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Entrepreneurship, Place, and Economic Development

July 24, 2014

Several scholarly articles published within the past few months highlight the role that entrepreneurship, high-tech employment, and place play in both economic growth and economic development. In a landscape where seemingly every place desires the successes found in the Silicon Valley model, new frameworks that support the economic efficacy of human capital, entrepreneurship, and place are needed to encourage innovation and prosperity.

Recent research in the latest issue of Economic Development Quarterly explores the influence that entrepreneurship and the concentration of high-technology jobs had on employment growth in the 114 largest U.S. metropolitan areas (MSAs) over the last full business cycle, the years between 1991 and 2007. In the article, the authors Ross Gittell, Jeffrey Sohl, and Edinaldo Tebaldi find that entrepreneurship had a robust positive influence on employment growth during all stages of the business cycle. The authors also find evidence that growth in high-technology concentration, rather than a high concentration of high-tech employment, spurred employment growth.

Research that highlights the nexus of entrepreneurship and technological innovation as a key factor in economic growth largely began in the mid-1980s with Peter Drucker’s seminal book Innovation and Entrepreneurship. Since then, numerous authors have written on the topic, yet research that empirically links the relationship to employment generation is largely limited. Camp (2005) added to the literature by finding that the most entrepreneurial regions had better local economies compared to the least entrepreneurial between 1990 and 2001. According to Camp’s research, the most entrepreneurial regions were also associated with higher levels of technology than the least entrepreneurial, as measured by R&D expenditures, educational attainment, and number of high-tech establishments.

By considering the entirety of the 1991-2007 business cycle, which contains periods of both growth and decline, Gittell, Sohl, and Tebaldi are able to more appropriately measure the impacts of technology and entrepreneurship on employment growth. Incorporating periods of decline into the analysis is important because although some tech centers may lead growth during the growth segment of the business cycle, the ability of these regions to display resiliency over time is more important to economic development.

Overall, the authors find that entrepreneurship contributes to job creation across MSAs in the United States, a result that is robust across several different model specifications. Entrepreneurship is calculated as the percent of individuals, ages 20 to 64 years, in each metropolitan area who did not own a business in the U.S. Census Current Population Survey that start a business in the following month, with 15 or more hours worked per week. When there is a strong link between a region’s high-tech concentration and entrepreneurship, job creation is stronger. Furthermore, according to the authors’ analysis it is not high-technology concentration that fuels job creation, but growth in high-technology concentration that matters most. This challenges the common view that high-technology concentration is associated with faster job creation, whereas in actuality it is a MSAs capacity to grow its high-tech base that creates jobs.

If entrepreneurship and a capacity to grow its high-tech base influence a region’s job creation, then what impacts a region’s ability to grow in these factors? According to Maryanne Feldman, the character of place – the “spirit of authenticity, engagement, and common purpose” -- is the particular feature that differentiates successful places.

Feldman notes that character of place can be defined by entrepreneurial attachments and investments, government capacity building, and local communities with common interests. Citing historic examples like Fred Terman (Silicon Valley), Ewing Marion Kauffman (Kansas City), and George Kozmetsky (Austin), as well as contemporary examples such as Dan Gilbert (Detroit) and Tony Hsieh (Las Vegas), attachment to place of what Feldman calls “regional champions” is critical to the ability of these individuals to establish the institutions and connections that are necessary for the transformation of local economies. Ultimately, geographic places have history and context that is meaningful to people like regional champions, as well as to subsequent waves of entrepreneurs. In addition to places facilitating the face-to-face interactions intrinsic in the development of social capital, geography also enhances the probability of serendipity and the chance for something unexpected to have transformative impacts.

Richard Florida, whose research is also present in the most recent Economic Development Quarterly, echoes several of Feldman’s points regarding the importance of place. Florida suggests two policy implications that stem from his theories on the creative class, both of which can be considered contradictory to conventional development practices. First is the notion that small things, not big things have the greatest impact. Small, low-cost, community-initiated, and bottom-up improvements rather than megaprojects create the desired spillover effects for regional economies, especially with regard to quality of life. Second, Florida argues that places need a “people climate,” not just a conventional business climate of low taxes, low regulations, and plentiful subsidies. Although incentives and business friendliness may prompt short-term relocation, it is a quality “people climate” that is far more likely to promote retention, collaboration, and an attachment to place.

Both of these policy implications hold true in the development of technology-based economies. High-tech facilities, large-scale research universities, and generous incentives mean nothing unless there are individuals around to take advantage of these resources. Building successful regional economies is a complex and long-term endeavor and requires changes, both large and small, to occur throughout the system. Entrepreneurship and the capacity to grow high-tech economies positively influences economic growth, but it is the realization of the potential of these individuals, their firms, and place that can positively influence economic development. 

entrepreneurship, metros