Clusters of Entrepreneurship
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Executive Summary (Via HBS)
Economic growth is highly correlated with an abundance of small, entrepreneurial firms. This relationship is even stronger looking across industries within cities, and has been taken as evidence for competition spurring technological progress, product cycles where growth is faster at earlier stages, and the importance of entrepreneurship for area success. Any of these interpretations is possible, however, and the only thing that we can be sure of is that entrepreneurial clusters exist in some areas but not in others. This paper first documents systematically some basic facts about average establishment size and new employment growth through entrepreneurship, then analyzes entry and industrial structures at the region and the city levels using the Longitudinal Business Database. Key concepts include:
- There is a remarkably strong correlation between smaller average firm size and subsequent employment growth due to start-ups.
- Evidence does not support the view that regional differences in demand for entrepreneurship are responsible for these entrepreneurial clusters.
- Instead, the evidence suggests that spatial differences in the fixed costs of entrepreneurship and/or in the supply of entrepreneurs best explain cluster formation.
Introduction (Via HBS)
We begin by documenting systematically some basic facts about average establishment size and new employment growth through entrepreneurship. We analyze entry and industrial structures at both the region and city levels using the Longitudinal Business Database. Section 2 confi
rms that the strong correlation in Figure 1 holds true under stricter frameworks and when using simple spatial instruments for industrial structures. A 10% increase in average establishment size in 1992 associates with a 7% decline in subsequent employment growth due to new startups. Employment growth due to facility expansions also falls by almost 5%. We further document that these reductions come primarily through weaker employment growth in small entrants.
What can explain these spatial di¤erences? We
rst note that the connection between average establishment size and subsequent entrepreneurship is empirically stronger at the city-industry level than on either dimension individually. This suggests that simple theories emphasizing just industry-wide or city-wide forces are insu¢ cient. Theories must instead build upon particular city-industry traits or on endogenous spatial sorting and organizational forms due to interactions of city traits with industry traits.
