Archive for August, 2011

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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