Start-ups are the main drivers of new jobs and economic growth, new research by the e61 Institute shows - and their dwindling numbers may be stifling Australia's economic potential.
The analysis finds that firms under five years old create 60% of new jobs and 51% of economic growth.
In contrast, small old firms reduce jobs and growth on average because they are more likely to stagnate, shrink, or shut down.
Large old firms tend to have a small positive contribution to job creation and growth - but this fluctuates and can fall negative during downturns, the research found.
"Our findings demonstrate the importance of start-ups to Australia's economic growth, especially compared to older small businesses," said e61 Research Manager Lachlan Vass.
"However, fewer new firms are being created and fewer old firms are shutting down, potentially stifling our economic potential."
The research paper, titled The Young and the Restless: The Contribution of Young Firms to the Economy, found that on average young firms grow jobs and value added by around 6% each year, compared to small old firms that decrease jobs by nearly 5%.
The top performing young firms see even greater employment and productivity outcomes, highlighting the importance of new firms that bring new ideas and innovations.
But the proportion of employing businesses created in a given year has declined over time from 15.1% of all businesses in 2004-05 to 10.7% in 2024-25.
The research also found that firms which shut down are 20% less productive than the industry average five years before they close, demonstrating the importance of firm closures to a healthy economy.
The research paper argued that governments should stop supporting businesses based on their size with policies such as lower taxes, lighter labour regulation, and grants.
"Our research shows that size alone is a particularly poor indicator of economic potential," said e61 Institute Research Economist Rachel Lee.
"Size-based policies risk supporting businesses that are unlikely to contribute meaningfully to future economic growth, while potentially distorting behaviour.
"Reducing policy-induced barriers to exit and supporting transitions for affected workers and
entrepreneurs will help ensure resources are reallocated to their most productive use."
The analysis is in line with evidence overseas. "To get business taxation and other regulations right, it is important to understand how firms are born, evolve and exit. By contrast, size-based business regulation has been found to hamper business dynamism" said UNSW Business School Professor Petr Sedláček.
