Economic Impact of Entrepreneurship

I am often asked for sources of data about the economic impact of entrepreneurship. This is a difficult question, at least in part because there is little agreement about what the term “entrepreneurship” actually means. The definition of entrepreneur that makes the most sense to me is “someone who perceives an opportunity and creates and grows an enterprise to pursue it.” This includes social entrepreneurs as well as those who create a for-profit entity.

Here’s a summary of what some of the research says about the economic impact of entrepreneurship:

• A California study of interstate business relocation (either into or out of the state) showed that over the ten-year period from 1993 to 2002 relocation had a negligible impact on job growth. Rather, employment changes in California were primarily driven by the processes of establishment expansion, contraction, birth, and death, rather than by relocation. (Neumark, Zhang and Kolko, 2006).

• A review of 57 recent research studies on the economic value of entrepreneurship, (van Praag and Versloot 2007) concludes that entrepreneurship has an important function in the economy. The authors define entrepreneurial firms as those that employ fewer than 100 employees, have existed for less than seven years, and are new entrants into the market. These firms engender substantial job creation as well as productivity growth and the development and commercialization of innovation. More importantly, however, “entrepreneurial firms produce important spillovers that affect regional employment growth rates of all companies in the region in the long run.”

• David Birch’s review of available data (1981) revealed that between 1969 and 1976, two-thirds of net new jobs were created by firms with 20 or fewer employees. Later studies (Birch and Medoff, 1994; Birch, Medoff and Haggerty, 1995), concluded that just 4 percent of ongoing firms—high growth firm, the so-called gazelles—account for 70 to 100 percent of all new jobs in the United States.

• In a recent survey of almost 20 research studies Henrekson (2008) validates the importance of gazelles in creating jobs. He finds that gazelles—which are not necessarily small or young firms—create all or a large share of net new jobs. Acs, Parsons, and Tracy (2008) add to this body of knowledge in their study of “high-impact firms,” which they describe as “enterprises whose sales have at least doubled over a four-year period and which have an employment growth quantifier of two or more over the period.” On average, high-impact firms are 25 years old, they represent between two and three percent of all firms, and they account for almost all of the private sector employment and revenue growth in the economy. They are found in all industries and almost all regions. Most have fewer than 20 employees.

• Economic Gardening, “an innovative entrepreneur-centered economic growth strategy that offers balance to the traditional economic development practice of business recruitment” (Quello, 2006), was first pioneered in Littleton, Colorado in 1989. Littleton’s economic gardening project has operated for two decades and has demonstrated some impressive outcomes. During the period between 1990 and 2006, Littleton’s employment growth more than doubled, from 14,907 to 30,151 jobs, while its population grew by a little over 24 percent. In comparison, the Denver metro region produced an increase of 45 percent in new job growth, and its population grew by about the same percent. Sales tax revenues in Littleton tripled during the same period of time, from $6.8 million in 1990 to $19.6 million in 2006 (Hamilton-Pennell, 2007). Several new retail and business developments came online during that 20-year period, so there are likely many reasons for the job growth. One important fact, however, is that Littleton did not spend any public funds on recruiting or providing incentives to businesses to come into the city.

References
Acs, Z. J., Parsons, W., & Tracy, S. (2008). High-impact firms: gazelles revisited. Washington, D.C.: Small Business Administration.

Birch, D. L. (1981). Who Creates Jobs? The Public Interest, 65(Fall), 3-14.

Birch, D. L., Haggerty, A., Parsons, W., & Cognetics, I. (1995). Who’s creating jobs? [Cambridge, Mass.]: Cognetics, Inc.

Birch, D. L., & Medoff, J. (1994). Gazelles. In Lewis C. Solmon and Alec R. Levenson, eds. Labor markets, employment policy and job creation (pp. 159-168). Boulder, Colo.: Westview Press.

Hamilton-Pennell, C. (2007, July). The City of Littleton’s economic gardening program: an entrepreneurial approach to economic development

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. Helena, Montana, Pacific Northwest Economic Development Council.

Henrekson, M., & Johansson, D. (2009). Gazelles as job creators: a survey and interpretation of the evidence. Stockholm: Research Institute of Industrial Economics, http://www.ifn.se/web/733_1.aspx.

Neumark, D., Zhang, J., and Kolko, J. D. (2006). Interstate business relocation: an industry-level analysis. San Francisco, Calif.: Public Policy Institute of California, http://www.ppic.org/main/publication.asp?i=710.

van Praag, C. M., & Versloot, P. H. (2007). What is the value of entrepreneurship? A review of recent research. Bonn, Germany: Institute for the Study of Labor, http://ftp.iza.org/dp3014.pdf.

Quello, S., & Toft, G. (n.d.). Economic gardening: next generation application for a balanced portfolio approach to economic growth. In The Small business economy for data year 2005: a report to the president (pp. 157-193). Washington, D.C.: Small Business Administration, http://www.sba.gov/advo/research/sbe.html.

(c) 2009 Christine Hamilton-Pennell

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2 Comments »

  1. I was doing an assignment on this topic and i can’t thank you enough for making it easier. GOOD WORK and THANKS A LOT.

  2. You actually make it seem so easy with your presentation but I find this
    topic to be actually something that I think I would never understand.

    It seems too complex and extremely broad for me.
    I am looking forward for your next post, I’ll try to get the hang of it!

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