Recent Research: What Happens to High-Growth Firms?

Because they focus on attracting mature firms through relocation incentives, job creation strategies at the state level are often misguided, according to the Center on Budget and Policy Priorities. Despite this, many metropolitan regions are increasingly focusing their efforts on attracting and retaining the high-growth firms responsible for an oversized share of job growth and economic output.  While considerable research has focused on the important role that startups and high-growth firms play in the national economy, relatively little has been done to apply a regional lens to this phenomenon. New research, tracks high-growth firms over a multiple-year period to assess how their changing operations can inform regional economic development.

In The Role of Entrepreneurship in U.S. Job Creation and Economic Dynamism, researchers from the University of Maryland and the U.S. Census Bureau assess the importance of startups and young firms as contributors to job creation and productivity growth. The authors note that while startups account for approximately 10 percent of firms and more than 20 percent of firm level gross job creation,  high-growth firms – those defined as firms expanding their employment by more than 25 percent per year – account for about 15 percent of firms and 50 percent of firm-level gross job creation. In a January 2016 study, High Growth Young Firms: Contribution to Job, Output and Productivity Growth, the same researchers assess additional impacts of these high-growth firms. They find further evidence that high-growth firms contribute disproportionately to job creation, output, and productivity growth. Although many firms fail in their first years, conditional on their survival, young firms have higher average net employment growth and output growth than their more mature counterparts.

While these reports provide strong support for high-growth firms from a macroeconomic perspective, relatively little research focused on their geographic concentrations. A research team led by Murray Rice of the University of North Texas seeks to address this issue in a recently released article, Defining the Record of High-Growth Firms by U.S. Metropolitan Region: What Happens to the Inc. 500? To collect information on high-growth firms, the authors survey the Inc. 500, an annual ranking of the United States’ 500 most rapidly expanding, privately held companies as measured by growth in annual revenues. While the dataset has some inherent biases – for instance, firms self-nominate for consideration – it is also particularly robust. Over the course of 2000 to 2008, the authors identify 4,501 firms from the Inc. 500, and then use reputable business databases to track these firms’ employment, revenue, geographic, and operational status over two-, five-, and 10-year periods. Because some firms can make the Inc. 500 multiple years, the authors remove these repeat appearances and study them in a separate analysis. Based on their data collection process, the authors assign firms one of four generalized operational statuses:

• Privately held: a company that has continued its status as privately held;
• Acquired or merged: a company that has transitioned out of its original, privately held through acquisition (96.1 percent) or merger (3.9 percent) into another firm;
• Initial Public Offering (IPO): a company that is no longer privately held because it offers its shares for sale on a public stock exchange; and,
• No longer in operation or unknown: a company where evidence exists to indicate that it was no longer in business, or where no record can be uncovered of an acquisition, merger, IPO, or business discontinuation, but also no evidence of continued operations. 

Since, by definition, firms gain Inc. 500 status as privately held businesses, it perhaps makes sense that the majority of these firms retain their privately held status. In the two years following an Inc. 500 appearance, 87.6 percent of companies were still private, while after five- and 10-years, 75.2 percent and 54.3 percent of companies retained their privately held status, respectively. While a small proportion of companies (3.6 percent) were acquired or had merged in the two years following an Inc. 500 appearance, this share grew to 11.2 percent after five years, and to 25 percent after 10 years. After appearing in the Inc. 500, firms that were either no longer in business or whose status was unknown accounted for: 8.4 percent after two-years; 12.2 percent after five years; and, 18.1 percent after 10 years. Very few firms (0.4 percent) made an IPO in the two-years after appearing in the Inc. 500, and, while this share grew in the five-year (1.2 percent) and 10-year (2.2 percent) periods, the small firm numbers caused the authors to minimize consideration of this otherwise-interesting IPO category.

To assess the outcomes of high-growth businesses on a regional basis, the authors focus their analyses on the 24 metropolitan areas that had at least 40 firms make the Inc. 500 list over the 2000 to 2008 study period.  By using location quotient analyses, which compare the level of an activity in a particular place with the same activity level as it occurs in a broader area, the authors are able to identify the variation across the 24 metropolitan areas studied.

The regions with the highest concentration of Inc. 500 businesses that continued as privately held firms are Portland (1.23 location quotient), New York (1.15), and Houston (1.13). Nashville (0.48), Seattle (0.57), and San Diego (0.58) had the lowest levels of Inc. 500 businesses retain their privately held status and were most likely to see ownership transitions. The continued maintenance of private ownership status over an extended period in a regional business community, according to the authors, could be considered an indication of ownership stability in that region.

Of the Inc. 500 companies subject to a merger or acquisition, 72.4 percent had a partner firm location come from a different metro area in another state, and 13 percent had a partner firm from outside the United States. The authors suggest that a large majority of merged/acquired firms saw relocations of corporate control because of M&A activity. The regions with the highest levels of Inc. 500 acquisitions were Boston (1.57 location quotient), Austin (1.50), and Baltimore (1.48), while Philadelphia (0.57), Nashville (0.67), and San Diego (0.82) had the lowest levels.

The regions with the highest concentration of Inc. 500 companies that either discontinued business or whose status was unknown were Detroit (1.68), San Diego (1.40), and Seattle (1.38), while very few Inc. 500 companies discontinued their operations in Austin (0.39), Nashville (0.46), and Portland (0.49). In general, the highest discontinuation values were found in the Northeast and on the Pacific coast, according to the authors, while Texas metros had a very low level of discontinuation.

Although the authors hesitate to make their own policy recommendations based on their study, they do conclude by noting that there is value for businesses and economic development officials to monitor the development of how corporate centers emerge. The authors allude to the policy recommendations made by Indiana University professor David Audretsch in his 2015 book Everything in Its Place: Entrepreneurship and the Strategic Management of Cities, Regions, and States, suggesting that public policy’s role in shaping the strategic management of places has the potential for application only when regional development monitoring information – such as the tracking of high-growth firms – is made available. While Defining the Record of High-Growth Firms provides a valuable geographic scope to view the types of firms that have an oversized role on job creation and economic output, additional research questions beyond the scope of this article may include:

• In the years following an appearance in the Inc. 500, how do employment and/or revenue statistics change in the regions affected? 
• In the years following an appearance in the Inc. 500, what is the likelihood that a firm relocates? Expands its operations into other regions?
• Following a merger or acquisition, to what extent do Inc. 500 firms relocate operations to follow their partner?  And,
• To what extent do the sectors of Inc. 500 companies relate to the established industry clusters in a given region?