Employment grew 15-34% faster after the last recession in cities that had strong entrepreneurial ecosystems, according to a new report by think tank Heartland Forward that also offers a path out of the COVID-19 recession for communities ready to look to the future: Support your young businesses, because that’s where the job growth comes from.
“There’s no other single measure that explains more of the job growth,” said Ross DeVol. “Many economic development officials know this and believe this. But there hasn’t been enough strong, compelling evidence to show politicians that this is how you maintain a vibrant economy.”
Entrepreneurship has often been dismissed as a global movement because there wasn’t enough evidence of job growth that stemmed, not from individual high-growth firms, but from broad measures that encourage many people to start and grow businesses.
The report, along with the recent research from the World Bank, offers some of the first evidence of a direct connection between entrepreneurship and job growth. It also offers communities some clues about how to proceed once the recovery begins, including by focusing on entrepreneurship in sectors likely to grow, like life sciences and telecom, supporting young firms with training that increases management expertise, and drawing people with money and/or social capital to a particular locality, large or small.
The Heartland Forward study found employment grew 15% faster in metropolitan areas with strong entrepreneurship ecosystems between 2010 and 2017, and 34% faster in micropolitan areas with strong knowledge-intensive ecosystems, Heartland Forward found.
What Are The Signs Of A Strong Entrepreneurial Ecosystem?
The authors, including well-known urbanist Richard Florida, used data from the U.S. Census Bureau to do the analysis. They started by ranking the top 50 metro areas and top 50 micropolitan areas for job growth. Those rankings were compared to the places that had strong entrepreneurial ecosystems, judging by the proportion of young firms (under five years), and the proportion of college-educated employees within those firms.
For every 1 percentage point increase in the share of employment by young firms, employment growth increased by .5 percentage points, according to the Heartland Forward study.
Some of the metro areas that did well are obvious, like San Jose, Calif., home of Silicon Valley. But others were less so: Boulder, Colo., ranked third in the nation. Three metro areas in Florida were also in the top 10. Resort communities there have drawn population from elsewhere, driving high demand for goods and services, DeVol said.
Metro areas where a large proportion of the employees at those young firms have college degrees had even better job growth. The average-growing metro from 2010 to 2017 could expect a 34 percent faster employment growth if their 2010 young firm knowledge intensity score was 1 percentage point higher.
The question of whether policies that spur entrepreneurship have a direct impact on job growth is an important one worldwide, said Arti Grover, senior economist with the World Bank. Recent research by Grover and senior economist Marcio Cruz into high-growth firms found results that gel with the study from Heartland Forward.
Though advocacy has centered around software-related companies and the venture financing system that sustains them, the World Bank economists have found that high-growth firms in emerging markets and in the United States aren’t necessarily in high-tech sectors (though some are). Nor are they likely to be startups in the classic sense. Rather, they are apt to be firms between 1-5 years old, and they’re found in many sectors, said Cruz. The best way to support them is via policy – because it’s nearly impossible to identify a particular firm’s potential for growth.
“We were basically looking at the difference between fact and fiction,” said Grover. “High growth firms are found in all types of sectors. And this episode of high growth is basically short-lived. By the time you noticed them, you are likely to miss the high growth episode.”
Platforms That Walk On Their Own
Heartland Forward’s research uncovered the role of knowledge intensity when it looked at the keys to driving job growth. For instance, a handful of Texas metro areas are strong in entrepreneurial energy because they are home to young companies in the energy sector.
“In some west Texas metros, in the Permian Basin, you can have these platforms that literally walk to where they’re going next,” DeVol said. “Many of these guys are engineers. You need to be highly trained to operate the equipment.”
Many of the micropolitan areas on Heartland Forward’s list of strong entrepreneurial ecosystems are surprising, too. Micropolitan areas are defined as cities of 10,000 and their surroundings, versus metro areas, with cities of 50,000 and their surroundings.
What Is The Highest-Ranked Micropolitan?
The micropolitan area that ranks highest in knowledge intensity is Los Alamos, N.M. The secret home to atomic bomb development during World War II, the area has transformed into a research hub for scientific fields ranging from supercomputing to medicine since the end of the Cold War.
Communities and individual can play a big role in driving entrepreneurship. Summit Park, Utah ranks third among micropolitican areas for its dynamic economy. A local group, Park City Angels, has made over 1,200 investments, mostly in Utah, since 2008, the report notes.
DeVol and his team studied entrepreneurship and job growth with a particular focus on Heartland states. Metropolitan areas in the Heartland perform relatively poorly, with only Nashville, Tenn., showing up in the top 20, at number 12. One reason may be that so much energy in the industrial heartland was focused on preserving the past, DeVol said. It’s ultimately a self-destructive impulse, because older companies tend to shed jobs.
“They didn’t want to lose the GE plant,” he said. “They didn’t think about we need to build new. Part of a legacy of the mass production culture. Where you had a larger share of mass production in the economy, the entrepreneurial culture diminished more.
“The entrepreneurs who were trying felt like they were crying in the wilderness.”
World Bank executives recently published a blog post that maps global responses so far and offers ideas for the recovery. Heartland Forward offered detailed ideas for growing entrepreneurial ecosystems here.
After triage – supporting companies with debt financing, tax policy and grants, communities could look to:
• Support young firms with training that increases management expertise, peer networks and access to finance.
• Forge partnerships with research facilities and national laboratories, emphasizing connections to life sciences and the ability to commercialize innovations.
• Look beyond traditional software-related industries for areas in which to build ecosystems and hubs that support fast-growing firms. In particular, DeVol said, telecom might be a good bet as rural broadband could become a priority.
• Draw people from established economic hubs. Powerful people – whose power may take the form of money or social capital — end up creating entrepreneurial ecosystems around themselves. If you get enough of those people, such as the clusters that exist in Boulder, Colo., or Jackson Hole, Wyoming, they can drive company creation and growth.
A Backdrop Of Declining Entrepreneurship
The report comes as there is a growing awareness that entrepreneurship in America is in the midst of a long-term, historic decline. That spells big trouble for the U.S. economy in the long term, because dynamism and innovation in the economy come from disproportionally from young firms.
The decline could be exacerbated by the COVID-19 pandemic. Young firms were less likely to survive the last recession. Nationally, small businesses accounted for 45% of employment, but as the economy shed about 5 million jobs from 2008 to 2009, they accounted for 62% of the net job loss, according to Sifan Lu and Joseph Parilla of the Brookings Institute.
Entrepreneurship rebounded somewhat after the last recession, but only in a few metropolitan areas on the coasts. Today, approximately one-third fewer workers hold jobs at young firms than in 2000, according to the Heartland Forward researchers.
But this recession is different from those that preceded it. It’s not being cause by a structural problem – like the mortgage-backed securities and widespread sloppiness in the financial sector that triggered the last one. Because of COVID-19, the economy is reshaping itself, and it’s doing itself against an entrepreneurial landscape that is vastly different. Many more women and people of color have started businesses since the last recession; and many more people are entrepreneurial participants in the economy.
More than 50 million people own small businesses, or are sole proprietors or microentrepreneurs — dynamics that are likely to make this recession and recovery different.
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This story and others on New Builders Dispatch are made possible by a sponsorship from the Ewing Marion Kauffman Foundation. The Ewing Marion Kauffman Foundation is a private, nonpartisan foundation that provides access to opportunities that help people achieve financial stability, upward mobility, and economic prosperity – regardless of race, gender, or geography. The Kansas City, Mo.-based foundation uses its grantmaking, research, programs, and initiatives to support the start and growth of new businesses, a more prepared workforce, and stronger communities. For more information, visit www.kauffman.org and connect with www.twitter.com/kauffmanfdn and www.facebook.com/kauffmanfdn.