Why are some metropolitan areas so much more entrepreneurial than others? Silicon Valley seems almost magically entrepreneurial, with a new startup on every street corner, but in declining Rust Belt cities such startups are far and few between.
In a new Policy Brief published by Harvard’s Rappaport Institute for Greater Boston, which is sponsoring a series of talks on geography and entrepreneurship, economists Edward Glaeser and William Kerr report that high levels of entrepreneurship are closely correlated with regional economic growth, which means that local policy makers who are looking for ways to rev the economic engines of their cities often are interested in policies that can generate more entrepreneurship.
Glaeser and Kerr use the presence of small firms as a proxy for entrepreneurship and find, that all else being equal, regional economic growth is highly correlated with an abundance of smaller firms. Specifically, they found that a 10 percent increase in the number of firms per worker in a metropolitan region in 1977 was associated with a nine percent increase in employment growth in that region between 1977 and 2000. Looking more closely at the connection between small independent firms and subsequent growth, they report that a 10 percent increase in average establishment size in 1992 was associated with a 7 percent decline in subsequent employment growth due to new startups. Regions with lots of small firms, in other words, tend to experience faster job growth than those with a few big ones.
If the relationship between an abundance of smaller firms and urban success is real, Glaeser and Kerr ask, then why are some regions more entrepreneurial than others? One possibility is that there might be particularly high returns for entrepreneurs in particular places and in particular industries. However, data on the value of shipments per worker does not support this hypothesis.
In contrast, they report, the data do support the idea—put forward in earlier work by both AnnaLee Saxenian (on the computer industry in the early 1990s) and by the late Ben Chinitz (on why New York City was outperforming Pittsburgh in the late 1950s)—that the presence of many small firms creates an infrastructure that makes it easier for new firms to enter the local marketplace.
They add that the data also seem to support a third explanation: that for a variety of reasons, some areas may have a greater supply of entrepreneurs. For example, places with more educated workforces generally have more startup growth, especially in industries that depend upon college-educated workers. Such industries, moreover, are more likely to locate in higher-amenity regions, particularly those with favorable climates.
Recognizing the powerful correlations between entrepreneurship and regional economic growth, state and local policymakers may want to do more to
