Entrepreneurial Activity and Regional Economic Growth Linked

A higher rate of entrepreneurial activity is strongly connected with faster growth of a local economy, the U.S. Census Bureau reports in Endogenous Growth and Entrepreneurial Activity in Cities.

The recent working paper, prepared by the Bureau’s Center for Economic Studies, examines the connection between knowledge spillover and economic growth in a regional economy. The study concludes that variation in the level of entrepreneurial activity, a diverse mix of industries, and the amount of human capital are positively correlated to growth rates.

Three major findings are presented:

* Firm birth rate is an important factor in regional employment growth — growth is higher in locales with greater competition and fewer obstacles to enter the market.

* Industrial specialization does not typically lead to higher quantities of externalities or spillovers that support growth in that particular sector. Specifically the study states that "industrial specialization has a negative effect on local employment growth, after controlling for birth rates, agglomeration effects, and differences in educational attainment." The authors point out these results are consistent with theories that emphasize the role of firm creation in encouraging competition. This finding may be of particular interest to those pursuing cluster strategies. And,

* A large workforce of high school graduates may contribute more to growth than the existence of a high number of college graduates.

The analysis also suggests that new firms play a vital role in exploiting knowledge spillovers within a region, and that entrepreneurship may be the critical link through which these externalities aid economic growth. Further analysis should concentrate on entrepreneurship to better understand the role of knowledge spillovers in regional economic growth, the study concludes.

The study draws on a very unique data set constructed by the Bureau of Census. The Longitudinal Establishment and Enterprise Microdata (LEEM) has multiple years of annual data for every U.S. private sector (non-farm) business with employees. Using a LEEM file that tracks employment, payroll, firm affiliation and employment for more than 11 million organizations between 1989 and 1996, the authors analyze data for 394 local economic areas and six broad industrial sectors.

Endogenous Growth and Entrepreneurial Activity in Cities can be downloaded at: http://www.ces.census.gov/paper.php?paper=101665

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Copyright State Science & Technology Institute 2003. Information in this issue of SSTI Weekly Digest was prepared under a cooperative agreement with the U.S. Department of Commerce, Economic Development Administration. 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. Any opinions expressed in the Digest do not necessarily reflect the official position of the U.S. Department of Commerce.