Edward L. Glaeser is an economics professor at Harvard.
The success of a city is tied to the area’s entrepreneurship, but what explains why some places are more entrepreneurial than others?The answer should matter for two reasons: local policy makers are constantly looking for ways to rev the economic engines of their cities, and the ingredients of success at the local level can help inform national policy. Just as city-level evidence on the connection between education and urban growth helps build the case for a national schooling agenda, city-level evidence on the determinants of entrepreneurship should help guide federal policies toward new businesses.
The modern economic literature on cities and entrepreneurship has ancient antecedents, like Adam Smith and Alfred Marshall, who used the now slightly unfortunate term “undertaker” to describe entrepreneurs.by Taco Ekkel
At the start of the 20th century, Frank Knight of the University of Chicago, and Joseph Schumpeter of Vienna and Harvard, emphasized and examined the role of entrepreneurship. In the 1950s, the link between entrepreneurship and urban success was made explicit by Raymond Vernon (Harvard economist and inventor of the peanut M&M) and the economist Benjamin Chinitz.
Chinitz argued that New York was doing better than Pittsburgh in those years because New York had lots of small, independent firms, a legacy of its garment industry. Smoke-and-coke intensive Pittsburgh was dominated by a few vertically integrated industrial giants and, in Chinitz’s view, they crowded out entrepreneurship and innovation.
The development of an empirical literature on cities and entrepreneurship faces an immediate problem: How do you measure entrepreneurship?
The great scholars of entrepreneurship weren’t so great on providing a clear, empirically usable definition. Schumpeter saw entrepreneurs as agents of transformative change; Knight thought that they assumed risk. Both were right, but where does that leave the empiricist eager to use Census or Dun & Bradstreet data?
One route is to use the self-employment rate, but self-employment doesn’t capture the scale of the enterprise or its success. It also creates some anomalous results.
If the self-employment rate captures entrepreneurship, then West Palm Beach is by far the most entrepreneurial place in the country and the San Jose metropolitan area, that home of Silicon Valley, is one of the least.
Two alternatives are the number of independent establishments in an area, usually normalized by the amount of employment, and the amount of employment growth in new firms. Luckily, average firm size and the growth of establishment in new firms are extremely highly correlated, across cities and industries, which suggests that both are capturing something like entrepreneurship.
The big fact about entrepreneurship and cities is that average firm size strongly predicts urban success.
The chart below shows that a 10 percent increase in the number of firms per worker in 1977 is associated with a 9 percent increase in employment growth between 1977 and 2000. An abundance of small, independent firms is, along with January temperature and share of the population with college degrees, one of the best predictors of urban growth.
But why is firm size so correlated with urban success?
Is this relationship largely spurious, the result of some omitted variable — or set of variables — that increases both the number of firms and city growth? If the relationship is real and an abundance of smaller firms actually causes urban success, then why are some places more entrepreneurial than others?
William Kerr of Harvard Business School, Giacomo Ponzetto of Barcelona’s Pompeu Fabra, and I have tried to shine some light on these questions, but I am afraid that there is still plenty of darkness.
Our primary approach is to look across industries within cities. We empirically examine why steel in Pittsburgh is doing better than either steel nationwide or Pittsburgh’s economy as a whole. Across city-industries, a 10 percent decrease in average establishment size is associated with 6.5 percent faster employment growth in new establishments and 4.5 percent faster employment growth in existing establishments.
By controlling for what industry a firm is in and the age of a firm, we can rule out the hypothesis that the connection between firm size and growth just reflects the fact that small firms are more prevalent earlier in the product cycle when growth is faster.
The fact that the employment growth/firm size correlation is so robust within cities enables us to move past theories that just emphasize city level characteristics, like low taxes. It isn’t that such factors don’t matter, but they are unlikely to explain within-city patterns.
The returns to entrepreneurship don’t seem to be higher in places where there are more entrepreneurs. This pushes us to think that the differences across cities and sectors reflect different supplies of entrepreneurship, rather than differences in how much people have to gain from becoming an entrepreneur in a given place.
Next week, I’ll follow up on how we should interpret the different supplies of entrepreneurs across cities.
Posted via web from Stuff important and amusing to Rob OBrien
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