What determines the economic health and vitality of a region? Edward Glaeser, who directs the Harvard Kennedy School’s Taubman Center for State and Local Government and its Rappaport Institute for Greater Boston, has shown that a sunny, temperate climate and a high proportion of college-educated residents are major factors in determining a robust economy. But two new studies, coauthored by Glaeser, suggest another important factor: an abundance of small, entrepreneurial businesses.
The giants of economic history, such as Joseph Schumpeter and Frank Knight, recognized this linkage, notes Glaeser. However, because their writing was “fairly conceptual,” they did not provide “a clear, empirically usable definition of how to measure entrepreneurship.”
The self-employment rate, which is a commonly used measure, doesn’t capture the scale of enterprises or their success. As a result, it suggests that West Palm Beach is the most entrepreneurial place in the country and that the San Jose metropolitan area, home of Silicon Valley, is one of the least.
In a new paper, “What Makes a City Entrepreneurial,” Glaeser and William Kerr used two alternative measures, both available from the Census Bureau’s Longitudinal Business Database: the number of independent establishments per worker in an area and the amount of employment growth in new establishments over a given time. They found that a 10 percent increase in the number of firms per worker in a metropolitan region in 1977 is associated with a 9 percent increase in employment growth in that region from 1977 to 2000.
“All else being equal,” they write in a new policy brief published by the Rappaport Institute and the Taubman Center, “regional economic growth is highly correlated with an abundance of smaller firms.”
In another study, “Clusters of Entrepreneurship,” Glaeser, Kerr, and Giacomo Ponzetto focused on industrial sectors within given metropolitan areas — such as computers in Silicon Valley — to see if a city-industry cluster that has an unusually large number of small, independent firms grew faster than other firms in the metropolitan area and faster than similar firms in the nation as a whole. They found that a 10 percent increase in the average size of non-entrepreneurial firms in 1992 is associated with a 7 percent decline in subsequent employment growth due to new start-ups.
Why are some regions more entrepreneurial than others? According to Glaeser, the data on the value of shipments per worker show that it’s not because returns are noticeably high for entrepreneurs in particular places and industries. Rather, the data suggest that the presence of many small firms creates an infrastructure that makes it easier for new firms to enter the local marketplace. They also suggest that places with better-educated workforces generally have more start-up growth, especially in industries that depend on college-educated workers, and that such industries are more likely to locate in higher-amenity regions.
Recognizing the powerful correlations between entrepreneurship and economic growth, state and local policymakers may want to do more to encourage entrepreneurship. While warning that economic researchers are only just beginning to fully understand key issues, Glaeser says the available evidence does have four tentative implications.
First, investing heavily to attract large, mature firms may not be good policy. Second, there is little reason to have much faith in the ability of local governments to play venture capitalist using public investment funds. Third, focusing on quality-of-life policies that can attract smart, entrepreneurial people makes sense, especially because few communities “ever screwed up by providing too much quality of life.” Finally, because of the robust link between educational institutions and certain types of high-return entrepreneurship, policymakers should be wary of policies that severely restrict the growth of local colleges and universities. — by David Luberoff