David Luberoff: What Makes a City Entrepreneurial?

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 start-ups 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 try to answer this question, which is important not only for entrepreneurs but also for policymakers and civic leaders trying to encourage regional economic development.
 
Their key finding is that the presence of small firms in the past is a key to future success – for both firms and regions.  Specifically, a 10 percent increase in the number of firms per worker in a metropolitan region in 1977 is associated with a nine percent increase in employment growth in that region between 1977 and 2000.
 
Why might this be the case?  It appears that the presence of many small firms creates an infrastructure that makes it easier and/or cheaper for new firms to enter the local marketplace. They report, for example, than in an analysis of just manufacturing start-ups, they recently found that an abundance of independent suppliers was one of the best predictors of new establishment formation.
 
In addition, 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 well want to do more to encourage entrepreneurship in their communities.  Glaeser and Kerr warn, however, that they should, however, proceed cautiously because economic research is only just beginning to fully understand key issues.
 
Even so, they note, the available evidence suggests four tentative policy conclusions:
1.      Investing heavily in attracting large, mature firms may not be good policy. 
2.      There is little reason to have much faith in the ability of local governments to play venture capitalist. 
3.      Instead, policymakers should focus on a mix of taxes and amenities likely to be attractive to smart, entrepreneurial people. 
4.      Given 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 such institutions.
 
“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 Monday, March 8 at 5:30 p.m. with a talk on Massachusetts’ innovations 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.