Archive for Research Studies

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

August 15, 2011 at 6:03 pm · Filed under Economic Development, Economic Gardening, Entrepreneurship, Research Studies ·Tagged , ,

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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The Role of Startups in Job Creation and Destruction

October 21, 2010 at 9:30 pm · Filed under Economic Gardening, Research Studies ·Tagged ,

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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Reflections on the Ideal Economic Gardening Audience

April 23, 2010 at 11:50 pm · Filed under Best Practices, Economic Gardening, Research Studies ·Tagged ,

By Christine Hamilton-Pennell
Growing Local Economies, Inc.
Updated December 21, 2010

I’ve been thinking a lot lately about the best target audience for an economic gardening program, particularly in smaller or more rural regions. Over the past several years, I have worked with hundreds of small businesses, helped communities around the country implement their economic gardening projects, reviewed numerous research reports on entrepreneurs, collaborated with Don Macke of the Center for Rural Entrepreneurship, and learned from Chris Gibbons at the City of Littleton. I have concluded that EG programs have three main criteria they can use to determine their target audience: company size (e.g., number of employees and/or revenues), company age, and company growth factors—or a combination of these criteria.

After reviewing all the evidence, I believe I have identified the “sweet spot”—the ideal target audience for most EG programs. First, let’s look at some facts about each of the three criteria.

Company Size

YourEconomy.org, a website created by the Edward Lowe Foundation, reports data on the composition and growth of the business universe in the United States over time. I checked my analysis of these figures and my conclusions with the staff at YourEconomy.

In this database, resident companies are broken out by stage:

Self-employed (one employee)
Stage 1 (2-9 employees)
Stage 2 (10-99 employees)
Stage 3 (100-499 employees)
Stage 4 (500+ employees)

The data reveal some interesting facts that are pertinent to choosing a target audience for an economic gardening program.

First of all, during the period from 2000-2008 (the period for which figures are reported in YourEconomy.org), Stage 3 and Stage 4 companies across the U.S. as a whole experienced net losses, both in the number of resident establishments and net new jobs. I don’t know anyone who disputes the fact that even during the best of times, the job creation rate across the majority of Stage 3 and 4 firms has been around zero for many years, and losses have only accelerated during this current recession. One exception reported in the literature (Stangler and Litan) indicates that the oldest and largest firms (10,000+ employees), still produce positive employment growth.

Current wisdom in the economic gardening world is that most of the high-growth companies are found in the Stage 2 group. This may very well be true, but this does not mean that targeting this group as a whole is more productive. The data in YourEconomy.org from 2000 to 2008 do not seem to support this conclusion. During that period of time Stage 2 companies across the U.S. averaged 10.6 percent of all resident establishments and contributed 2.0 percent of net new jobs. During the period from 2006 to 2008, the percentage of Stage 2 establishments fell to 7.7 percent of resident establishments, and they contributed to a loss of -1.9 percent of net new jobs.

By contrast, from 2006 to 2008, the self-employed (nonemployers) and Stage 1 companies taken together represented almost 91 percent of all resident establishments and created virtually 100 percent of net new jobs.

A significant factor to take into account is the “churn” characteristic of nonemployer and Stage 1 companies. A large number of these firms start or expand each year, creating a substantial number of the net new jobs, but a large number also shrink or close, eliminating a percentage of the jobs. In fact, fewer than 50 percent of new firms still exist after five years. Nevertheless, the net effect on job creation is overwhelmingly positive.

Many EG programs have discovered that providing extensive services to early Stage 1 companies and nonemployers (“aspiring” entrepreneurs or those in the planning stages) is not very productive in terms of job growth. The exception is when the planned business start-up has high potential to become a growth company.

Taking all of these factors into consideration, it appears that using company size alone as a criterion for selecting a target EG audience does not guarantee the greatest economic growth for a community.

Company Age

In the recent Kauffman report, Where Will the Jobs Come From?, authors Litan and Stangler analyze Census data, which reveals that two-thirds of new job growth comes from companies 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. Taking into account the “churn” mentioned in the section above among the youngest companies, i.e., job creation and destruction, as well as the dynamic interaction between the youngest and oldest firms, they reach the following conclusion:

“…new and young companies and the entrepreneurs that create them are the engines of job creation and eventual economic recovery. 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.”(http://www.kauffman.org/research-and-policy/where-will-the-jobs-come-from.aspx)

Another study by NBER, Who Creates Jobs? Small vs. Large vs. Young, supports this conclusion. The authors’ main finding is that “once we control for firm age there is no systematic relationship between firm size and growth. Our findings highlight the important role of business startups and young businesses in U.S. job creation. Business startups contribute substantially to both gross and net job creation. In addition, we find an ‘up or out’ dynamic of young firms. These findings imply that it is critical to control for and understand the role of firm age in explaining U.S. job creation.”

Company Growth

The most important criteria to consider when selecting an ideal EG target audience is the growth companies in the mix. From the time of David Birch’s seminal research studies in the 1980s—in which he first coined the term “gazelles”—to the present, research has conclusively shown that a small number of high-growth companies create the majority of new job growth. These companies are buried within the universe of existing companies and are the ones that break away from the pack and create an extraordinary number of jobs, as indicated in a recent report from the Kauffman Foundation.

High-Growth Firms and the Future of the American Economy shows that the top-performing one percent of firms generates roughly 40 percent of new jobs. The “average” company in the U.S. economy creates roughly two or three jobs per years, whereas the “average” company in this top-performing one percent contributes 88 jobs per year. And fast-growing young firms, while they represent less than one percent of all companies, create roughly 10 percent of all new jobs in any given year, or 27 jobs per company.

High-growth companies are found in all sectors (including retail and services) and nearly every geographic region. They are relatively young (three to five years old), and in their early stages are subject to a significant amount of “churn.” The fastest growing young firms (five percent) generally have 20 to 249 employees, although a significant number are larger. Once these companies have stabilized, their failure rate is very small (about three percent).

Since high-growth companies clearly have the greatest economic impact on the economy in terms of job creation, isn’t this the logical audience for an EG program to target?

The “Sweet Spot”

There are a number of reasons why local economic gardening programs might find it difficult to target these high-growth companies. Being relatively rare and often flying below the radar, these companies are hard to find, and may not even exist in every community. In addition, their needs are very specialized, and local communities often do not have the technical resources to help them. A recent study in Connecticut found that “while firms with low margins may worry chiefly about the high costs of taxes and healthcare, for fast-growing companies the primary issues have to do with networks—both social and physical.” They are looking for both strong professional networks and state government support for their needs.

Creating the best conditions for their growth generally entails policy decisions at higher levels of government than can often be affected at the local or regional level. Finally, the entrepreneurs who establish these companies are driven to create them whether we help them or not.

On the other hand, the high-growth companies had to start somewhere, and much of their initial growth spurt happens when they are late Stage 1 or early Stage 2 companies. The key is to identify these potential high-growth companies early in their life and help them avoid the pitfalls that may lead to early failure as they begin to grow.

These companies will not all become high-growth companies, but if they experience continuous—or sporadic—growth at all, they will likely contribute new jobs to the economy.

So what does this mean for a local or regional economic gardening program in terms of targeting a particular audience (or audiences) for its services? Taking all of this data into account, I have come to the following conclusion:

I would argue that 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.

Finding these entrepreneurs is the tricky part. They may start out as a home-based business, or look like a secondary business such as a local retail or service business that is exploring an outside market through the Internet or franchising. We will explore the problems with finding growth-oriented entrepreneurs in a future blog entry.

According to Don Macke of the Center for Rural Entrepreneurship, an EG program should ask three questions of potential candidate for its program:

1. Do they have a niche where they are competitive?
2. Are they committed to growth?
3. Are they actively exploring creating an external market footprint?

By getting help at this crucial phase, Stage 1 and early Stage 2 growth-oriented entrepreneurs will be more likely to make good decisions that will allow them to remain viable and sustain their growth to reach the next level, however we define it.

I welcome your discussion and responses.

Sources:

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

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Churches and Economic Development

March 13, 2009 at 12:12 am · Filed under Economic Gardening, Research Studies ·Tagged ,

by Christine Hamilton-Pennell
Growing Local Economies, Inc.

Most people don’t think of churches and other houses of worship as drivers of economic development. After all, the separation of church and state in the U.S. means that not-for-profit religious institutions do not pay property and other taxes. A community that depends on property taxes to drive government revenues will lose money on the property owned by a church or other house of worship (temple, synagogue, mosque, or shrine).

But looked at from another perspective, churches and other houses of worship contribute to the local economy in a variety of ways. Most churches employ at least one person, and many have upwards of 20 employees, especially if they operate a childcare facility or school. Since they generally operate a facility, churches are consumers of energy to heat and cool the often large, open spaces. They also use insurance, maintenance, landscaping, and construction services (albeit sometimes as volunteer labor), and they consume office supplies, furniture, curriculum materials, and specialty church items.

Participants in religious organizations represent a significant market for religious goods and services. According to the 2009 annual edition of the Yearbook of American & Canadian Churches (edited by the National Council of Churches and published by Abingdon), membership of the top 25 churches in the U.S. totals more than 146.6 million. A 2004 Gallup Poll reports that six in ten Americans consider religion to be a “very important” part of their lives and another 26 percent responded that religion was fairly important. More than eight in ten were affiliated with a Christian religion, and half of the respondents said they were Protestants. The largest single religious denomination was Catholic, accounting for about 25 percent of Americans. Some 2 percent were Mormons and another 2 percent were Jewish.

In 2006, a Packaged Facts report on religious markets predicted that the overall religious market for publishing, inspirational merchandise, and audio/video/software product would grow to $9.5 billion by 2010.

On a more personal level, many entrepreneurs report that the religious community has been an important source of moral support for them as they start and grow their businesses. The connections made in a worship community can lead to financial opportunities as well.

Beyond their role as consumers of goods and services, however, churches and their members can also be a force for economic development in their local communities.

The Black church in the U.S. has been aware of its important role in economic development since the time of slavery. In 1977, Gil B. Lloyd wrote an article, “The Black Church and Economic Development,” in which he demonstrated that, historically, the Black church has played an important role in the social and economic life of the Black community. He argued that the Black church, often in partnership with the federal government, has provided both moral and economic impetus for the economic redevelopment of urban areas.

Fast forward to 1993, when Black Enterprise featured a cover story entitled, “The New Agenda of the Black Church: Economic Development for Black America.” In it, author Lloyd Gite profiles the work done by Black churches in several urban areas, including Detroit’s Hartford Memorial Baptist Church, which invested heavily in local economic development projects, from building shopping centers to senior citizen housing in order to create jobs and businesses.

Rev. Charles Adams, Hartford Memorial’s pastor, offered his perspective. “The church needs to concentrate on the business of creating economic institutions,” declared Adams. “The issue is jobs. People being laid off through all this corporate downsizing is affecting every black community in this country. The church finds itself in a situation where it is the best continuing, organized entity in the black community for the acquisition and redevelopment of land, the building of business enterprises and the employment of people.”

“The black church recognizes it has to be in the forefront of economic development,” says C. Eric Lincoln, author of The Black Church in the African-American Experience. “It has become evident that black people are simply going to have to stand on their own feet and the black church, with all of its economic power, can help facilitate that by creating businesses.”

The same issue of Black Enterprise also includes an article on how to set up an economic development plan for a church.

A 2006 article in The State, “Church Plans Tangible Change to a Community,” was picked up by The Black Informant, http://www.blackinformant.com/, and reiterates this theme. The article states, “In many cities and towns, the net result of diminishing government and private investment, deteriorating infrastructure, business closures and joblessness is the perpetuation of an underclass disenfranchised from mainstream society. While many of these areas are distressed and full of despair, the good news is that African-American churches are bringing the gospel of economic development to these communities and renewing hope for a better way of life. The article profiles the economic development work done by Columbia, South Carolina’s Bible Way Church of Atlas Road.

“Bible Way Church of Atlas Road, through its Midlands Community Development Corp., is helping lead the way. The church recently announced a 106-acre mixed-use project that will include affordable homes, a new worship center, a performing arts building, a recreational facility, a hotel and a commercial and medical complex. These developments could transform the Lower Richland community and have rippling effects across the Midlands.

“When such developments take place in low-income areas, they increase property values, attract new residents and become magnets for diverse businesses and better-paying jobs. Church-based business enterprises help rebuild a community’s social infrastructure and provide such much-needed values-based services as child care, youth development, elder care and substance abuse counseling. These activities tend to lead to improved schools, better public safety and an enhanced quality-of-life. From this type of community economic development, everyone—those living in the area and those in surrounding communities—benefits.”

Of interest is an upcoming book by Marci Bounds Littlefield, Assistant Professor of Sociology at IUPUI, who works in the areas of race and ethnicity, urban development, and family in relation to religious institutions. She writes on the black church and economic development in the United States and is presently at work on a book titled Religious Institutions and New Ventures: Evidence from the African American Experience, http://www.iupui.edu/~raac/fellows.html.

Finally, a recent research study by Jonathan Gruber of the MIT Department of Economics looks at the implications of religiosity for economic outcomes. He determines that a major determinant of religious participation is religious market density, or the share of the population in an area which is of an individual’s religion. His findings are that a higher market density leads to a significantly increased level of religious participation, and as well to better outcomes according to several key economic indicators: higher levels of education and income, lower levels of welfare receipt and disability, higher levels of marriage, and lower levels of divorce.

Churches and other houses of worship are part of the network of assets in a local community. Regardless of the fact that their fortunes are tied to the rise and fall of the economy, they are a significant force for economic development in at least three areas—as investors, consumers, and support groups for entrepreneurs.

Sources:

“Church Plans Tangible Change to a Community, November 24, 2006, The State, reported in The Black Informant, http://www.blackinformant.com/uncategorized/church-plans-tangible-change-to-a-community.

“Consumer View: Religious Market: Provided Retail Remains Healthy, the Religious Market Will Continue to Grow.” License Global!, September 1, 2006, http://www.licensemag.com/licensemag.

Gite, Lloyd. “The New Agenda of the Black Church: Economic Development for Black America,” Black Enterprise, Dec, 1993. http://findarticles.com/p/articles/mi_m1365/is_n5_v24/ai_14680366.

Gruber, Jonathan. Religious Market Structure, Religious Participation, and Outcomes: Is Religion Good for You? National Bureau of Economic Research Working Paper Series, No. 11377, May 2005. http://www.nber.org/papers/w11377

Lindner, Eileen W., National Council of the Churches of Christ in the United States of America, eds. Yearbook of American & Canadian Churches. Nashville: Abingdon. 2009.

Lloyd, Gil B. The Black Church and Economic Development,” Western Journal of Black Studies, v1 n4 p270-75 Dec 1977.

“Religious Organizations.” Encyclopedia of American Industries. Gale, 2008. Reproduced in Business and Company Resource Center. Farmington Hills, Mich: Gale Group. 2009.

(c)2009 Christine Hamilton-Pennell, Growing Local Economies, Inc.

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Economic Impact of Entrepreneurship

March 5, 2009 at 5:24 pm · Filed under Economic Gardening, Research Studies ·Tagged , ,

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.

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(c) 2009 Christine Hamilton-Pennell

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