What Makes a City Entrepreneurial?

2/25/10

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 encourage entrepreneurship in their communities. Glaeser and Kerr warn, however, that policymakers should proceed cautiously, because economic research is only just beginning to fully understand key issues.

Even so, they note, the available evidence does suggest a few tentative policy conclusions. First, investing too much in attracting large, mature firms may not be good policy. These firms may provide an immediate headline associated with new jobs, but encouraging a profusion of small, independent firms is more likely to lead to sustained economic growth

Second, there is little reason to have much faith in the ability of local governments to play venture capitalist through public investment funds. Classic economic research found that Japan’s Ministry of International Trade and Investment, which was staffed with Japan’s best minds, generally picked losers. Why should local investment funds be able to do any better?

Third, there is much to be said for the strategy of focusing on the quality-of-life policies that can attract smart, entrepreneurial people. This approach is particularly appealing because the downside is so low. What community, Glaeser and Kerr ask, ever screwed up by providing too much quality of life?

Finally, there is a robust link between educational institutions and certain types of high-return entrepreneurship. These facts do not imply that universities should be locally subsidized, but they do suggest that imposing costs that restrict the growth of such institutions can be costly.

“What Makes a City Entrepreneurial?” a Rappaport Institute Policy Brief by Glaeser and Kerr’s is available at http://www.hks.harvard.edu/rappaport/downloads/policybriefs/entrepreneurs.pdf

The Rappaport Institute’s series on the geography of entrepreneurship will continue on Monday, March 8 at 5:30 p.m. with a talk on Massachusetts’ innovation agenda by Gregory Bialecki, Massachusetts Secretary of Housing and Economic Development, who will be speaking in the Allison Dining Room, 5th floor of the Kennedy School of Government’s Taubman Building, 15 Eliot Street, Cambridge.

The series will conclude on Wednesday, March 24th at 5:30 with a talk by HBS Professor Josh Lerner on “Geography, Venture Capital, and Public Policy.” That talk will be held in Nye AB, which also is on the 5th floor of the Kennedy School’s Taubman Building.

David Luberoff is Executive Director of Harvard University’s Rappaport Institute for Greater Boston. Follow @

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  • http://economicarchitecture.gspconsulting.com/ Jerry Paytas

    I generally agree with what you are saying, but in reviewing the rigorous research on the subject you fall into the trap of case analysis. You say that local investments funds are unlikely to be successful because MITI didn’t do it. Beyond that one case, there are a myriad of successful programs that have assisted entrepreneurial growth through a combination of investment and mentoring. There are models that have worked to varying degrees, such the Ben Franklin program in PA, KTEC in KS, USTAR in Utah, OCAST in OK, TEDCO in MD, MassTech, and more.

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  • http://www.iftf.org Anthony Townsend

    Still to read the report, but to say its the presence of big or small firms that dictates growth seems overly simplistic to me. Everyone seems to forget that Silicon Valley’s startups depend on big companies as customers, business partners, investors, finishing schools for their labor pool, social networking engines, etc etc. Silicon Valley is no more a constellation of small firms than Detroit or New York is. But…. and a big but…. they are very different kinds of big firms, mostly but not completely because they were startups within recent memory. But also because they know that startups are a key part of their innovation system, so the cultivate them.