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Business failure and change: An Australian perspective

Staff research paper

This paper by Ian Bickerdyke, Ralph Lattimore and Alan Madge was released on 20 December 2000. The paper is about the outflow of businesses - 'business exits', one of its aims being to provide data on different types of business exits, to comment on the reasons why these occur and to highlight some of the key economic implications emerging from the data. It also examines institutional arrangements and policy mechanisms for dealing with insolvent businesses.

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A Staff Research Paper, Business Failure and Change: An Australian Perspective, presents the most recent available evidence of business exits and failures. Some of the key findings are contrary to common perceptions.

It is widely thought that most new businesses will die in the first few years of their operation. The paper reveals that, in fact, most survive for a considerable time. For example, around two-thirds of businesses are still operating after five years. Moreover, the majority of businesses that cease operations are not'failures'- they are solvent businesses closing for reasons unrelated to their financial position (such as when the owner retires or seeks a different lifestyle).

Business failure is a comparatively rare phenomenon. Only around 2 per cent of businesses cease operations each year because the owners, while solvent, are unable to secure a sufficient return. And less than 0.5 per cent of businesses cease operations each year due to insolvency - down significantly from the rate applying in the early 1990s.

Common misperceptions about the level of business failure and the chances of survival may lead some entrepreneurs to overestimate the risk of failure, reducing their willingness to commence new businesses.

Governments have an important role in defining arrangements for the orderly closure or reorganisation of insolvent businesses. The research paper examines institutional arrangements and policy mechanisms for dealing with insolvent businesses.

The loss of employee entitlements in the event of business failure has been the subject of much debate in recent years. Governments around the world use a variety of mechanisms to protect employee entitlements in these situations (a government-funded national employee protection fund was introduced in Australia in early-2000). The paper outlines criteria for evaluating these mechanisms and assesses the various alternatives.

Background Information

02 6240 3330

Cover, Copyright, Contents, Acknowledgments, Glossary, Key messages, Overview

1 Introduction
1.1 What are business exits?
1.2 The economic role of business exits
1.3 Scope and data sources
1.4 Outline

2 Nature and extent of business exits
2.1 Magnitude and impact of business exits
2.2 Business exits by location and industry sector
2.3 Characteristics of exiting businesses
2.4 Business survival rates
2.5 Comparisons with other Australian evidence
2.6 Business exit intentions
2.7 Summary

3 Business failures
3.1 Measuring business failures
3.2 Trends in business-related bankruptcies and company liquidations
3.3 Magnitude and impact of enterprise failures
3.4 Factors influencing the likelihood of business failure
3.5 Causes of business failure
3.6 Summary

4 Insolvency arrangements in Australia
4.1 Incorporated enterprises
4.2 Unincorporated enterprises
4.3 Receivership
4.4 Statutory priorities in liquidation, bankruptcy and receivership

5 Assessing insolvency codes
5.1 Why does insolvency matter?
5.2 The role of government in business insolvency
5.3 Criteria for assessing insolvency codes
5.4 Liquidation or reorganisation?
5.5 Appropriate allocation of liquidated assets
5.6 Summary

6 Protecting employee entitlements in the event of insolvency
6.1 What is at stake?
6.2 Current policy approach in Australia
6.3 Mechanisms for protecting employee entitlements
6.4 Design aspects of employee protection schemes
6.5 Summary

7 Other insolvency issues
7.1 Protecting other classes of unsecured creditors
7.2 Measures to reduce excessive risk taking
7.3 Allowing bankrupts back into business

A Australian exits data

B Overseas data
B.1 Entry and exit data for European countries
B.2 Entry and exit data for the United Kingdom
B.3 Entry and exit data for the United States
B.4 Entry and exit data for Japan
B.5 Entry and exit data for Canada

C Australian bankruptcy data

D Modelling bankruptcy
D.1 Can a bankruptcy rate be defined?
D.2 The behaviour of bankruptcies over time
D.3 Possible factors affecting the bankruptcy rate
D.4 Model results