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Does Education Drive New Firm Survival?

When it comes to new firm survival in the service sector, do regions that have above-average high school dropout rates fare worse than regions with higher percentages of their adult populations earning college degrees? The answer, according to a recent discussion paper by Zoltan Acs, Catherine Armington, and Ting Zhang, is it depends.

In The Determinants of New-firm Survival across Regional Economies, the authors find, that regardless of whether the economy is in recession or growth, the higher a region’s high school dropout rates, the lower its new-firm survival rate in the service sector. [Note: High school dropouts are such a drain on state and regional economies, in fact, that many states are raising the legal age from 16 to 18 before a student can excuse himself from school permanently. For example, several governors used their State of the State Addresses this year to call for the change.]

But what about all of those college grads? The answer depends on the health of the overall economy, the authors say. During times of economic growth, the higher a region’s percentage of college graduates, the higher its new-firm survival rate. But during recessions, the opposite was true: the college graduate rate had a negative, although weak, impact on the new-firm survival rate.

In addition to exploring the relationship between human capital and new-firm survival at the regional level, the authors explore the impact of spillover effects from new firms, as they control for measures including population growth, income growth, unemployment rates, and establishment sizes within their model. The spillover effects were defined as the ratio of establishments per square mile to the population per square mile for various sectors within each Labor Market Areas, geographically defined by labor commuting patterns.

Regarding spillover, in both times of economic growth and recession, the ratio of service firms in a region had a negative effect on the new-firm survival rate but the ratio of all firms across diverse sectors had a positive effect on new-firm survival. According to the authors, additional research needs to be performed to show the effects of knowledge spillovers within industry specializations compared to those of a diverse economy.

The Determinants of New-firm Survival across Regional Economies, can be downloaded at: ftp://papers.mpiew-jena.mpg.de/egp/discussionpapers/2007-04.pdf

Copyright State Science & Technology Institute 2007. Redistribution to all others interested in tech-based economic development is strongly encouraged. Please cite the State Science & Technology Institute whenever portions are reproduced or redirected.

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