Response to “Private Sector Dynamics: The Key to Understanding U.S. Growth”

by Christine Hamilton-Pennell
Growing Local Economies, Inc.
August 15, 2011

Since my blog article, “The Role of Startups in Job Creation and Destruction”, is cited in the first paragraph of economist Donald W. Walls’ report, “Private Sector Dynamics: The Key to Understanding U.S. Growth”, I’d like to offer a response. My article was based on reports produced by the Kauffman Foundation and the Small Business Administration. I don’t believe a “serious misperception” of the data by these reputable sources, as claimed by Walls in the first paragraph of his report, is the issue, so much as which data we rely upon to guide the design of entrepreneurship support efforts in our communities.

The factors that produce economic growth in a community are extremely complex, and have been much-researched and debated for decades. Economic and business datasets used to measure economic activity, whether micro- or macro-based, provide a different snapshot based on their methodology and sources. Do they measure nonemployer or employer firms? How is company growth defined and measured? How are start-ups, entrepreneurs, high growth companies, and exporting companies defined and identified? What unit of measure is used for the geographic area? How is the data parsed and analyzed? There is conflicting data on most things, and business and economic statistics are no different. Depending on what question you want to answer, there is a number for that.

Strong conclusions have been drawn from the data over the years that are widely accepted in the field. One is the crucial role small businesses (particularly high-growth companies) play in creating jobs. Another is the role of traded-sector, exporting companies in bringing wealth into a region.

I believe that the recent research on the role of startups is also significant and must be considered by policy makers. Walls has provided another useful view by looking at the role of expanding businesses in creating job growth, a view that has not received as much attention in recent years.

In his paper, sponsored by the Edward Lowe Foundation, Walls argues that expansion startups (defined as “new establishments launched by existing companies in a new geographic location or new line of business”), outpaced new startups in job creation by 71 percent. This appears to be supported by his data. I have always asserted that it is expanding companies that create the lion’s share of new job growth. (See also David Neumark, Junfu Zhang, and Jed Kolko,“Interstate Business Relocation: An Industry-Level Analysis, Public Policy Institute of California”, 2006).

Walls’ paper does not comprehensively address the issue of company size and its relationship to job growth. Expansion startups by his definition are adding a new establishment or product line to their already existing company. What size is that initial company? Is it stage 1, stage 2 or stage 3? If you add together all the new employees, what size is it then? More research on the correlation between the size of existing employer firms (which excludes sole proprietors or nonemployer firms) and job growth characteristics is certainly needed, particularly for firms with five or more employees. It will be helpful to know by the numbers whether a company of a certain size (e.g., stage 1 or stage 2) creates the most sustainable job growth, or whether size is not a key factor.

Prior research has indicated that “once we control for firm age there is no systematic relationship between firm size and growth.” (Haltiwanger, John C., Ron S. Jarmin, and Javier Miranda. “Who Creates Jobs? Small vs. Large vs. Young” NBER Working Paper No. 16300, August 2010). Obviously, expanding stage 1 companies (defined as 1-9 employees by YourEconomy.org), create fewer jobs apiece, or they wouldn’t be categorized as stage 1. However, the greater number of stage 1 companies means that there are many more of them to contribute to sustainable job growth.

I have synthesized available research to identify what appears to be the ideal target audience for an economic gardening program:

“The ‘sweet spot’ for most economic gardening programs is to target entrepreneurs who have started a venture that is between one and five years old and want to grow it, regardless of its size. These ventures aren’t necessarily “high-tech,” but they have developed some sort of innovation in their product, process or delivery method. They also have a potential or actual market outside the local economic region, and create quality, living-wage jobs.” (Reflections on the Ideal Economic Gardening Audience).

Walls’ report does not appear to contradict these conclusions.

I have also frequently made the argument that so-called high-growth or “exceptional growth” companies are not only extremely rare, but they will also create jobs no matter what economic development or economic gardening programs offer to them. As Chris Gibbons has often stated, “It’s entrepreneurs who create jobs, not economic developers.” And these high-growth entrepreneurs are going to do it with or without us.

Practically speaking, I believe the weight of research evidence and on-the-ground experience with entrepreneurs—especially in small and rural areas—points most communities towards designing entrepreneurship support efforts that focus on smaller growth-oriented existing companies. In the early stages of growth these companies can often benefit from developing a strategic focus to lead them to expand into the next stage. These may very well be companies that don’t yet meet the threshold for stage 2 companies, and may never become “exceptional growth companies.” Nevertheless, they have great potential for expanding and creating high-wage, sustainable jobs in their communities.

I welcome continued dialogue on this topic.

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Lessons from GrowFL, Florida’s Statewide Economic Gardening Project

by Christine Hamilton-Pennell
Growing Local Economies, Inc.

Florida’s popular statewide economic gardening program, GrowFL, has been hit by funding woes. “In a move that surprised local economic development officials, Gov. Rick Scott eliminated $2.5 million in state funding for two programs aimed at promoting business growth,” a $2 million cut to the budget for the University of Central Florida’s GrowFL economic gardening program, and a $500,000 cut to the statewide Small Business Development Centers. Program officials are assessing how the cuts will affect their efforts.

This despite the widely-touted success of the program in helping entrepreneurs create new jobs, and the governor’s campaign commitment to grow private-sector jobs in Florida.

The GrowFL experience illustrates the vagaries that attend to state government funding of economic gardening programs (and relying upon government funding sources at other levels as well). Economic development programs are taking a hit all across the county. Regional approaches to economic gardening (EG) with more diversified funding streams may make more sense, since economies are usually geographically bounded and local folks have more investment in what happens in their communities.

The approach that Don Macke of the Center for Rural Entrepreneurship and I take when consulting with communities about implementing an economic gardening project is that EG is a strategy that operates within a larger entrepreneurial development system. Economic gardening brings a sophisticated set of market research tools and high-level technical assistance to a selected segment of growth entrepreneurs. It’s an important strategy, but one that can’t stand alone. It must be integrated into the formal and informal systems that already exist in a community.

We believe that effective EG programs need to be built from the ground up—that is, from the local community level first. Businesses are located within a specific community, and those on the ground are in the best position to understand where the growth businesses are and how they relate to the larger political, economic, and community infrastructure.

Building support for EG at the local level ultimately means that the community has some investment in the project—they have “skin in the game”—as well as providing a network of advocates who can support the project politically. Community support also provides a greater opportunity to develop program sustainability by capitalizing the project from a number of different sources—both public and private. A diversified portfolio is always better than banking on only one investment.

NetWork Kansas is a great example of how that kind of grassroots infrastructure can support an EG effort. NetWork Kansas, directed by Steve Radley, has operated as an entrepreneurial support system for several years at the state level, but has built its structure around local community networks, including more than 420 network partners across the state. Wally Kearns, retired state SBDC director, and many others, including the staff of the Center for Rural Entrepreneurship, have worked with these rural communities in Kansas for many years. They have sought to bolster local community development and support for entrepreneurship, and to increase their capacity to provide assistance to local businesses.

The NetWork Kansas pilot Economic Gardening Network has been able to tap into the expertise and knowledge of the network partners to identify potential target businesses, and to close the loop back to the businesses after they have received technical assistance and market research from the central team. It will be interesting to see how this project is capitalized once the USDA grant funding runs out.

We think it is appropriate to broker and/or provide high-end EG services through a centralized center—whether at a university or other location—since many communities do not have the capacity to provide these services themselves. Economic gardening services will probably always have to be subsidized by some outside entity to be sustainable. But however an EG project is funded, and at whatever location services are offered, the relationship with the entrepreneur should grow from and be nurtured by the local community. Otherwise, it may be possible to demonstrate that jobs have been created, but not necessarily that the local community has experienced positive economic impact or increases in the wellbeing of its citizens as a result of the intervention.

©2011 Christine Hamilton-Pennell

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Sara Jones: Profile of a Library Innovator

by Christine Hamilton-Pennell
Growing Local Economies, Inc.
May 10, 2011

Sara Jones, Carson City Library Director

Sara Jones, Carson City Library Director

When Sara Jones took over the helm of the Carson City Library, she had a vision for how the library could become the face of the community. Along with her efforts to create the Business Resource Innovation Center (BRIC) and the downtown redevelopment project that includes a new larger library building, she has initiated several other efforts that have increased the visibility of the library.

First of all, Sara shows up. She attends community and political meetings and receptions, and offers to take on tasks that need to be done. She works tirelessly to put together mutually-beneficial partnerships among key business and community players.

Both Sara and Tammy Westergard, the library’s marketing manager, are not afraid to ask for support and funding for the library. Since they both already have connections all over town, these are not “cold calls.” Neither one of them will take “no” for an answer. According to Tammy, “Partnerships and matching funds are the name of the game. You can’t be shy and expect to get what you need.” Tammy says Sara has been particularly successful in obtaining grants and other sources of funding. “If there is money to be had, Sara will not leave it on the table.”

Sara has done grant-writing workshops for library audiences, and was recently asked to do such a workshop for the local arts council. She wasn’t sure at first whether her curriculum would translate into giving grants to individuals, but she said it turned out to be pretty simple: “Write a good proposal and show that you can deliver on it.”

Building upon the ideas of Elizabeth Martinez, director of the Salinas Public Library and former director of ALA, Sara and her staff gave a library card to every school child in Carson City. They offered a “reverse permission slip” by which parents could opt out of their child receiving the card (few did). She and her staff went to every classroom in the city to hand out the library cards. As a result, library use has skyrocketed.

Sara put three years of funding into the grant that funded the BRIC (a state library stimulus broadband grant) for a business librarian to staff the center. This soft money will allow them to demonstrate that the BRIC has been successful in meeting its goals. They keep detailed records of the center’s usage.

The library completed a strategic plan for 2009-2013, and Sara reports that the library has already met 75 percent of its goals. One of the goals involved restoring cut service hours with three fewer staff. One way she freed up the necessary staff time was to get all their materials labeled with RFID tags to reduce the number of times an item is handled.

Sara and Tammy are currently pursuing funding to purchase an automated library “branch.” It is essentially a “library vending machine” with a robotic arm that can deliver a book or media item from a collection of 500 items. The technology is experimental, and they hope to be a test case for the manufacturer.

As all of these examples demonstrate, Sara takes a “how can we do this?” attitude towards every project. As she herself acknowledges, she tends to wear rose-colored glasses and is an unflagging optimist. But with the dire state of Nevada’s economy, she reflects, “all you can do is try to do something about it. That’s all we have control over.”

©2011 Christine Hamilton-Pennell, Growing Local Economies, Inc.

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Carson City Library, Partner in Economic Revitalization

by Christine Hamilton-Pennell
Growing Local Economies, Inc.
May 10, 2011

Sara Jones, Director of the Carson City Library, is an entrepreneur at heart. The former state librarian took her current position because she wanted to have more influence at the local level. She had a vision that the library could be an integral part of Carson City’s community infrastructure and business support systems. The seed for developing a collaborative effort was planted when Jones attended my workshop, “Building Public Partnerships,” sponsored by the Nevada State Library and Archives. Sara also brought City Supervisor Robin Williamson and Carson City Economic Development Director, Joe McCarthy to the workshop. She returned to the library with a mission to serve Carson City’s small business community and thereby contribute to the area’s economic growth. Carson Nugget Casino

The state of Nevada faces enormous economic challenges. Its unemployment rate, at more than 14 percent (some estimate it is as high as 22 percent, if underemployment is included), is the highest in the nation. Its educational system is among the most poorly rated, with one of the highest dropout rates in the nation. The state budget is slated to be slashed by 50 percent. The economy in Carson City has faired slightly better than the state as a whole, but revenues are down, and both the government and the business community are hurting financially from the economic downturn.

The Carson City Library is located near the historic downtown area. It is bursting at the seams in its 21,000 square-foot, 30-year-old facility. Jones recognized that the voters would never approve expansion of the library if its value to the community could not be demonstrated. In what proved to be a smart move she hired Tammy Westergard, who had previously worked for the city’s economic development agency, as the library’s deputy director.

Together, Sara and Tammy are an unbeatable duo. Tammy grew up in Carson City, and cares deeply about the health and wellbeing of her community. She has contacts in every sector of the city; on a recent visit, we toured the area in her cherry-red VW bug convertible and met people everywhere we stopped who knew Tammy. She is a dynamo—politician, deal-maker, and superb networker.

Tammy Westergard in front of BRIC

Tammy Westergard in front of BRIC


Sara and Tammy found an ideal opportunity to position the library as a key player in economic development. After attending the Building Public Partnerships workshop, they wrote and received an LSTA grant to develop a Business Resource Center that would house the Carson City Office of Business Development, Small Business Development Center (SBDC), and a library business resource center in a joint location in the downtown area. The idea proved to be a catalyst for the city—which was also planning to move its licensing and regulatory departments to a new location—to place their offices there as well. They found the perfect solution in an office building vacated by the state. The city decided to obtain the building and renovate it, in order to house its own departments as well as local business support organizations and a business resource center staff by the library. Thus, the Business Resource Innovation Center (BRIC) was born. It was conceived as a multi-function business center that would support local entrepreneurs from the ground up by providing a centralized suite of services. Sara and Tammy already had a history of developing partnerships across the city, so it was a natural next step to collaborate with them to make the BRIC a reality.
Sara Jones by quilt in BRIC

Carson City Library Director Sara Jones in front of BRIC artwork


Upstairs, the BRIC houses the city’s Building Division, Business Licenses and Permit Center, Planning Division, and Engineering Division. On the ground floor there are offices for the Carson City Office of Business Development, the Nevada Small Business Development Center, the Capital City Arts Initiative, and of course, the Business Library. The building itself displays numerous pieces of local art, connecting commerce with culture. According to Mayor Bob Crowell, “it creates a sense of place in downtown that is welcoming, available to everyone, and is quite lovely. I can’t think of a better way to do business.”

Mona Reno, part-time Business Librarian for the BRIC, is the first point of contact for business owners. She directs them to the resources throughout the building that will help them with their needs, including business research. A recent project Mona worked on involved a local business owner who wanted to know which manufacturers in northern Nevada might have use for his company’s products. She used ReferenceUSA to produce a list of potential clients in the state and create a spreadsheet for him.

Susan Antipa and Mona Reno at BRIC

Adult Services Librarian Susan Antipa and BRIC Business Librarian Mona Reno


Adult Services Librarian Susan Antipa divides her time between the regular library and the BRIC. She was both excited and apprehensive to take on this new role at the BRIC. “I’m learning a lot,” she says. “It’s a whole new world for me. I never thought much about business. It can be intimidating, but if someone asks for something, I want to be able to help them.” Having other business service providers in the building has given her experts to consult with when she gets stuck.

Since August 2010, the BRIC has served more than 3,000 clients, the majority of whom use the center to attend workshops and access the center’s computers, which offer several business resources such as ReferenceUSA and Business Decision. The response from local business owners has been enthusiastic. One client wrote out a check for $500 to the BRIC because he said he “had never received this kind of help before.”

Sara and Tammy have not stopped with the creation of the BRIC. They have also taken a leadership role in moving forward a downtown economic development project. The City Center Project is a public-private partnership that aims to “achieve long-term sustainable and focused economic growth by building a diverse, innovative downtown economy that attracts high-wage, high-impact jobs that provide opportunity and prosperity for the City’s residents, businesses and entrepreneurs throughout the entire community.” The “catalytic civic investment” for the project is a new state-of-the-art 60,000 square-foot library, known as the Carson City Knowledge and Discovery Center.

Through the BRIC and the City Center Project, the Carson City Library has become embedded in the City’s economic, political, and community structure. It is a vital force for economic and community revitalization in turbulent times, and serves as a shining example of how public libraries can stimulate the local economy through innovative leadership and public-private partnerships.

View the Community First video on YouTube that was directed and produced by Tammy Westergard with help from a local high school student. It highlights the role of the proposed new Carson City Knowledge and Discovery Center in creating economic and lifelong learning opportunities for Carson City citizens and businesses.

Read the entire case study in our e-book, Creating an Entrepreneur-Friendly Public Library, for sale on our website at http://www.growinglocaleconomies.com/efriendly.

©2011 Christine Hamilton-Pennell, Growing Local Economies, Inc.

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Out of Poverty: Design Thinking for Survival Entrepreneurs

By Christine Hamilton-Pennell
Growing Local Economies, Inc.
February 24, 2011

Dr. Paul Polak, psychiatrist, entrepreneur, innovator, and founder of International Development Enterprises (IDE), has a crazy notion. He believes that poor people are poor because they need to make more money. This simple but revolutionary concept has spurred his work among the world’s poorest people for 30 years. Polak asserts that traditional development approaches to ending poverty have been misguided, expensive, and mostly haven’t worked. There are around 800 million people who live on a dollar a day, mostly rural farmers with less than an acre of land. These subsistence-level farmers typically grow staple crops during the monsoon season, sometimes supplementing them with vegetables such as tomatoes and cucumbers. Most of the food is consumed by their families, and if they are lucky, they have enough to cover their basic needs and a little left over to sell in the marketplace. In bad years, they may go hungry for part of the year.

After talking to thousands of such farmers in Nepal, Bangladesh, India, Vietnam, and other developing countries, Polak determined that if they could irrigate their plots during the dry season, they could grow and sell high-value, labor-intensive products, such as off-season fruits and vegetables, to customers who can afford them. The challenge, then, was to figure out how to develop and market low-cost drip-irrigation systems that would be affordable and accessible to dollar-a-day farmers and allow them to increase the revenue from their land.

So, in the spirit of Thomas Edison, Polak and his team at IDE set out to develop just such a technology. IDE used the principles of “design thinking,” long before it was a fashionable concept, to solve this problem. Tim Brown, CEO and President of IDEO, an innovation and design firm headquartered in Palo Alto, defines design thinking in a recent Harvard Business Review article as “a discipline that uses the designer’s sensibility and methods to match people’s needs with what is technologically feasible and what a viable business strategy can convert into customer value and market opportunity.”

After much trial and error, IDE designed and developed a human-powered treadle pump that cost $25.00 and could irrigate a half acre of land.

Polak knew that this was not enough. Subsistence farmers also needed new markets capable of bringing them the inputs they needed to grow their crops, such as seeds and fertilizer, as well as new value chains capable of bringing their goods to market at reasonable prices. Polak and his colleagues took eight practical steps to make this happen. IDE:

1. Did not accept subsidies from government or development agencies for their products, choosing instead to sell them at fair market value to the farmers. Their experience showed that subsidizing the costs of products and services undercut the local market mechanisms.
2. Lowered the cost of their products by simplifying the design and finding less expensive materials, and by providing different quality standards at different price points for consumers.
3. Recruited small-scale manufacturers to build the pumps.
4. Recruited village dealers to sell the pumps.
5. Trained well-drillers to install the pumps.
6. Opened access to microcredit.
7. Implemented marketing and promotion initiatives.
8. Established strategically placed demonstration plots.

IDE energized 75 small-volume workshop entrepreneurs who each invested $500 to $2,000 (US) to get into the treadle-pump business. In addition, more than 2,000 village dealers and 3,000 well-drillers now earn their living by making, selling, and installing treadle pumps at an unsubsidized fair market price of $25.00.

The results? More than one-and-a-half million treadle pumps have been sold to subsistence farmers through these private sector supply chains, irrigating more than 750,000 acres at a fraction of the cost of conventional systems. More than 17 million people have been able to move out of poverty because of the additional income their land has been able to generate. IDE has gone on to develop many other devices and systems that allow subsistence farmers to efficiently store and deliver water to their fields and homes.

Polak hasn’t stopped there. He sees market opportunities among the millions of dollar-a-day slum dwellers as well. Instead of viewing slums as hellholes of misery and deprivation, he sees them as “a beehive of grassroots enterprises” where people who eke out a living making and selling simple products could leverage their low-cost labor and learn to produce higher-value goods to sell outside their local areas.

Polak doesn’t minimize the need for international aid to support education, healthcare, and infrastructure in poor communities. He has repeatedly found, however, that when farmers and slum dwellers begin to move out of poverty, they do make investments in education and healthcare for their families.

If design thinking and simple market mechanisms such as these can have such a profound impact on the world’s survival entrepreneurs, what lessons can be learned for our situation here in the U.S.? Research shows that the number of “necessity entrepreneurs” in this country—those who have launched a new business out of necessity after losing a job or not being able find employment—has risen dramatically in the past several years. How can we find simple and affordable solutions to support the business, technical, financial, and market needs of these start-up entrepreneurs, many of whom live in low-income communities with minimal business support systems, and help them move to the next stage of becoming “opportunity entrepreneurs?”

I welcome your thoughts.

©2011 Christine Hamilton-Pennell, Growing Local Economies, Inc.

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The Goals of Economic Development: To Create Hope, Wealth, and Choices

By Christine Hamilton-Pennell
Growing Local Economies, Inc.

In 1989, Phil Burgess, President of Denver’s Center for the New West (now defunct), gave a presentation called “Expanding Choices in America’s New Economy.” In his talk, Burgess, who is credited with first coining the phrase “economic gardening,” argued that “new hope, increasing wealth and expanding choices are the universal goals of economic development.”

These goals “invoke themes with deep roots in American culture: faith in the future, the desire for freedom, and the demand for choice. They resonate with most people….Perhaps most importantly, though, they are good standards by which to measure progress at any level—the family, the firm, the community, the region or the nation.”

More than 20 years later, these goals are more relevant than ever. Thriving communities—whether small or large, rural or urban—have citizens who believe they have options for their future, that they can make their lives (and those of their children) better in some way. People have hope instead of fear. They believe that they can find – or create – jobs for themselves. They are confident that their fellow community members and political leaders will support their business enterprises and address their social needs. They support local entrepreneurs, who in turn create or expand their businesses and give back to the community in many tangible ways.

The community itself provides adequate educational opportunities, financial resources, a trained workforce, a safety net for those in need, and support for quality of life amenities such as libraries, arts, recreational opportunities, and green spaces that make it a desirable place to live and work.

In short, a thriving community exhibits a spirit of optimism instead of despair, and offers options and choices to its citizens. Its citizens are motivated to take action, both on behalf of their own aspirations and hopes, and those of their neighbors.

I believe all of us want to live in such a community.

Burgess makes the case that economic expansion and area development follow a specific pathway. They are driven by civic leadership, which encompasses the political realm, the business sector, education and labor leaders, and community organizations. These leaders envision and negotiate the elements of area and regional development—factors such as development of human capital and financial resources, physical and quality of life infrastructure, and government regulatory support. These resources contribute to expansion factors such as a skilled workforce, new and improved technology, and improved capital availability and utilization, which in turn lead to the development of new and expanding markets and innovation within the private sector. New and expanding enterprises produce more jobs, higher income, and increased productivity. The end result for the community is new hope, increasing wealth, and expanding choices.

Each community will find a different path to achieve the goals of new hope, increasing wealth, and expanding choices. But three things are clear: each community must assess and build upon its existing assets, address the gaps in its resources, and develop a support system at the local level that creates a positive instead of a negative cycle for all its citizens. It is the task of the community’s leaders to initiate and drive this virtuous cycle, and the task of every citizen to contribute to the betterment of the community.

Community development and economic development cannot be separated. They are part of the same ecosystem, one which ultimately produces both hope and expanding choices for all its members.

Sources:

Philip M. Burgess, “Expanding Choices in America’s New Economy,” Points West, Winter 1990. (Posted by Dan Ripke on Scribd, http://www.scribd.com/doc/38481612/Expanding-Choices-in-America-s-New-Economy)

Christine Hamilton-Pennell, “Ten Tips for Implementing an Economic Gardening Project,” free white paper, www.growinglocaleconomies.com.

©Christine Hamilton-Pennell 2010, Growing Local Economies, Inc.

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The Role of Startups in Job Creation and Destruction

By Christine Hamilton-Pennell
Growing Local Economies, Inc.

Lately, there has been a spate of new research reports from the Kauffman Foundation, Small Business Administration, and other sources focusing on the crucial role start-up companies play in job creation and destruction.

A recent Kauffman study by Tim Kane, for example, uses Business Dynamics Statistics, a new dataset from the U.S. government, to show that “startups aren’t everything when it comes to job growth. They’re the only thing.”

The data examined indicate that “startup firms are responsible for all net job creation du ring most years, while existing firms (aged one year and older) are usually net job losers.” New firms add an average of 3 million jobs in their first year, while older companies (of all ages) lose 1 million jobs annually.

Startups are defined as companies within their first year of operation, while existing companies refer to those that have been in operation for at least one year. By definition, startups can create jobs but can’t lose them.

Kane’s study focuses on firms rather than establishments, which is an important distinction when drawing conclusions from different datasets. A firm may have multiple establishments in different locations, while an establishment refers to a business in a single physical location.

A further clarification is that the definition of “existing” firms includes both firms that go out of business (deaths) and continuing firms. Kane’s study focuses on survivors. He points out that if business deaths are removed from the equation, survivors, as a group, usually create more net jobs than startups. Fast growing firms (gazelles) are particularly important in this regard.

Another recent Kauffman report, Where Will the Jobs Come From?, further refines these conclusions. Authors Litan and Stangler analyze Census data, which reveals that two-thirds of new job growth comes from firms that are between one and five years old. Job creation comes from three sources: startups; young firms, ages one to five; and the largest and oldest companies. They state that “new and young companies and the entrepreneurs that create them are the engines of job creation and eventual economic recovery.”

The authors conclude that “the distinction of firm age, not necessarily size, as the driver of job creation has many implications, particularly for policymakers who are focusing on small business as the answer to a dire employment situation.”

The rate of job creation and destruction is influenced by the “churn” of business starts and deaths in a given year. According to data provided by the Small Business Administration, 552,600 new firms started in 2009, while 660,900 firms closed. During the recession, more total firms have closed than opened.

On the other hand, the Kauffman Index of Entrepreneurial Activity indicates that start-up rates among the self-employed are at their highest level in 14 years. An SBA study shows that the start-up rates for nonemployer firms (the self-employed) are countercyclical to the current recession. Self-employment is more often an occupational decision and is correlated with state unemployment rates. The decision to create an employer firm, on the other hand, is more often based on economic opportunity, and is correlated to state real GDP.

How does the job creation provided by start-ups endure over time? Another Kauffman Foundation study by Michael Horrell and Robert Litan analyzes the BDS data for cohorts of firms from 1977-2000. They conclude the following:

• Startups retain, on average, 80 percent of their initial total employment to age five.
• Startups initially hire fewer people during a recession, but catch back up to the same levels of employment at age five.
• Prolonged recessions appear to lower employment among startups.

The research presented above points to the role startups and young companies can play in creating new employment. This does not tell the whole story, of course. For one thing, there is no agreed-upon definition of startups. There is also a difference among data sources as to whether nonemployer firms (i.e., sole proprietors) are included in the datasets. In addition, these studies do not address the quality and sustainability of the jobs created by startups. More research is certainly needed on the dynamics of job growth over time among employer firms. In the meantime, entrepreneurship support organizations and policymakers need to consider the role that startups can play in developing their ongoing strategies for economic recovery and growth.

(In another blog article I have synthesized available research to identify what appears to be the ideal target audience for an economic gardening program, Reflections on the Ideal Economic Gardening Audience.)

Sources:

Kane, Tim. “The Importance of Startups in Job Creation and Job Destruction,” Ewing Marion Kauffman Foundation, July 2010, http://www.kauffman.org/research-and-policy/the-importance-of-startups-in-job-creation-and-job-desctruction.aspx.

Stangler, Dale and Robert E. Litan, “Where Will the Jobs Come From?” Ewing Marion Kauffman Foundation, November 2009, http://www.kauffman.org/research-and-policy/where-will-the-jobs-come-from.aspx.

Small Business Administration. Office of Advocacy. Frequently Asked Questions, 2010, http://web.sba.gov/faqs/faqIndexAll.cfm?areaid=24.

Kauffman Index of Entrepreneurial Activity: 1996-2000.  Ewing Marion Kauffman Foundation, 2010, http://www.kauffman.org/research-and-policy/kauffman-index-of-entrepreneurial-activity.aspx.

Acs, Zoltan, Brian Headd, and Hezekiah Agwara, “The Nonemployer Start-up Puzzle.” SBA Small Business Research Summary, 2009, http://www.sba.gov/advo/research/wkpapers.html.

Horrell, Michael  and Robert Litan, “After Inception: How Enduring is Job Creation by Startups?” Ewing Marion Kauffman Foundation, July 2010, http://www.kauffman.org/research-and-policy/after-inception-how-enduring-is-job-creation-by-startups.aspx.

©Christine Hamilton-Pennell 2010, Growing Local Economies, Inc.

 

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