise factors on possible relocation or expansion decisions
Ma admie of Michigan, see: Eva Mueller, Arnold Wilken and
ergaret Wood, Location Decisions and Industrial Mobility in
Thchi an, 1261 (Ann Arb'or: Institute for SociaTI Researcfi,

e University of Michigan, 1961), especially pp. 52-64.

possibility is that adverse effects similar to those which

forced these firms out may also become a decisive factor in

the relocation or dispersion of the auto industry. With

compact cars gaining an increasing share of total sales in
the industry, Michigan's economy may suffer even further
because most of these compacts are produced outside of the

state. Dispersion may take place in one of three forms:

either the local plants are closed and new ones are opened

elsewhere, or local plants are kept while all new ones are

built in other areas, or while the (local plants are kept the

same ones located elsewhere may be expanded. The dispersion

in the auto industry more often seems to take either one of

the latter two forms.

The Impact of Defense Contracts

Defense contracts played a vital role in our

economy. As Senator Hart stated: ". . . because the magni-

tUde tof the defense budget and the rate at which large sums
are Spent affect not only the armament industries, but
nearly every other industry in the country."12 Between
fmca1 1953 and fiscal 1960 the defense procurement outlays
decliJled by one-sixth, from $17 billion to $14 billion, as

Table 9 indicates. Also during this period an important

\

A H 12Special release from the office of Senator Phillip

th ath entitled "Remarks of Senator Hart on the Floor of

ore Shanate on Introduction of Resolution Authorizing Study
the Economic Impact of National Defense."

129

TABLE 9

DEPARTMEqu OF DEFENSE EXPENDITURES
FOR FISCAL YEARS 1953 and 1959a

m

 

1953 1959
Millions of Millions of
$ 3‘ $ $5
Total procurements 17,197 100.0 14,409 100.0
Aircraft 8, 189 47. 7, 730 53 .6
Missiles 245 1. 3,337 23.2
Ships 920 5 . 3 1, 491 10. 3
Ordnance, vehicles , and
related equipment 4 , 686 27 . 1 399 2 . 8
Electronics and communi-
cations 937 5 .4 720 5 .O
Other equipment 2,320 13 .4 730 5. 1

 

aDetail may not add to total because of rounding.

SOURCE: Economic Reportr of the President and the

 

Economic Situation aha Out ook anua ashington:
. vernment‘Prn n ing Office, 196?), p.

reallotment of these expenditures took place as seen in the
table. While outlays on aircraft, missiles, and ships were
54.0 percent of the total in 1953, their proportion by
fiscal 1959 rose to 87.1 percent. On the other hand, the,
relative share of the ordance, vehicles and related equip-
ment category, which is the most important from Michigan's
9°11“: of view, shrank from 27.1 percent of the total in
1953. to 2.8 in 1960; its dollar volume contracted more than
ten times. The state's benefits from defense procurements
Here at their peak when tanks and ordnances were very

1mDC'I‘tant items in these procurements.13
\

a 13william Haber, "The Outlook for the Michigan
cohomy, " Michigan Business Review, May, 1959. Do 1

Along with the adverse effects of this change, it is
also claimed that Michigan manufacturers have been losing
their bidding power relative to those of the rest of the
nation. Although without substantiation, this point is
counted as one of the factors causing the contraction in
Michigan's overall share of defense contracts.

The end result of the above-mentioned factors was a
downfall in Michigan's share of defense procurements from
about 5 percent of the national total in fiscal 1953 to
approximately 2.5 percent in fiscal 1960 (Figure l).
Michigan's stake in these contracts is undisputable. The
loss in the relative position of the state in defense con-
traxrts caused not only a direct deterioration in the portion
of.‘ income generated by these contracts, but also adverse
effects on the state's economy occurred through a smaller
defemlse employment. As Brimmer put it: "The changing
Pattern of defense demand is engraved in the trend of
defense employment in the state."1" Table 10 illustrates
this point. As opposed to a 70 thousand increase between
l951~tmnd 1952, the number of Michigan workers, since
D“ember, 1952, engaged in defense production declined
°°nt1nually until the end of 1958.

Impacts on Income

Thus far our analyses reaffirmed the dependency of
\

 

Th ”Andrew F. Brimmer, "Durable Goods in Michigan,"
\e W Economic Record, July-August, 1959, p. .

131

Figure l

MICHIGAN'S PERCENT SHARE OF
MILITARY PROCUREMENTS

15%

 

‘n

10%-

5%-

 

 

e—-—m——s

 

1 L
N» F; dr""'8T""15
U\ wx aw in in xx U\ U\ in \o
0\ ca ox Ox ox (m ox ox ox ox
H H H H H H H H H H
Fiscal Year
SOURCE:

Data derived from "Net Value of Military
Procurement Actions," Office of Secretary of Defense, as

appeared in the special release from the office of Senator
Phillip A. Hart, _2, cit.

 

132

TABLE 10

DEFENSE EMPLOYMENT IN MICHIGAN, 1951-1958
(In Thousands)

 

Date Defense Employment Annual Change

December 1951 145

December 1952 215 +70
December 1953 157 -58
December 1954 88 -25
December 1955 63 -25
December 1956 59 - 4
December 1957 49 ' ~10
December 1958 46 - 3

 

SOURCE: Brimmer, "Durable Goods in Michigan."

Michigan's economy on the durable goods industries. This
situation creates a number of problems for the state's
economy. First the durable goods industries are character-
ized by wide variations in production levels during boom and
recession periods which reflect on prosperity. Thus, the
more dependent an economy is on the durable goods indus-
tries, the more erratic is its nature. From the unemploy-
ment point of view this means that when in recession, the
state economy would have a larger unemployment and in
recovery years this figure would be lower than in economies
that are less dependent on durable goods. As shown by Table
10, in the recession years of 1949, 1954, and 1958,
Michigan's unemployment problem was considerably more acute
than the nation as a whole.

Another problem that emerges from excessive

dependency on the durable goods industries is the chronic

133

unemployment in the state. Table 11 indicates that in
recovery years since 1953 the state's unemployment picture

has not looked very encouraging.

TABLE 11

UNEMPLOYMENT AS PERCENT OF THE TOTAL LABOR FORCE
IN MICHIGAN AND THE UNITED STATES

 

 

 

 

Michigan United States
1949 7.3 5.9
1950 4.1 5.3
1951 4.0 3.3
1952 4.1 3.1
1953 2.6 2.9
1954 7.1 5.6
1955 3.7 4.4
1956 6.4 4.2
1957 6.8 4.3
1958 13.6 6.8
1959 8.9 5.5
SOURCE: various issues of Egployment and Earnings,
92, g_£,; and various issues of Mic gen 3. or Market,.Jg.
ci .

After the 1954 recession the rate of unemployment in
the state did not come near that of 1953, and after 1955 it
started lagging behind the national rate also (Table 11).
This situation was basically due to three distinct develop-
ments; first, the manufacturing employment in the nation was
growing less rapidly than total employment, as indicated in
Table 2, and Michigan has a heavy reliance on manufacturing.
Second, automobile employmentwas growing even less rapidly

than manufacturing. And lastly, Michigan's share of the

134

auto industry was also declining.15

All these factors put together formed a certain
pattern in the state's income picture which was quite dis-
tinctive from its national counterpart. Per capita personal
income in the state has always been above that of the nation
for the period analyzed. In examining Figure 2, for discus-
sion purposes two major periods can be distinguished. The
first period is that up until 1953. With one noticeable
recession as an exception, income in the state rose faster
than nationally. The second period is that between 1954 and
1959, during which the Michigan income picture looked rather
bleak. Even outside of the two recessions in 1954 and 1958,
the state's income did not rise as Sharply as its national
counterpart. In 1959 despite the recovery which was not
nearly as good as the one which took place in 1949, Michigan
and the national per capita personal income were the closest
'together of all the 13 years considered. A similar picture
can be seen when total personal income figures are

analyzed.16

Concentration of Industrial Power
Before closing the analyses of the industrial

structure in both economies, it is appropriate to discuss

 

15Bowlby, "Michigan's Position in the Automobile
Industry," _2, cit.

16In Chapter Four when we use total personal income
figures this point will be demonstrated. Also see The

1

J

Figure 2

PER CAPITA PERSONAL INCOME IN MICHIGAN
AND THE UIITED STATJS, 19u7-1959

Dollars

2,HO

 

2,300
2,200
2,100
2,00C
1,900
1,800

1,70C
1,600
1,500
moq

V

Ivlichiggan

 

T T

r U

T

1,

V

V

T—

 

l

1 l

 

1,30

1960.

HT

'51 )3 ‘55 '57 '59

SOURCE: The Michigan Economig_Record, September,

 

 

136

briefly the industrial concentration. The analysis of con-
centration in itself is a very controversial subject, and it
would hardly be Justifiable to handle this involved topic
within the framework of a few paragraphs. However, in this
section an attempt will be made to show that with the
exception of manufacturing it is likely that concentration
in Michigan's economic sectors had little impact on the dis-
parity that exists between the state's failure pattern and
its national counterpart.

As was mentioned in the first chapter, one way of
measuring the concentration of economic power is simply the
investigation of size, which, like concentration of income
or wealth among individuals or households, is fundamentally
a measure of inequality of distribution. The usual practice
in measuring inequality is to arrange the units in order of
increasing size, and to express inequality in terms of per-
centages: thus, the highest x percent of all the units hold
y percent of, say, the total income of all the units.17

Speculations as to how concentration might affect
the total fatality picture in business have already been
presented in the first chapter. Here we shall briefly look
at the size distribution of firms in different sectors and

Michi an Economic Record, September, 1959, in which total
personal income figures are plotted in terms of index
numbers, which substantiate the above statements.

17Adelman, 22, cit., p. 4.

137

their share of the sector's total sales or employment. In
these analyses census data were employed. The statistics
compiled in the above manner, when plotted, are called
Lorenz curves; the straigher these curves, the more homo-
geneous is the size distribution of industrial concentration
whereas the more u-shaped they are, the poorer is the size
distribution, hence, the higher is the concentration.

Lorenz curves, although very simple and usable, have
a number of shortcomings. First, they do not distinguish
between the presence of many firms having similar sizes and
that of a few firms of equally well-distributed magnitudes.
Another and probably more serious shortcoming is that this
method of analysis presents what Adelman calls "a spurious
concentration" during recessions, while an equally spurious
decrease in concentration is displayed in revivals. This
fact stems from the declining size of the business popu-
lation in recessions and its soaring number in boom years.18
This latter shortcoming was somewhat mitigated since both
the 1954 and 1958 censuses were taken in recession years,
and only data from these censuses were utilized here.
Furthermore, the intention here is to point out that the
differences between the concentration patterns of the two
economies are based on the data available for the nearest

census year. Therefore, the data show the same bias at the

laxpid.. pp. u. 5.

138

state as well as the national levels; hence, no harm is done
to their comparability. Among a number of alternatives,
employee size distribution for manufacturing firms and
receipt size distribution for wholesaling, retailing and
service sectors were utilized as indicators of size.

Tables 12, 13, lb, and 15 point out that the only
economic sector where a distinct difference between Michigan
and national concentration exists is the manufacturing
sector. Although data for 1958 are not yet available, it is
unlikely that there is a Spectacular change. From Table 12
it is readily noticeable that in Michigan fewer large busi-
nesses employed a larger bulk of the total employment than
their national counterparts. Also, more smaller firms in
the state employed a relatively smaller percent of total
manufacturing employment. This difference in the concen-
tration picture could very well have contributed to the dis-
similarity between the patterns of failures in the two
economies. In recessions Michigan manufacturing composed of
relatively more small firms, may experience a higher death
toll among these little men. This is another factor that
could contribute to the greater conformity of Michigan manu-
facturing failures to recessions; this was previously illus-
trated by pointing out the failure rate in the durable goods

industries increased more than proportionately in 1954 and

1958.

139

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141

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142

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1&3

The concentration pictures in other sectors not only

demonstrated a high similarity in both of the economies but

also showed a similar slight increase. These comparable

magnitudes and changes in the concentration pattern sug-

gested no impact, from this point of view, on the differing

failure patterns of the two economies.

Conclusions

Throughout the entire analysis in this chapter we

luave established the following:

1.

Durable goods industries, and particularly the
motor vehicles and equipment sectors, lost their
relative importance, to a limited extent,
between 1950 and 1959. However, these indus-
tries, especially the one mentioned, are still
of the greatest importance to the prosperity of
the state's economy, because of their share of
the total employment and their share of the
total income generated in the state.

In the national scene the durable goods indus-
tries, relatively speaking, were only half as
important as their Michigan counterparts. Thus,
Michigan's relative as well as absolute depend-
ence on durable goods manufacturing is obvious.
The data indicated that durable goods industries
neither in.Michigan nor in the nation showed the

qu

growth experienced by the rest of the economy.
In Michigan especially, the long term tendencies
indicated that, mainly due to the declining
share of defense contracts and due to the con-
traction in the size of defense contracts,
durable goods industries were facing a shrinking
demand.

Furthermore, the decentralization occurring in
the automobile industry reflected adversely on
the state's economy to a large degree.

Michigan is relatively more dependent on durable
goods industries, and since these industries
display a more cyclically erratic nature than
the rest of the economy, personal income in
Michigan showed sharper ups and downs than its
national counterpart. '

Because of the adverse effects of these long
term developments as set forth above in item a,
personal income in Michigan seems to have become
relatively more stagnant than in the nation as a
whole.

Concentration of the economic power in different
sectors displayed no significant difference
between the state and the national economies,
with the exception of the manufacturing sector.

The concentration in this sector was more

145

detectable, and it is likely that this differ-
ence contributed to the state's business
failure pattern which departs noticeably from
that of the nation.

 

.
.4 ‘An. ._.—._....

CHAPTER IV

BUSINESS FAILURES AND THE ECONOMY

In the previous chapter we contended that the re:

2w.

capacity of the Michigan economy to generate income is

wan-s "\1

heavily dependent on the durable goods industries. Because

of the particular properties of these industries the state's

 

income is more erratic than that of the nation. The present
chapter aims to establish certain interrelationships between
income, the nature of the economy and the failure pattern.
In so doing it seeks to explain the disparity between the
state and national business failure patterns.
Magnitude of the Economy and
Business Failures
It is a fact that there is a very strong tendency in
those states where income payments to individuals are rela-
1:1Ve1y high to also have a relatively larger business popu-
lation; i.e., there is a proportionality between the size of
the economy and the number of firms. In Vermont, for
1“Stance, in 1959 total personal income was 694 million
dollars with a business population of 6 ,784 as opposed to,
f°r example, New York's l$5,103 million dollars personal
income and 263,292 business population. This proportionality

betWeen income and business population is very close to

146

‘Vf a”...

147

being perfect, for it represents a correlation coefficient

of almost 1.00 and has been tested for a number of years and
found to be stable.1 It is axiomatic that a large popu-
lation, in absolute terms, would have a large death toll.
This axiom applies readily to the business failures picture,
for the states with a large number of firms also were found
to have a large number of failures; by the same token small
states with a small business population had a small number
of failures.2

An equally detectable interrelationship was found

between income and the number of failures. In 1959 the
state of New York for instance had the highest income of all
the states (42,157 million dollars); the highest number of
failures also occurred in this state. On the other hand,
Vermont had the lowest income—6145 million dollars—with
the lowest number of failures.3 Thus, the greater the total
income in the economy, the greater is the business popu-
lation, and equally great is the death toll among the firms.
It must be remembered that these relationships do not neces-
sari 1y indicate causation. What is stated here is simply

g

C 1Betty C. Churchill, "State Distribution of Business
°ncems," Survey 91 Current Business, November, 1954, p. 16.

f 2A correlation analysis between the number of
Ogilures and the number of firms yielded a high correlation
er 1‘ icient of .8626, which substantiates our statement.

Ber 3The correlation coefficient between these two
1'38 (income and the number of failures) was found to be

~9307 for 1959 and .9140 for 1958-

1148

that when there is high income there is a large business
population and therefore there is also a large number of
failures.

Two questions then came to mind: what significant
impact does a change in income have on failures? and is
there any relationship between the change in the number of
failures and new entries into the business world?

Although failures and income were positively corre-
lated in terms of magnitudes, changes in income and number
of failures were inversely related. When income rose the
number of failures shrunk and vice versa. This covariation
was substantiated by the data presented in Tables 1 and 2.

In most of the years analyzed, both in Michigan and the
nation, the above relationship held. In correlating the
change in income in Michigan to the change in the number of
fallures a correlation coefficient of -.6051 was obtained.
A Similar analysis yielded a correlation coefficient of

‘o8165 for the nation as a whole.4

k

“Applying correlation analysis to time series has
certain shortcomings. The trend factor may be cited as the
number. one problem: if the two series happen to have the
“"10 kind of trend a high correlation coefficient may be
“P1 Ved despite the inexistence of interrelationship. A
“:1!!er of similar problems prevail because of the existence
:1 rcertain trends in the time series. Another important

h fltaulty in using correlation analysis on time series is
the lack of logical basis for estimating the reliability of
m: coefficient of correlation. The problem emerges from
gem.afbsence of randomness in the observation. In time
instea each observation is related to the preceding one
com ead of being random. For further detail on these short-

1113s see, for example: I“. E. Croxton and D. J. Cowden,

 

 

149

TABLE 1

NET INCREASE OR DECREASE IN MICHIGAN'S PERSONAL

INCOME AND IN FAILURES, 1947-1959

 

Number of Change in Personal Change in

Business the Failure Income the Personal
Year Failures Number (in Millions) Income
194 139 8,832
194 157 + 18 9.579 + 747
1949 337 +180 9, 22 - 37
1950 2 0 - 57 10, 03 +1,2 1
1951 181 - 99 12,103 +l,3oo
1952 170 - 11 12,902 + 99
1953 114 - 56 14,516 +1, 14
1954 209 + 95 14,127 - 389
1955 211 + 2 15,787 +1,66o
1956 413 +202 16,587 + 800
195 512 + 99 16.923 + 335
195 47 + 35 16,581 - 3 2
1959 96 - 51 17,493 + 912

E

SOURCE: Failure figures are from Dun and Bradstreet,
Inc ., as reported in different issues of the Statistical
Abstract 93 the United States, 0 . cit. Income data are

MsonaI—Inm Ms nee—1929, 23. cit., P- 1533
and the StatisticaI A street of t e _. __., 1 61, p. 307.

cOllunms two and—four are compU’Eea.

 

 

This close association between the number of

1'31 lures and income created two unique conditions in

¥

W General Statistics (New York: Prentice-Hall, Inc.,
’ p. o

1 In our analyses the trend factor is not very

c:‘<’)‘P<>I“l;ant for three reasons. First, when the correlation

e1.gff‘ilxient is negative, the trend factor becomes less

c e<31:ive in distorting the results. Second, correlation of

Jr? ‘88s automatically eliminates an important part of the

3a nd. And lastly, for our analyses, it is not even neces-

th? to eliminate the trend factor for it is likely that

me. 3 may actually be caused by income, and elimination of it
y mean distortion of the real picture.

150

TABLE 2

NET INCREASE OR DECREASE IN PERSONAL INCOME
AND IN FAILURES OF THE U. 3., 1947-1959

 

the Personal

Business the Failure P rsonal Inc

 

gar Failures Mumber in Billions Income
194 3,474 191.6

194 5,2 +1,776 210.4 +18.8
1949 9,2 46,230 208.3 - 2.1
1951 , 058 -l, 104 256 .7 +28 .2
1952 7,611 - 447 273.1 +16.4
195 8,862 +1,251 288. +15.2
195 11,086 +2,224 289. + l.
1955 10.969 - 117 310.2 +20.
1956 12,686 +l,7l7 332.9 +22.7
195 1 .739 +1.053 351-4 +185
195 l ,964 +1,225 360.3 + 8.9
1959 14.053 - 911 383.3 +23.0

SOURCE: Failure figures are from Dun and Bradstreet,
Inc., as reported in different issues of the Statistic l
Abatract 93; the United States, 0 . ci .; and BusIness
sEaEIsEIcs 1 Mn, U. 3. par ment of Comoros,

62'I'Ice of Bus ness EEonomics (Washington: U. 8. Government
Printing Office, 1961), p. 5. Columns two and five are

°°mputed.

Michigan's failure pattern. As was established in the
Previous chapter, Michigan's income is more erratic than the
mitianal aggregate and also has been rising more slowly
during the past three years. Corresponding to these two
B“Km-a1 properties, the state's failure pattern also proved
t° be more erratic, as seen in Figures 1 and 2 in Chapter
One, Furthermore, during the past three years the state
mil\l-Jr‘e rate increased faster than that of the nation (Table
1’ chapter One). Also during this period the failure rate

151

in the state reached a high plateau which was substantially
higher than the 1951-1953 level and quite close to the
national rate of failure.

2h: Role g_f_ Ne! Firms
Our analyses thus far substantiated the theory put

forth in the first chapter, namely, that when business con-
ditions worsen, failures increase while the reverse also is

true. Here we have stated that there is a definite corre-

lation between the size of an economy and the number of

firms; in addition there is a correlation between the number

of failures and the size of the economy. He were now con-

earned with the interrelationship between the new entries

and the number of failures. According to many, there must

be a positive correlation between the number of new entries

and the variations in the number of failures;5 hence, when

¥

t 5Kap1an, already cited in the first chapter, con-
nided that birth rates determine mortality (see Chapter One
Thorp a number of years ago stated that "the mor-

9' 16).
fility rate is very largely a function of the birth rate."
zillard L. Thorp, Hearings Before the Temporary National
Onomic Comittee. Investigation of Economic Power Part I,
75th Cong., 2d Sess. (Washington: U. S.

W Prolo e
Vernmen r n ng Office, 1941), p. 89. The probable
ationships between the number of new entries and the

inter-rel
rib ations in the number of failures were discussed in the
mt‘Bt chapter. Claiming a positive correlation between
create two variables actually is contrary to the above finding
c an inverse relationship between changes in income and
see in failures. Because there are generall more
(for this point see tty C.

ggtl'ies in prosperous years
hill, 'Rise in the Business Population, " Surve 93‘.
faIIures must

MBusiness May, 1959, p. 15), business
11° I‘ease wfien income rises. However, we have already estab-
e. Bhed that there is a negative correlation between the
“ha-ages in income and the changes in business failures.

e1ther- of these two theories, i.e., business failures is a

152

the number of entries goes up failures also soar. Two
series of computations were made to test the relevance of
this particular proposition.

The net increase in the number of failures (Table 3)
was correlated to the net increase in the number of firms
(Table l), as the first test, both for Michigan and the
United States. The end results of this first degree differ-
ence analysis were strikingly low correlations. At the
state level the correlation coefficient did not exceed
.2182 whereas in the national economy a little higher corre-
lation coefficient of .4160 was obtained. Both cases showed
trust the effect of new firms on the increase or decrease of

failures was not nearly as high as the effect of changes in
income.

There were two shortcomings to this type of analysis.

Fir-31;, the yearly number of firms are given as of July each
year. in the 2. g _B_. Reference @9315. These figures, there-
fore, did not include all the new entries that survived less
thaurl a year,6 which represented an inherent bias in the

IEE§\11388. Also, as we have already discussed in the second
\

gage tion of entries, and business failures is a negative

thsiitsion of income, can be completely substantiated or

leg ted; however, as our analyses showed, the first one is
53 significant.

tho 6Not only those newly entered who failed but also

oveae who entered and ceased existence before the year was

at; 3? ‘were excluded from the net change in the total firms
a“hiatus.

153

TABLE 3

NET CHANGE IN THE NUMBER or FIRMS IN MICHIGAN
AND THE UNITED STATES, 1947-19598

M

 

 

m mted States
Number Increase or Number Increase or

Year ___ of Firms Decrease of Firms Decrease
1945 93.9 3 2,404.88

194 97,9 9 +4,016 2,550.01 +145,135
1949 100,243 +2,294 2,679,306 +129,2 8
1950 104,231 +3,988 2,686,786 +136,768
1951 969967 '71264 226071977 ‘ 781809
1952 99,217 +2,250 2,637,004 + 29,027
195 100,366 +l,149 2,666,680 + 2 ,676
195 100.330 - 36 2,632,312 - 3 ,368
1955 101,074 + 7 4 2,633,063 + 751
1956 102,130 +1,056 2,628,910 - 4,15
195 101, 30 - 800 2,652,248 + 23,33
195» 103, 42 +2,512 2,675,409 + 23,161
1959 105.432 +1.590 2.708. 158 + 32. 759

“These numbers do not cover all the business enter-
prises of the country. Certain types of businesses not
included are: financial enterprises including banks, and
mortgage, loan, and investment companies; insurance and real
estate companies; railroads; terminals; amusements; many
small one-man services; professions; and farmers. This lack
of complete coverage, however, does not harm our findings,
for the failure data also are composed of similar types of
businesses. Thus, data presented in this table are
perfectly comparable to the failure data.

SOURCE: Dun and Bradstreet, Inc., as appeared in
different issues of the Statistical Abstract 2§,the United

States , 92. 93,3.
chapter the number of failures that survived less than a
year was very low, mainly because of the D. b B. definition
of failure. These two shortcomings probably decrease the
reliability of the above results. In fact, it is quite
possible that if the same type of computations were made by

154

using Department of Commerce figures on business discontinu-
ances, somewhat different results would have been obtained.7
The second test to check the degree of covariation
between the new entries and the number of failures was per-
fbrmed by using the change in the number of names added to
the 2. g B. Reference 5129}; during a year and the change in
the number of failures. These figures eliminated one of the
shortcomings of the previous test. They include all the
names added to the Reference Book throughout the year, and
thus, they encompass those firms that lasted less than a
year. But these figures had a different shortcoming. They
did.not represent the change in the number of firms solely;
they rather represented changes in the names of the firms
and thus they include successions.8 As a result, a sub-
stantial number of concerns which were included in these
statistics represented nothing more than a change in the
ownership or legal form of an existing organization.9 The
number of new names added in the 2. g B. Reference £9.29.
yearly are shown in Table 4. Keeping the shortcomings in
mind, these figures were used for similar types of corre-

lation analyses such as were used in the first test discussed

7To prove or disprove this statement was not within
the scope of the present study.

8A change in ownership or legal form or organization
was recorded as a new enterprise which is known as "suc-
cession.

9Dun and Bradstreet, Inc., Vital Statistics, 92, cit,

155

above, i.e., first degree difference analysis.

TABLE 4

NAMES ADDED IN THE DUN AND BRADSTREET REFERENCE BOOK,
MICHIGAN AND THE UNITED STATESa

   

-w _. -_—— -1W-_“-_

United States __3

 

 

 

Michigan _ H

Number 2 ncrease Number NeE Ifiarease ““3
of New or Decrease of New or Decrease

Year Names in New Names Names in New Names

194 27,468 712,000

1 25,091 -2.377 651,000 -61,000

1949 21,224 -3.537 61,000 -90,000 g

1950 19, 3 -2,111 99,000 -62,ooo g

1951 1 ,815 -l,628 407,000 -92,000 e

1952 1 .795 -l.020 405,000 - 2,000

195 17,321 + 226 403,000 - 2,000

195 1 .771 + 50 416,000 +13,000

1955 1 .330 + 5 9 431.000 +15.000

1956 20, 12 +2,g 2 433,000 + 2,000

195 18,911 + z 40 ,000 -l9,000

1959 17.: 367 ‘1: 5h 438: 000 +30: 000

aIncludes successions as new entries.

SOURCE: .Dun and Bradstreet, Inc., personal
correspondence.

The first correlation between the change in the
number of the names added to the 2. g B_. Reference 5129);. in
Michigan and the net increase or decrease of business
failures in the state proved to have a low correlation
«coefficient of .1742. Similarly, the same type of compu-
tations for the national economy showed that again a very
low relationship existed between these two times series, as

the correlation coefficient did not exceed .2864.

156

Thus far entry figures and failure statistics in our
analyses were correlated for the same year. In other words
the number of entries in, for instance, 1958 was compared
with the number of failures for the same year. Thus, only
one year's span was taken into consideration which includes
only immediate (within one year) drop-outs among the new
entrants and also part of the immediate failures among the
old timers due to the competition generated by newcomers.

In many cases, it may take more than a year for a firm to
fail. By the time the firm gets started, borrows money, and
goes bankrupt or causes a loss to its creditors, it may very
well have been over a year. Thus, it became imperative to
compare not only the entries of 1958 with the failures of
1958 but also the entries of 1958 with the failures of 1959.

So the above-mentioned correlations were computed
again with a one year lag. The net increase in the number
of failures correlated to the net increase in the number of
firms yielded a correlation coefficient of .3071 for the
nation as a whole and .0122 for Michigan.

In correlating the changes in the names added with
the changes in business failure statistics with a one year
lag, a correlation coefficient of .3757 for Michigan, and
.2709 for the nation was obtained. Although further lead-
lag analyses can be made by using two, three or more years,
it becomes rather difficult to distinguish net effects of

new entries from those of economic or noneconomic factors.

157

After a two year period it is not possible to tell whether
increased competition or some other factors caused the
failure.

Our analyses then so far suggest that the impact of

new entries on the failure picture was not nearly as

important as the changes in income. This, however, did not
mean that entries do not have any effect on the formation of
failure statistics. In fact statistics (Tables 18 and 34,
Chapter Two) indicated that the first three years probably
are the most dangerous period in any firm's life. But this
fact did not necessarily imply a direct relationship between
the number of entries and the number of failures or exits.
In cases of soaring entries the probability of failure
statistics to increase would grow, but the actual increase
would depend on many other external factors, both economic
and noneconomic. If the need for more firms in the economy
exceeded the number of entries, then despite the soaring

number of new entrants, failure statistics may be low.10

 

10The following statistics substantiate this point:
BIRTHS AND'DEATHS IN BUSINESS POPULATIONa

‘-_--.. v--m “.1. s..- _—_..._-—--~ ~—. .- “cn—o-v. v ' -

Number of Discontinued

     

 

Number of Discontinued Businesses as

New Businesses Businesses Percent of
‘Year (000) (000) New Firms
1943 146.0 337.0 230.8
1944 330.9 174.6 32.8
1945 422.7 17 .2 1.4
1946 617.4 20 .7 33.8
1947 460.8 239.2 51.9

158

Business Conditions

In the first chapter, a distinction was made between
the cyclical and noncyclical aspects of business conditions.
Throughout the previous chapters we established that
Michigan's economy is highly cycle sensitive, a fact
demonstrated by the erratic nature of the state's income and
employment patterns which conformed readily to the cyclical
pattern of the national economy. We also established that
certain noncyclical changes had been affecting the state
economy adversely. These were first, the decline in the

demand for durable goods, second, a reduction in the share

BIRTHS AND DEATHS IN BUSINESS POPULNTIONa-—Continued
W

 

Number of Discontinued
Number of Discontinued Businesses as
New Businesses Businesses Percent of
Year (000) (000) New Firms
1948 393.3 282.0 71.7
1949 331.1 306.5 92.6
1950 3 8.2 289.6 82.2
1951 327.1 276.2 8 .4

 

aThese figures have a much broader scope than those
of the D. & B., for they include the total of the service
industry population, as well as finance, insurance and real
estate firms.

SOURCE: U. S. Department of Commerce, Office of
Business Economics, Business Statistics 1 Edition
(Washington: U. S. UBvernmont‘PrintIng cc, 1959), p. 26.

As can be observed in the table above, especially
throughout the period 1944-1947, the difference between the
number of entries and exits was very wide which means that
the large number of entries did not result in a large number
of exits, probably because their services were needed by
society.

159

of state employment in the auto industry, and third, changes
in the nature ansthe magnitude of defense procurements.

Our analyses demonstrated that significant covari-
ations exist between income and business failures. Since
the direction of causation or even causation cannot be
determined by the correlation analysis itself, we face three
resultant propositions.

First, the increase in business failures caused a
decline in income; thus, it is not the income that caused
the changes in the failure picture, but the changes in
failures caused ups and downs in income.11 Second, changes
in income resulted in changes in the failures, and as income
goes down submarginal firms were forced out. Third, both
income and failure statistics varied under the influence of
some outside forces.

All of these statements have merits and to sub-
stantiate or refute the validity of any one of them is not
within the scope of this study. However, the second and
third propositions seem to be more plausible than the first
one. It is unlikely that .52 percent of all firms with
$692,808,000 total liabilities could affect total income so
adversely that it would create a further slacking in business

 

11Although this first proposition may seem to be an
absurdity in the light of the analysis made at the beginning
of this chapter, i.e., a positive correlation between income
and business failures, it actually is not if we restate the
fact that this analysis did not show causation.

160

conditions or cause a recession. On the other hand, income

definitely has a direct bearing on business failures. Small
firms who are more prone to failure can easily be forced out
of the market by the occurrence of a slump in income which

would practically nullify their already very limited market L,
demand. This situation could most readily prevail in the _“73
retailing or construction sectors where a decline in

personal income causes postponement of certain planned

 

expenditures. It can also be argued that income is actually j
a result of business conditions.12 The cyclical and non- L
cyclical aspects of business conditions Jointly reflect on
total personal income, and we have established that there is
a strong relationship between income and the total failure
picture. From this point of view the third proposition
above may be accepted as the most relevant.

This distinction between income and business con-
ditions as a factor forming the failure pattern was con-
venient as a tool for further analyses. It facilitated the
last step of our considerations, which was to distinguish
between business conditions in the durable and nondurable
goods industries and to test the covariations between these

and business failures in the state and national economies.

 

12For an economy such as Michigan's which is basi-
cally dependent upon interstate trade, this statement is
reasonable. If demand for Michigan manufactures expands in
the national economy, naturally income in the state will
r se. '

on

‘

(J

m

(A)

161

One very good measure of business conditions is the
Federal Reserve Board's Index of industrial production.

This index provides measures of physical production based on
input output analyses in different industries.13 A negative
correlation must exist between this index and the index of
business failures because an increase in industrial pro-
duction is indicative of healthy business conditions and a
concomitant shrinkage in failures.

A series of correlations based on the first degree
differences revealed a number of important results. Corre-
lating the changes in the Index of industrial production of
durable goods with the changes in business failures in
Michigan revealed a relatively strong covariation indicated
by a correlation coefficient of -.6069. This correlation
coefficient was significantly greater than that obtained
from correlating the changes in nondurable goods production
with the changes in the Michigan business failure index,
which was -.4996. Similar analysis in the national economy
showed Just the opposite tendencies. Here the changes in
the nondurable goods production and the changes in the busi-
:ness failure index showed a stronger tendency to covariate
.as shown by a correlation coefficient of -.7403. This was
greater than the correlation coefficient of -.6877 which was
obtained by correlating the change in durable goods

13For a detailed analysis of this index see "Revised

Industrial Production Index," Federal Reserve Bulletin,
December, 1959, pp. 1451-1466.

 

162

production with the change in the national failure index.
These analyses showed that Michigan's failure picture, rela-
tively speaking, was influenced more noticeably by the con-
ditions in the durable goods sector, whereas in the national
picture the nondurable goods sector played a more pertinent
role. Table 5 presents the basic data utilized for these
analyses.

Although the industrial productivity index is a very
important indicator of business conditions in the durable
and nondurable goods sectors, it does not show the real
picture at the wholesaling and retailing levels. Probably
the analyses of retail and wholesale inventories provide a
better understanding of business conditions. A special
measure was developed here to overcome this possible short-
coming of the industrial productivity indexes. This measure
was the ratio of inventories to new plus unfilled orders

Inventories ). A high level business
N3?‘3533§§_$—U5TTITZH’orders
activity in most cases leads to a low inventory level
because of excess demand. Furthermore, the size of new
orders runs high. The normal consequence of high level
business activity, therefore, is a low ratio of inventories
to unfilled plus new orders. Also the converse is true:
when the level of business activity is not very high this
ratio will go up by virtue of the sagging new and unfilled
orders coupled with the heavy inventory accumulation due to

lack of adequate sales.

 

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163

 

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Many extraneous factors may interfere with this
relationship. A high rate of production, for instance,
because of positive expectations, might continue even though
the sales level and the inflow of orders are not very
impressive. Similarly, positive expectations on the part of
retailers and wholesalers may raise the ratio by a more than
proportionate increase in their inventories. In cases such
as these high business activity may coexist with the high
ratio, at least temporarily.

The use of this ratio in our analyses was confined
to the durable and nondurable goods industries. Table 6
presents the data used to compute the ratio and the ratio
itself. The figures here include not only manufacturers',
but wholesalers' and retailers' inventories as well. In the
previous chapter we saw that Michigan has an extreme
dependence on durable goods industries; on the other hand,
nondurable goods play a relatively more important role in
generating income in the national scene. It was, therefore,
important to compute the above ratio on the basis of durable
and nondurable industries.

As expected, correlation analyses revealed that the
ratio based on the statistics of durable goods industries
had a relatively stronger relationship with.Michigan's
failure record. The rate of failure in the state when
correlated to the aboveqmentioned ratio yielded a corre-

lation coefficient of .53u1 as opposed to the correlation

165

 

 

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166

coefficient of .3814 which was obtained when the ratio was
based on the nondurable goods statistics. 0n the national
level the picture appeared to be completely reversed. Here
a high correlation of .8357 was found between the rate of
failures and the ratio of inventories to new plus unfilled
orders when this ratio is based on the nondurable goods
statistics. The durable goods industries, in contrast,
showed a low correlation coefficient of .3957 when the same
analysis was made.

From these findings, it became easy to distinguish
the effects of business conditions in the durable and non-
durable goods industries on the business failure picture.
When business conditions in the durable goods industries
worsen the ratio would go up as would failures in the state.
For the nation as a whole, the role of business conditions
pertaining to the nondurable goods industries in the for-
mation of the business failure pattern seemed to be highly
important.

The relative importance of durable goods and non-
durable goods business conditions in the state and nation
were very much parallel to these industries' relative

importance in the two economic structures.1n As was

 

1“It must be kept in mind that in these two sets of
analyses, i.e., correlations dealing with failures and
industrial productivity, and correlations dealing with the
ratio of inventories to new orders plus unfilled orders and
failures, we have utilized the national data for analyzing
Michigan failures also. This may seem to be a serious

167

concluded in the previous chapter, Michigan's dependence on
the durable goods industries in income generation by far
outstripped the national. Similarly, the national economy
was more dependent on the nondurable goods industries.
Michigan's dependency on the durable goods indus-
tries play a multiple role in the formation of the overall
failure picture. These industries prosper directly when
they face a higher demand for their output. Furthermore,
through the prosperity of these industries and their contri-
butions to total income, the other economic sectors will
also prosper. In a period of contraction, however, the
whole scheme will be reversed; the durable goods industries
will be adversely affected in the first place, forcing out
the firms with less durability. with the contraction of
income the other sectors also will be hurt immediately or
within a short lapse of time. Expenditures, for instance,
at the retail level or in construction will be limited to
more urgent needs and hence failures in retailing and con-

struction firms, and perhaps even in wholesaling, will soar.

Conclusions

In the above analyses we have established that

 

weakness at first sight. However, this is not the case as
Michigan's economy, being very dependent upon manufacturing
especially durable goods, is affected very readily by
changes in the national business conditions. If Michigan
were to consume a major portion of its own industrial pro-
duction, then these analyses would have been subject to
severe criticism.

168

Michigan failures are closely related to the conditions in

the durable goods industries. Also, it is stated that the

covariation between income and the number of failures is

high and readily detectable. These two findings lead to the

following conclusions:

1.

The difference between the industrial character-
istics of the state and national economies,
which the prevailing business conditions affect
differently, plays a very important role in the
formation of the failure pattern. This mainly
accounts for the difference between the overall
picture of business failures in the state and
the nation.

Income and its variations is one of the main
factors forming the overall failure pattern.
This factor is far more effective than new
entries as a cause of failures. An inverse
relationship exists between the number of
failures and income.

Two basic factors reflect on the absolute magni-
tude as well as the fluctuations of income.
These are business conditions and the industrial
structure. Everything being the same good busi-
ness conditions at the national level would
yield more income in both the state and the

national economies, and probably would keep the

169

business failures to a minimum. However, the
changes in and the magnitude of the state income
is not dependent on business conditions solely:
the nature as well as the magnitude of the
existing demand is of utmost importance. As was
seen in Chapter'Three, certain noncyclical
developments in business conditions have a
negative impact on the state’s economy,
especially on income. The structure of the
state's economy, as we have seen, is such that
the durable goods industries play a vital role.
If the overall demand for durable goods is high
then income in the state would be relatively
higher than the nation. This situation can be
witnessed throughout 1951 and 1953, when accumu-
lated postwar income coupled with the needs of
the Korean war created a very satisfactory .
demand picture forllichigan's durable goods. As
a result the personal income increased, and
unemployment as well as failures were kept to a
minimum. During this period, the ratio of
inventories to new plus unfilled orders averaged
52.2, which was relatively low compared to the
average of 78.8 for the period 1957-1959. In
this latter period flichigan did not enjoy a high
rate of growth in income mainly because of the

5.

170

contraction in demand for durable goods,
especially Hichigan's specialties.

Thus, business conditions or national demand for
Michigan's output is one of the major causes
forming the failure pattern here. Hewever, it
should be stressed that Michigan's output is
strongly influenced by its industrial structure.
In other words, the state's economy has certain
specialties limdted by its economic character-
istics. If the demand for these products expand
then the economy prospers.

Consequently, in the main, business conditions
in conjunction with the industrial structure of
the economy are two major determinants of the
level and fluctuations of income, and/or the

overall failure pattern.

CHAPTER V
OTHER FACTORS

In Chapter Three we dealt with the structure of the
economy and business conditions as the decisive factors in
the changes and magnitudes of income. Income, furthermore,
has a significant relationship to the overall failure
pattern. As was stated, the correlation coefficient between
these two variables, i.e., income and failures, was in
Michigan -.6051 and in the U. S. -.8065. There are two
questions which then came to mind: first, why this differ-
ence between the Michigan and national correlation coef-
ficients, and secondly, what other factors might be func-
tioning in the formation of the overall pattern of business
failures? This latter question emerges from the fact that
these correlation coefficients are not unity (r = 1.00),
which indicates the existence of some other outside inde-
pendent factors interfering with the relationship between
these two variables.

In the present chapter an attempt is made to discuss
some important factors other than business conditions,
economic structure, and income and new entries, which have
already been examined. These other factors are believed to
play an important role in the fate of existing firms as well
as of newcomers in the economy.

171

1??

Although their role is not as yet exactly known, the
intention here is not to provide an exhaustive list of
factors. Our contention is that the factors considered in
this chapter contributed relatively to the overall failure
pattern more than the large number of others that are not
discussed here. The lack of information on the relation-
ships between the factors mentioned in this chapter and
business failures necessitated the discussions being kept at
an extremely broad level. Special reference to the state
and national situations are made whenever data were
available. There were two objectives of this endeavor: to
focus attention on the existence and proposed impact of
these factors, and by so doing indicate the lack of knowl-
edge and the need for further research. One last effort
will be made in the latter part of this chapter to point out
why, throughout the period under examination (1947-1959),
the Michigan failure rate has been below that of the nation.
gredit Availability_and Liquidity

Whether it is a cause or an effect, lack of liquidity
plays the final role in the failure. Hence, to have access
to further credits not only may postpone failure but in some
cases may also avoid it completely. This latter is true,of
course, only if the lack of liquidity is due to some
temporary factors.

If lack of liquidity is a cause of failure, then

having access to more funds would act as a preventive factor.

173

However, when lack of liquidity is only an effect rather
than the cause of failure, availability of credit would not
be effective in the fight for survival. In this case the
duration of the cause of failure plays the major role.
Assuming the failing firm finds new sources of funds, which
are not depleted before the cause of failure disappears, the
firm will manage to exist. If, on the other hand, these new
sources are short lived, or if the cause of failure is
permanent, the firm will not survive. Thus, availability of
credit in the economy whether local or national, in some
cases, would contribute significantly to the fight for

survival.1

 

lParadoxically many small businesses, which may
already lack endurance cannot get the type of credit that
they need most: credit for long-run growth. Olin S. Pugh
lists some of the characteristics of small business firms
which affect their capacity to attract funds from outsiders
as follows:

Reliance upon personal qualities of the manager
Undiversified business operation

Limitation to a single market and financial
locality

. Keen competition with other firms

. Preferences of individual owners.

U11: UJIUH

Olin S. Pugh, Financing 68 Small Business Firms i2 South
Carolina, 1 ‘8- x , ma usiness Management Research
Reports (Washington: Small Business Administration, 1961),
p. 121. Whatever credit they can get for short terms costs
them relatively more. Moreover, this credit picture may be
worsened during a business slump, for creditors act more
cautiously and try to eliminate bad risks as far as possible.
As a result, small businesses prove to be at a disadvantage
in fighting for survival. Kaplan, Small Business, 92, cit.,
chapter 7. See also, T.N.E.C., Monograpth . 17, 92, gl§:,
chapter 18; U. S. Congress, Financing Small Business, 92,
933, For an opposite point of view see: ’Edwin B. George,

 

 

Although there are many proposed measures of
liquidity, a study of the differences in state and national
credit availability would be very difficult. Indications
are such that since 1956 industrial and commercial credits
have declined in Michigan while remaining relatively con-
stant in the nation as a whole.2 This situation may be due
to a declining liquidity or credit availability in the state
as well as due to a lack of interest in borrowing. Although
harmful to the economy in either case, it would be important
to distinguish between these two causes and to discover the

more relevant one, in order to determine the right remedy.3

—

"Can Small Businesses Get the Capital They Need?," Dunig
Review, October, 1952, p. 11?. Here he argues that small
businesses do not have much difficulty in obtaining finances
since, not only have institutions that lend money to small
business been increasing, but also credits in general
(government or private) are becoming more plentiful. If
small businesses are really having a hard time finding capi-
tal it is because of their ignorance of the possible sources.

 

2The following figures substantiate this point.

TOTAL COMMERCIAL AND INDUSTRIAL LOANS

 

 

 

 

 

m W “Z? 4%: :
Michigan United States

gears (Millions) (Billions)

1956 995.1 39.0

1957 955-1.? 1*0 . 8

1958 918.0 140.8

1959 855.9 40.5

SOURCE: Different issues of the Annual Re ort of
the Comptroller 9f the Currency (Washington: U. 3. Printing
Office).

 

3This, however, is not within the scope of this
study.

T 9 Food of Consumers

 

The relationship between income and consumption,

i.e., "the propensity to consume," becomes significant when
considering the overall pattern of failures. A decline in
the willingness to purchase, everything else being the same,

contracts the aggregate market demand, and the financially
weak will be forced out. Thus, whatever the reason may be,
a change in the buying mood of consumers will soon be
reflected in business casualties.

If it were possible to calculate propensity to con-
sunm in different sectors of the economy, conceivably these
.ropensities would correlate highly with the failure
Inlttern in each one of these r'ectors. Let us, for instance,
aessume the two economies have similar concentration patterns
irl retailing, i.e., similar changes in the propensity to
(Mansume in retailing would affect both in a similar manner.
It: can be stated that if the marginal propensity to purchase
at :retail in the first economy declines at a sharper rate
truan in the second, the rate of failure in the retailing
Semltor of the first economy will be greater than in the

C;:ord. This situation may be presented symbolically as

it

(1

 

 

 

 

 

 

 

 

fOllows:
FtI - Ft‘11 FtII - Ft“111
1r
5‘1 - Rt'll Rtn - Rt'lu then F1'-I FtII
YtI - Yt'lr YtII - Yt‘11: PtI - Pt'lx P‘II - Pt’lix
P Pt

tI II

176

where R = retail sales, t = recent period, t-l previous

ll

period, F = number of failures in retailing, Y = effective
buying power, and P = business‘population of that particular
economy.

Available data indicate a decline in the proportion
of income Spent in retailing in the state since 1955.“ A
similar but lesser decline was also experienced by the
national economy.

Wholesale Prices

It is generally assumed that when business activity
is high, demand exceeds supply and prices rise, and vice
versa. As a result there is a negative correlation between
wholesale prices and the rate of failure, since wholesale
prices indicate the level of business activity.

There are, of course, shortcomings to this type of
analysis. Ours is not a perfect market economy where there
is no monopoly power and administered prices. The existence
of imperfections often causes a loss in downward price
sensitivity; although upward flexibility may be retained,
prices become downward inflexible. Due to this shortcoming
it becomes necessary to look at the rate of change in prices.
Even if they are not lowered because of downward inflexi-
bility, at least they will not increase significantly in

times of low business activity.

 

“See Footnote 27 of Chapter Two.

177

Another line of reasoning demonstrating an inter-
relationship between prices and failure rate is brought
forth by Foulke, who emphasizes the effects of the wholesale
price level on the well-being of a business enterprise. He
believes that a distinct inverse relationship exists between
the wholesale price index and the index of business
failures. The reasoning behind this, he contends, is the
.fact that extra profits are realized on inventories as
I>rices go up, and contrarywise excessive losses occur when
tliey go down. While an increase in realized profits cuts
Ckawn the number of failures as prices go up, the failure
rnamber, during an opposite shift in prices, grows signifi-
caintly. Some firms who already have a heavy inventory are
Lusually forced out because of hardship created by the price
decline.5

Although Foulke establishes a strong argument, his
ENDidat of view does not represent the complete picture. When
'plfilces rise the failures decrease not only because non-
eccnnomic profits arise but also because there is enough
buftiness for everyone. On the contrary, at times when
prixles fall businesses do not fail solely by losses on
in"el’itories; in such times contracting demand also causes

ellInitiation of those who cannot cover either their accounting

Or' tlieir economic costs.
\

5Foulke, 92. cit., p. 57.

178

In short then it is not really known how much
importance must be attributed to the wholesale price index
as a factor causing failure and how much weight this concept
carries as an economic indicator. Our contention is that
the latter idea of the wholesale price index carrying more
weight as an economic indicator is more important. Thus,

the wholesale price index and failure statistics show a
negative correlation.
Demographi c Changes

Changes in population affect the viability of busi-
riesses (mainly retailers), in two major aspects. First, the
Eibsolute changes in population have a direct bearing on
:failure statistics. Some years ago a study stated that when
IDOpulation increase was slow the life span of business con-
<3erns was greatest.6 This indicates that when population
idacreases very fast businesses may increase even faster and
Shame of these sooner or later fail. Also population increase
ewularges demand for certain items which in turn forces costs
‘XD. and the retailer who fails to raise his price accord-
1rlgly, faces a cost squeeze which might be detrimental.

The second effect of population on business failures
exnerges from its movements. The tendency among people to

"Kbve to suburbia definitely affects the success or failure

01? small urban retail and service stores. Along with the
\

6Ruth G. Hutchinson, Arthur R. Hutchinson, and Mabel
Newcomer, "A Study in Business Mortality," American Economic

Efiiview, September, 1938, p. 511.

i
population movements, changing shopping habits are also
important. A recent study, for instance, proposed that
populations in standard metropolitan areas are becoming more
and more dense. However, retail sales in nonstandard metro-
politan areas were increasing more rapidly than sales in
standard metropolitan areas.7 This implies that some stores
in standard metropolitan areas may eventually face failure
because of contracting demand.

Examination of the statistics suggested that the
degree of dispersion of retail sales in Michigan was
slightly more noticeable than in its national counterpart.
While concentration of population in the standard metropoli-
tan areas in the state between 1954 and 1958 increased
faster than in the nation, the proportion of total retail
sales taking place in these areas has declined whereas there
was a slight increase in the national scene.8 This might

Eflrtually have contributed to the relatively faster increasing

‘

7Eli P. Cox, "The Decline of Metropolitan Retailing,"
I3usiness Topics, Spring, 1901, pp. 32-42.

M.

8The following table illustrates this point.

PERCENTAGES OF POPULATION AND RETAIL SALES CONCENTRATED
IN STANDARD METROPOLITAN AREAS

 

 

 

 

 

% L1 W

Michigan United Statesa
_ 1954 1958 19514 1958
Population 72. 19 72.83 60- 19 61:55
Retail Sales 76. 19 75. i6 67. 10 67.56

 

aIncludes totals of SMA's of he states.

SOURCE: Cox, op, cit.

retailing failures in the state.
Other Factors

Urban renewal projects should also be considered as
a factor with a definitive impact on the viability of small
.retailers and other establishments. During the 1960's at
least 150,000 businesses are going to be forced to move
laecause of urban renewal projects in cities throughout the
IJnited States. About 75 percent of these, according to a
recent study, relocate successfully whereas 25 percent of

them will either disappear or fail. Approximately one-
fourth of this latter portion is expected to be failures.9

A second point to be considered is that of super
frighway developments and their impact on business failures.
TWIGSG highway developments distort the present state of
affairs for small stores by forcing them either to relocate
01‘ to try to attract traffic from outside. In either case
Scnne casualties occur.10

There are also other special problems occurring on
dihfferent occasions which have certain distinctive effects
0T1 business failures. During the war years, for instance,

PIRoblems confronting business firms such as the scarcity of

”Materials, merchandises, and employees,11 were much different
\_

11 9William N. Kinnard and Zenon S. Malinowski, "How
1T’ban Renewal Projects Affect Small Business,” Management

_£E§§arch Summary, January, 1961.

lOIbid.

n llDonald W. Paden, "Life Span of Discontinued Busi-
eases,” MQW Business, December, 1915, p, 19,

p_.a
O“
H

from those generally prevailing in peace time. Any of these

can easily beget failures.

Other Characteristics of the
Business Population

In the first chapter we stated that the character—
istics of the business population is one of the major
determinants of the basic failure pattern. In Chapter Two
we tried to prove this by analyzing D. & B. data and com-
paring them with the census data in different economic
sectors. In that chapter we mainly examined the composition
of the business population and failures. There are two
other characteristics which must be considered, the size
distribution and the legal form structure of the business
population. Given a different size distribution and legal
form structure, similar extraneous factors would beget
different outcomes in two different economies. If, for
€n<ample, in the first of two economies the average firm size
1E3 smaller, then a similar drop in income may cause more
failures due to size inefficiency.

.§£§2 Distribution 9§_Business Population

We have already mentioned in the second chapter that
in those categories where the average liability size of
failures was larger the longevity also tended to be longer.
This is in line wdth the prevailing contention that the
larger concern has a significant advantage over the smaller

in surviving business hazards. While several studies

182

comment on this specific issue, there is not, unfortunately,
a very precise measurement of relationship between size and
longevity. In one of these studies it has been stated that
A3 percent of those firms with capital exceeding $10,000

survived more than five years as opposed to only 18 percent

of those with less than $500.12

 

12T.N.E.c., Monograph No. 17, 3%,,ggg., pp. 32-33.
Also see U. S. Department of Commerce, ureau of Foreign and
Domestic Commerce, How Long 29 Retail and Wholesale Estab-
lishments Tend to Survive Economic (Small BuSIness) Series
No. §H (Wash ngton: U. 3. Government Printing Office). It
is stated that "a comparison of the average annual sales of
establishments showed that older firms, in general, had a
higher averare sales than newer ones. ' p. 5.

 

Another indicator of size, of course, is the number
of employees of a firm. From this point of view also large
size and longevity show a high correlation. The following
table illustrates this fact effectively.

ENTRY AND DISCONTINUANCE RATssa
AND SIZE OF FIRM, 1945-1946

—‘ w ___

 

 

 

Entry Rates Discontinuance Rates
___ Size Class 1945 1946 1947 1928 1945 19u6 19u7 1948
KL1.industries 134 176 123 99 63 6h 76 94
0 ~ 3 employees 155 206 14 115 73 76 88 111
4 - 7 employees 86 124 8 75 34 35 H8 53
8 — 19 emp1oyees 55 74 51 41 35 32 41 46
20 or more
employees 33 38 26 22 26 2M 29 29

M

3Number of new and discontinued firms each calendar
Year per 1,000 firms in operation March 31.

SOURCE. M. F. Foss and B. C. Churchill, ”The Size
Distribution of the Postwar Business Population," Survey gf
Eurrent Business, May, 1950, p. 17. Low rates of turnover
here are indicative of longevity among large firms.

 

183

Since small enterprises make up the bulk of the busi—
ness population, a large part of the failures is likewise
composed of small businesses.13 Of course, if

the opportunities for expansion in the economy
increase at a faster rate than the large firms can take
advantage of them and if the large firms cannot prevent
the entry of Shall firms, there will be scope for the
continued growth in size and number of favorably endowed
small firms.14

Not only basic differences in the size distributions
lut also changes in size distributions may in time cause
differences in failure patterns.l5 There is no evidence as
such but it is probable that the decline in the average size
of firms in Michigan might have caused a more than propor-
tionate increase in the state's failures during the latter

part of the fifties.

P 1 V‘ C‘ “3
Le a- Fo.m structu.e

 

Of the three major legal forms, proprietorship,

Ifitrtnership and corporations,16 the last one is more likely

~

l3Kaplan, Small Business, 9p, cit., p. 60.

 

luPenrose, 92. cit., p. 223.

19Changes in relative size may come about from
differential rates in the growth of individual firms as well
as mergers. Differential rates of growth of individual
f1Pms may be due to differences in management skills and
goals, different rates of growth in different markets, and
technological changes. Norman R. Collins and Lee E. Preston,
The Size Structure of the Largest Industrial Firms, 1900-
195é," American Economic Review, December, 1961, p. 996. If
We were to take the managerial skills as well as goals as
given, then differences in the growth rates in different
maPkets and technological changes would be reasons enough to
Shange the size distribution of the business population.
bee also Penrose, 9p, git,

 

16There are a number of other forms of business
OI‘8;an.ization, among which are: limited partnership, joint

to survive business vicissitudes. A few reasons may be
given for this tendency. The average corporation usually is
larger than the average partnership and proprietorship, and
larger firms generally survive longer. Secondly, corpo-
rations are more sophisticated in solving complex business
problems and usually are better equipped with technical
know-how. Furthermore, corporations usually have a better
chance of accumulating necessary funds and finding extra
credits in cases of emergency. Another reason why corpo-
rations, relatively speaking, live longer is that many
organizations become corporations after they have entered
and survived a few years. Thus, survival is almost insured
since these firms have already passed the most dangerous
period of their lives. And lastly, unlike the case of the
Proprietor who dies leaving an inexperienced heir to take
over and fail, corporations with their diverse and scattered
OWBiership are commonly free of this risk.

It is very difficult to distinguish between the
longevity of partnerships and that of proprietorships. One

Would be inclined to assume that the former, on the average,

 

 

Venture, the syndicate and the business trust. See
Theodore J. Shielaff and John W. Aberle, Introduction £2_
Business (San Francisco: Wadsworth PublishingfiCOmpany, Inc.,
, pp. 49-53. The number of these is no more than about
1-9 percent of all firms in the national economy. Betty C.
Churchill, "Business Population by Legal Form of Organi-
zation," Survey 2f Current Business, April, 1955, p. 18. It
13 not only unimportant but also very speculative to comment
on each one of these legal forms in terms of its longevity.

may live longer because of several decision makers who can
consult with each other in facing complex business problems,
and possibly because they have access to larger sums of

capital.

Positive Considerations

Thus far, our efforts have been focused mainly on
explaining why the rate of failures in the state has been
increasing faster than that of the nation; however, there is
one very important aspect of th e mparisons between the two
failure pictures which requires Special attention. That is
the fact that since 1947 the failure rate in Michigan has
been always lower than the national. Although during the
past few years these two have been approaching one another,
Michigan's rate is still lower.

A number of reasons may be given for Michigan's
.h3wer failure rate. Among these the first one to be con-
Sinered is the size difference between the state and national
firms. Previously, it was argued that everything being the
same the larger firm would have a tendency to survive
longer. The state firms are on the average larger than
their national counterparts in terms of the number of
employees (Table 1). Thus, the lower failure rate that
EXisted in Michigan may be partially at least accounted for
by the larger size of state firms.

The next factor to be considered is income. As was

seen previously, per capita personal income has been and is

186

TABLE 1

mmxss 3123 or MICHIGAN AND THE
NATIONAL ESTABLISHMENTS,3 1956

W
\ Number of Employees
Per Reporting Unit

Michigan United States

Industry and commerce total 16.6 lg.0
Contract construction 7.5 .6
Manufacturing 91.0 58.4
Public utilities 27.3 25.9
Wholesale trade 12.1 11.6
Retail trade 7.7 7.g
Finance, insurance, and real estate 9.2 8.

Services 5.9 5.8

3As opposed to the firm or the enterprise concept of
D. & B., here re ortina units or establishments are used as
the basis for the business population count. A firm listed
in D. & B. statistics may have more than one reporting unit
and thus, the statistics here are not strictly comparable to
those of D. & B. However, the general picture presented
here is, in general, also applicable to D. & B. statistics.

SOURCE: Computed from County Business Patterns,
First Quarter 1956, o . cit.
higher in Michigan than the nation. Again, everything being
the same, this situation provides more security to estab-
lishments especially in retailing and services, because of

the more favorable demand.17 In addition to higher income

 

17This statement at first sight appears to be con-
trary to the statements made at the beginning of Chapter
Four but actually is not. In Chapter Four we have estab-
lished that there is a tendency in those economies with a
large total income to have also a large number of failures
in absolute terms. In other words, the larger the economy
the more sizeable is the absolute death toll among busi-
nesses. But this statement does not say anything about the
causation of failure, and neither does it say anything about

187

in the state, if we consider the fact that the number of
retail and selected service establishments in the state per
thousand population is lower than that of the nation, we
probably have the major portion of the answer to Michigan's
lower failure rate. The small number of establishments
indicate relatively less competition and thus again more
security. Table 2 presents factual data showing the smaller
relative number of establishments per thousand population in
the state. While in 1958 there were 9.63 establishments per
thousand Michiganders, there were 10.26 establishments per

thousand Americans.

 

the relative changes in the failure rate. In Chapter Four
we also stated that the greater the number of firms the
greater is the tendency to have a larger absolute number of
failures. However, when we look at the relative magnitude
of failures, i.e., failures as a percent of all firms, and
compare this with the relative magnitude of income, i.e.,
income per establishment, the picture reverses itself, for
no correlation can be obtained. Considering the relative
relationships it can be stated that in two economies of
similar size and structure the one that has greater income
per store and/or a greater number of consumers per store
enjoys a relatively lower failure rate. This is why in
analyzing the changes from one year to the next we obtained
negative correlations between the changes in income and
changes in failures, and also between the changes in busi-
ness conditions and the changes in failures. Thus, once
again it must be emphasized that although in absolute terms
the magnitudes of income and business failures correlate
highly and positively, the relative changes in these corre-
late highly and negatively.

188

 

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N m4m<8

CHAPTER VI

SUMMARY CONCLUSIONS AND
WELFARE IMPLICATIONS

A comparison between the rates of business failure
in Michigan and the United States for the past 15 years
indicated that Michigan's rate is more erratic than its
national counterpart. Also, the failure rate in the state
for the past five years has been increasing, on the average,
faster than the national. Despite these two tendencies,
Michigan's rate, with the exception of 1949, has been below
the national since 1947. Some appreciation of the under-
lying causes of failures as well as the overall functioning
of their respective economies can be attained by examining
the disparity between these two failure patterns.

Two major causes of failures can be distinguished-—
internal and external. While the former deals mainly with
managerial ability and other internal properties of the
business enterprise, the latter relates failures to business
conditions and the economic structure.

Both of these\approaches have merits in explaining
failure. At any given time there will be certain firms with
submarginal managers entering into the race and probably no
matter how good business conditions are they will not long
stay in business. However, basically the external causes

superimposed upon the internal would form the general

189

190

failure pattern. In other words, there will always be some
internally weak firms which cannot combat the adverse
effects of certain external factors. Since the most
important internal factor, managerial skills, does not
change from one year to the next and also are more difficult
to analyze objectively, the external factors are more
suitable for quantitative as well as qualitative analysis.
In this type of approach time spans greater than one year
must necessarily be considered. '

Of these two approaches the second one was employed
in this study. Aggregate Michigan and national failure
statistics were considered within their respective economies
as a whole, and also in respect to different economic
sectors. The analyses were based not only on time series
but also on special selected points in time. The discus-
sions of failure patterns were restricted to their compo-
sition, size groups, age, and cyclical characteristics.

When treated as a continuum, failure rate analyses were
related to other major changes in the economy to attain
further understanding of business failures in the aggregate
economy.

By the analyses of external changes it is possible
to explain significant changes in the failure rates from one
year to the next. Among the external factors considered
here business population, income, business conditions, and

new entries were given special consideration as being

191

important in the formation of the overall failure patterns.
Establishing interrelationships between these factors and
business failure statistics contributes substantially to the
explanation of the disparity between Michigan and the

national business failure rates.

Business failures in this study were defined as {a
voluntary or involuntary cessation of business activities i
entailing a loss to creditors. The data used here are
limited because of their very definition. It is possible J

 

that many firms going out of business because of poor per-
formance may not entail a loss to creditors; these are by
definition left out of the study. One very important
characteristic of the failure statistics, however, is their
resemblance to the discontinuance figures. Despite their
limited scope the movements in failure statistics are
generally duplicated by discontinuance figures.

It is then the main contention of this study that
basically the differences between the business failure
patterns in Michigan and the United States are traceable to
the very nature of these respective economies. This, in
conjunction with the changes in business conditions, forms

the overall bdsiness failure pattern.

Business Failure Patterns
A comparison of business failure patterns in

Michigan and the United States for 1953, 195”, 1958, and

192

1959 revealed the following patterns in terms of kinds of

failures, size of failures, life span, and cyclical changes.

1.

The overall resemblance of business population
and the composition of business failures was the
first important observation in our analyses.
Generally speaking, in the economic sectors and
industrial groups where the number of existing
firms is large, the probability of having a
larger number of failures is proportionately
high. In many cases this was observed to be
true. However, the similarity between the
composition of business population and that of
business failures was not perfect. In some
industry groups there were more than proportion-
ate failures, which is chiefly explained by
specific adverse business conditions in these
categories. For instance, when the manufacturing
failures were analyzed it was found that there
were, relatively speaking, more failures inf
Michigan which were producing durable goods
prior to cessation. Similarly, a larger portion
of the national manufacturing failures belonged
to nondurable goods industries. Although still
behind the national rate, Michigan's failure
rate showed a sharper increase. This was con-

sistent with the relatively slower performance

 

 

 

193

of the state economy as a whole which was
reflected by higher state unemployment rates and
relatively slower increasing personal income,
especially during 1954-1959. During 195h-l959
not only was there a temporarily lessened demand
for the state's major durable goods but also
certain long term tendencies prevailed. Among
these were the dispersion of the auto industry,
shrinking defense contracts and changes in their
composition. All of these, no doubt, played
pertinent roles in the slower performance of the
state economy relative to the national.
In all but one category Michigan failure rates,
i.e., failures expressed as a percent of total
firms, were lower than their national counter-
parts. However, comparisons between 1954 and
1958 revealed that failure rates in the state in
all categories increased faster (Table 1). This
fact mainly could be accounted for by certain
developments in the state economy, among which
were:
a. A decline in the lumber and lumber products
industry.
b. Dispersion and integration in the automobile
industry.
0. A decline in demand for major consumer

durable goods.

194

d. Less than proportionate increase in retail
sales relative to the rest of the economy.

e. A slowdown in the construction industry.

TABLE 1

NUMBER OF FAILURES EXPRESSED AS A PERCENT OF NUMBER
OF ESTABLISHMENTS IN DIFFERENT ECONOMIC SECTORS
IN MICHIGAN AND THE UNITED STATES, 195“, 1958

—— -- ~___.—-..—-- ...—.——..—.—-—..-.—.

     

- w.-— .....---... —-—-. _. ——

 

mums... Salestt
Sectors 1954 1958 1954 1958
Percent Percent Percent Percent

Manufacturing .36 .72 .78 .87

Wholesaling -—- .59 -—- .20

Retailing .16 .29 .33 . 4

Construction .16 . 2 .39 .33
Services .03 .05 .0 .

Total .21 .52 .42 .5h

SOURCE: Tables 4, 8, 17, 20, and 23, Chapter Two.

3. The size of business casualties was analyzed by
considering their liability size on the basic
assumption that larger firms have greater lia-
bilities. These analyses revealed that Michigan
failures in general were more sizeable than
their national counterparts. The smallest sizes
prevailed in the services sector in the state,
while retailers were the smallest failures in
the national picture. Both of these sectors are
relatively more easy to enter in terms of low

capital and know-how requirements. The average

195

liability size of manufacturing failures was the
largest in both economies, and were somewhat
greater in Michigan. This latter fact is most
probably due to relatively more durable goods
manufacturing failures in the state. Generally
speaking, durable goods manufacturers are rela-
tively larger than nondurable goods manufacturers
because of lower capital and manpower require-
ments. Analyses indicated that in those sectors
where failures had relatively the greatest size,
life spans were the longest. Manufacturing
failures, for instance, the largest in terms of
liability size, survived the longest both state
and nationwide. Michigan failures experienced a
longer life span, in general, than their
national counterparts, and their liability size
also was greater. Relatively fewer state
failures in service industries and relatively
more in durable goods industries can account for
the major disparity in life spans between
Michigan and the United States.

Both.Michigan and national manufacturing failures
showed a high sensitivity to business cycles.

In Michigan this sensitivity was noticeably
higher, especially among failures in durable
goods industries. The Michigan failure rates in

196

recession years increased faster in these cate-
gories and in general faster than their national

counterparts.

The Economic Structure

A comparison of Michigan's economic structure with
the national provides a partial answer for the dissimilarity
between the failure patterns in these two economies. An
analysis of income and its composition in both economies
showed a more erratic pattern in Michigan and similarly
Michigan's failure picture also has been more erratic. The
basic single cause for this instability was the lack of
diversity in the state economy. Michigan's extreme
dependency on durable goods, and specifically on the auto-
mobile industry, helped the state's economy to grow faster
than the national in good times as was the case between 1950
and 1953. Contrarywise, when demand for these industries'
outputs slackened, Michigan was hit harder. Thus, while
during 1950 l 1953 Michigan's failure rates were sub-
stantially below their national counterpart, they increased
during 1956 - 1959 much faster than in the nation.

Another observation was the slowly decreasing role
of manufacturing in Michigan's income and employment picture,
which suggested that the two economies are becoming more
alike. Akin to this trend were the income and failure
pictures of the two economies which also are tending to come

closer together.

197

Besides being extremely sensitive and thus having
short-term implications, the durable goods industries played
a negative long-term role in the state's economy. First,
the durable goods industries in the national economy
suffered a decline in their relative importance. The
growth in the rest of the economy since 1955 was not experi-
enced in this sector, a fact which was more harmful for the
state than the nation as a whole. Second, Michigan's share
in defense contracts declined, both because of the con-
traction in their size and more important because of the
changes in their nature.

Lastly, the dispersion of the automobile industry
also seemed to be an important factor with adverse effects
on the state economy. The very structure of Michigan's
economy with its relative lack of diversity and heavy
dependence on durable goods seemed to be a major cause of
the more erratic nature of the state's income. Significant
disparity was witnessed between the state and national
income, the former being more erratic and growing at a
slower pace during the latter part of the 50's. Failure
rates also in the state were more erratic than the national.

Correlation analyses established the relationship
between these two phenomena, i.e., income and failure rate.
Analyses of correlation Setween the change in income and the
change in the failure rate yielded correlation coefficients
of -.6051 and -.8065 for Michigan and the nation as a whole,

respectively.

 

198

As stated previously, despite the sharper increase
in.Michigan's failure rate between 1954 and 1959 the state's
rate was still lower than its national counterpart. The
average larger size of establishments in Michigan coupled
with the higher per capita income in the state along with
larger population per existing establishment, were in the
main, major causes of the lower rate. These conditions made
the state economy, on the average, more desirable for the

marginal firms .

Business Conditions

Although business conditions can hardly be separated
from economic structure and income generation, an attempt
was made toward this end. Such a distinction is important
in an economy such as Michigan's which is very dependent
upon conditions in the national economy. When national
demand for certain consumers' durable goods contracts, two
distinct impacts can be witnessed. First, those manu-
facturing firms which lack capital, know-how and diversifi-
cation fail and secondly, the shrinking demand brings about
an insane contraction which further contracts local demand
for consumer's goods and services. Consequently, some local
firms in wholesaling, retailing, construction, and services

fail.1

 

1It is extremely difficult to pass a judgment on the
timing of these two groups of occurrences. Although
possibly they might take place in a sequential order of some
sort, it is equally possible that they occur concurrently.

199

A special measure was devised to test the relative
impact of conditions in the nondurable and durable goods
industries on business failures. This measure is the ratio
of inventories to new and unfilled orders. Fluctuations in
this ratio indicate ups and downs in the economic sectors. .,
A series of correlation analyses showed that in the nation F1}
as a whole the state of business in the nondurable goods 8
industries had relatively more bearing on the failure

picture. In Michigan, on the other hand, conditions in the 3 j

 

durable goods industries affected the failure pattern more
noticeably. Business conditions in general had more impact
on failures than the new entries. This finding, however
limited, refutes the basic premise that failures are a
function of entries. A series of correlations between
failures and new entries substantiated this statement by
showing very low correlation coefficients. There are also a
number of other factors which have bearing on the overall
formation of the failure pattern. While detailed analyses
of these are not within the scope of this study it has been
asserted that the size of firms, the legal form, credit
availability and liquidity in an economy, the mood of con-
sumers, wholesale prices, population changes and others are
all pertinent factors which must be considered. Just how
significant these factors are in the formation of the
overall failure pattern, and how they actually affect the

failure pattern are two specific questions needing to be

200

answered, and therefore, further research is needed in these
areas.

Our analyses thus far indicated a number of
functional relationships between the economy, business con-
ditions, and failures. It is necessary for our purposes to
take a brief look at the welfare aspects of business
failures. Only by adequate understanding of these aspects
can areas needing investigation be identified. In the
following few pages the welfare aspects of business failures

are briefly discussed.

Welfare and Failures

There are basically two extreme approaches to the
failure problem. The first and probably most advocated
maintains that failures manifest the veto power of the
market place. In the free enterprise system the unwanted
firms are bound to fail. Thus, failure usually means the
elimination of weaklings; the economy becomes sounder and
more efficient. The other view, in contrast, contends that
above a "certain" rate failures become costly for the
economy, since the resultant waste and malutilization of
resources may indicate not good health but a certain type of
economic malaise.

Choosing one of these two approaches is very
important in terms of determining what to do about failures.
If the first point of view is correct then there will be no

need to be alarmed when failures increase. However, if

201

failures do not contribute anything to competition or wel-
fare why continue carrying the burden? To investigate the
validity of either point of view one may take a retrospective
approach by looking at the types of businesses, when they
ceased existence, how long they survived and whether they
really had anything to offer to society.

_ Just how costly then are failures? Are advantages
obtained from failures more than enough to offset their
cost? Present economic knowledge is notadequate to answer
these questions. However, some observations can be made
here which would be of value. Oxenfeldt distinguished four
specific cases in which new firms will be beneficial to the
economy. New entrants will benefit the society if they,
bring about:

1. Reduction in prices by partially eliminating
excessive pays to factors of production.

2. Reduction in cost without underpaying the pro-
ductive factors mainly by innovations in pro-
duction and distribution.

3. Reductions in profits without compelling the
etisting producers to leave but forcing them to
reduce their profits thus attaining normalcy.

A. Reductions in the number of concerns by elnmi-

hating the marginal or inefficient producers.2

' 2Alfred R. 0xenfeldt, New Firms and Free Ente rise
égashington: American Council on P315113 Iff‘aIrs, 1935;, p.

202

If, however, the prices of the established firms are
not affected by the new firm or none of the existing firms
are compelled to leave and the total sales of the industry
remain the same, the profitability of the existing firms
declines because of the decline in per establishment sales F
volume. Hence, the ultimate effect is an increase in cost IE
because of the increased idle capacity. A social cost
commonly associated with unused capacity is the depletion of
irreplaceable natural resources.3

In many cases the fact that about two-thirds of the

 

 

E—"_
1%; ,

total failures take place during the first five years of
operation, may indicate that the newcomers actually do not
have a chance to contribute much to total welfare. They
cease existence without becoming beneficial to the economy.”
The smaller than normal size places the new entrants in a
disadvantageous position at the very beginning.
As already discussed, there is a positive relation-

ship between survival and size. Oxenfeldt wrote:

The fact that new firms, on the average, are consider-

ably smaller than established firms in an industry has

extremely significant implications. It implies that new
firms are generally not erected of a size permitting

 

3Oxenfeldt, _p, g;§,, p. 69.

“In one sense this might be compared with biological
fertility. The increased infant mortality causes a smaller
proportion of the population to survive to the reproductive
age. An interesting discussion of population functions,
mortality, and fertility is resented in K. E. Boulding, _A_

.Reconstructi n of Economics New York: John Wiley a Sons,
I955), Cfiapter'I: especIaIIy pp. 17-21.

 

203

profitable operation and that their invested capital
will therefore be dissipated. The relatively small size
of new firms also brings into question the rationality
with which entrepreneurs select the scale of their oper-
ations. Moreover, it suggests that, despite the
existence of many producers and the entrance of many
firms each year, industries often are not highly com-
petitive because of the uneconomical scale of the new
operators.5

Furthermore, although competition may keep some prices low,
which to a certain extent, is the case in retailing, yet as
failures take place the public pays indirectly.6 Especially,
even if the unfit and inefficient were to be eliminated,
they would be replaced by others probably equally as bad,
thus eliminating all the advantages that might be gained by

the occurrence of failures.7

 

50xenfeldt, _p_. cit., p. 139.

6Prices in the retailing sector of our economy are
relativ ly more stable as was found by Helen B. Junz and
Theodore R. Gates, "Do Retail Prices Follow Wholesale
Prices?," National Industrial Conference Board, Business
Record, June, 1957, pp. 271-276.

7Boer wrote: "If our system as presently consti-
tuted eliminated the unfit and inefficient, not to be
replaced by others equally as bad, there would be no point
in raising a question regarding either the method or the
results. However, the system apparently perpetuates the
dissipation of capital, encourages a waste of the services
of labor, results in lessened purchasing power, and causes
inconvenience to the consuming public." A. E. Boer,
"Mortality Costs in Retail Trades," The Journal gf'Marketing,
July, 1937, pp. 59-60. On this Cox REE EEIs to say:
"Freedom of entry in practice is costly because peOple do
make mistakes. They do not know whether they are going to
succeed or fail, and the screens set up to separate the
probable successes from the probable failures are far from
exact and accurate. In fact, the available evidence indi-
cates that failure is considerably more common than success
among new business ventures. The fact that the business
population is maintained through a costly process offsetting

204

f

Our analyses in Chapter Four showed that failures in
the strict sense are not a function of new entries since the
two did not correlate highly. This means that neither new
entrants due to extreme incapability go out of business
immediately nor due to superior competitive power do they
soon force existing firms out of the market.

Analyses, on the other hand, also showed a close
inverse relationship between business conditions and busi-
ness failures by indicating high correlation coefficients.
It necessarily follows that in recession or depression years
failures soar. If by this process it were possible to
guarantee the elimdnation of the inefficient then the result
naturally could be beneficial to the general welfare. How-
ever, marginal and inefficient firms in an imperfect economy
are not synonyms as would be the case in perfect competition.
In many cases the inefficient large firms can easily survive
a recession or depression by simply absorbing the losses
incurred. As Corwin Edwards stated:

Where big companies have small competitors, small
suppliers, or small customers, there may be a sub-

stantial inequality of bargaining power between the big
and those who must deal with them or compete with them.

 

against each other a high disappearance rate and a corre-
spondingly high rate of inflow indicates that opportunity in
at least one sense is very great for individuals in this
country . . . . In the real world, this extreme form of
opportunity is not wholly desirable. Less costly ways are
needed for winnowing the fit from the unfit." Reavis Cox,
'Quantity Limits and the Theory of Economic Opportunity."

In Reavis Cox and Wroe Alderson (eds.), Theory in Marketin
(Chicago: Richard D. Irwin, Inc., 1950), pp. 2 -253.

 

205

Whether or not the large concern has an advantage over
the small in productive techniques and operating costs,
it is likely to be able to outwit its small customer or
supplier, to outbid its small rival . . . .8
Thus, despite the fact that it is not inefficient,
the small firm might go out of business mainly due to the
size of its capital and assets.
From the above discussions it becomes obvious that
the picture is not at all clear-cut. As McKean put it ". .
. . Whether current rates of business turnover are indica-
tive of health or sickness in the small business world is by
no means self-evident from the data."9
The importance of the welfare implications of busi-
ness failures makes the topic especially important and
necessitates further studies to understand clearly the above

proposed interrelationships. In Cole's words: "Possibly no

inquiry in the area of economics deserves greater support."10

Need for Further Inquiry
Besides the studies made in the 1930's and the

 

BCorwin D. Edwards, 131 Business and the Polic of
C etition Cleveland: The ress of Western‘REserve Gar:
versIty, 195 ), p. 10. Also in a paper submitted by H.
Woorhies in the A.M.A. national convention during December,
1961, in New York, it was stated that small concerns do not
have a chance despite their efficiency because they do not
own mass media and cannot advertise nationally. It might be
added that multi-product large firms are better safeguarded
than relatively fewer or single product small firms.

9McKean, 22. gig” I). 33-

10A. H. Cole, "A Note on Continuity of Enterprise,"
Business History Revigw, Spring, 1961, p. 75.

206

N.B.E.R. studies, business failures is a relatively neglected
topic. A number of reasons can be given for this lack of
interest. For one thing, they are considered by many
students to be beneficial to the economy. Some consider
them a necessary evil. Others accept them on faith. Also
for some, failures is a negative topic and would not be con-
sidered unless the failure rate becomes very high. Success
stories are more popular topics for detailed study. Until
recently, the lack of data also was one of the hindrances.
In addition, a lack of data reliability might sometimes
present a negative factor.

The studies of the 30's as well as the present
studies by D. & B. consider failures in the micro sense and
attribute casualties to internal, mainly managerial causes.
The N.B.E.R. studies go no further than establishing a rela-
tionship between the ups and downs in the economy and the
total failure data, thus providing a use for failure
statistics as an economic indicator.

Throughout this study, an effort was made to estab-
lish a functional relationship between the failure pattern,
i.e., kind, size, age and cyclical characteristics of
failures, and the nature of the economy in conjunction with
business conditions. Despite the specific findings, the
analyses are not conclusive due mainly to the limited
numbers of years considered. It is important in the future
to substantiate further or to refute the findings of this

207

study. Thus, more concrete functional relationships can be
established between the economy and the failure picture.

Not only substantiation of these findings but further analy-
ses of the factors suggested in Chapter Five is a consider-
ation for future studies. Among these are: the size of
firm, legal form, credit availability and liquidity, the
mood of consumers, wholesale prices, and many other socio-
economic and demographic factors.

Another future avenue for prospective study would be
to establish further relationships between the macro and
micro analyses of failure studies. It then would be
possible to know under what circumstances, with any given
external conditions firms fail. 0n the same basis, it may
be possible also to ascertain with any given internal con-
ditions which factors precipitate failure.

By means of these studies it would be possible to
appreciate the role of failures in society, to propose
remedies to minimize the costs incurred, and to maximize
healthier competition. Only at that time will there be‘
adequate information on failures to guide managerial action

and thus be valuable in a micro sense.

208

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209

APPENDIX-TABLE II
NUMBER OF FIRMS AND BUSINESS FAILURES

 

 

IN MICHIGAN
Number of Number of Failures as a

Year Failures Firms Percent of Firms
1940 361 76,316 '.47
1941 250 79,620 .31
1932 226 78, 62 .29
19 70 75. 59 .09
a 2: °2 °°“

5 1 . . 03
1946 43 81,566 .05
194 139 93 . 933 - 15
19. 157 97. 949 . 16
1949 387 100,243 .34
1950 2 0 104,221 .27
1951 181 96.9 7 .19
1952 170 99,217 .17
195 114 100,366 .11
195 209 100,330 .21
1955 211 101,074 .21
1956 413 102,130 .40
195 512 101,g20 .51
195 - 47 103, 2 . 3
1959 96 105. ”:32 . 7

 

SOURCE: Dun and Bradstreet Inc., as reported in
the Statistical Abstract 9; the g. .51., J. cit.

—:
f

APPENDIX-TABLE III

210

NUMBER OF FIRMS AND BUSINESS FAILURES

IN THE UNITED STATES

 

 

 

 

 

 

Number of Number of Failures as a

Year Failures Firms Percent of Firms
1940 13,61 2,156,450 .63
1941 11,84 2,170,615 .52
1942 9,405 2,151,549 .4
1943 3,221 2,023,007 .16
1944 1,222 1,855,033 .07
1945 810 1,909,095 .04
1946 1,130 2,141,807 .02
1945 3,474 2,404,88 .l
194 5,220 2,550.01 .21
1949 9.2 5 2.5g9.306 .32
1950 3,162 2,6 6,786 .
1951 .058 2.607.977 31
1952 g,611 2 37.0 .29
1953 ,862 2,666,680 .23
1954 11,086 2,632,312 . 2
1955 10,969 2,638,063 .42
1956 12,686 2,62 ,910 .48
195 12,;gfi 2,652,248 .52
195 1 , 2,6vg,4 .56
1959 14.053 2.70 .16 .52

SOURCE: Dun and Bradstreet Inc., as reported in

the Statistical Abstract 2;; the Q. i

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