Clusters of Entrepreneurship Working Paper - Semantic Scholar

This paper has been screened to insure that no confidential data are revealed. 2Corresponding author: Rock Center 212, Harvard Business School, Boston, MA 02163; 617%496%. 7021; [email protected] ...... Syracuse. Las Vegas. New Haven.
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Clusters of Entrepreneurship Edward L. Glaeser William R. Kerr Giacomo A. M. Ponzetto

Working Paper 10-019

Copyright © 2009 by Edward L. Glaeser, William R. Kerr, and Giacomo A. M. Ponzetto Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author.

Clusters of Entrepreneurship1 Edward L. Glaeser Harvard University and NBER

William R. Kerr2 Harvard Business School

Giacomo A. M. Ponzetto CREI and Universitat Pompeu Fabra September 2009

1 Comments

are appreciated and can be sent to [email protected], [email protected], and [email protected] Kristina Tobio provided excellent research assistance. We thank Zoltan J. Acs, Jim Davis, Mercedes Delgado, Stuart Rosenthal, Will Strange, and participants of the Cities and Entrepreneurship conference for advice on this paper. This research is supported by Harvard Business School, the Kau¤man Foundation, the National Science Foundation, and the Innovation Policy and the Economy Group. The research in this paper was conducted while the authors were Special Sworn Status researchers of the US Census Bureau at the Boston Census Research Data Center (BRDC). Support for this research from NSF grant (ITR-0427889) is gratefully acknowledged. Research results and conclusions expressed are our own and do not necessarily re‡ect the views of the Census Bureau or NSF. This paper has been screened to insure that no con…dential data are revealed. 2 Corresponding author: Rock Center 212, Harvard Business School, Boston, MA 02163; 617-4967021; [email protected]

Abstract Employment growth is strongly predicted by smaller average establishment size, both across cities and across industries within cities, but there is little consensus on why this relationship exists. Traditional economic explanations emphasize factors that reduce entry costs or raise entrepreneurial returns, thereby increasing net returns and attracting entrepreneurs. A second class of theories hypothesizes that some places are endowed with a greater supply of entrepreneurship. Evidence on sales per worker does not support the higher returns for entrepreneurship rationale. Our evidence suggests that entrepreneurship is higher when …xed costs are lower and when there are more entrepreneurial people. JEL Classi…cation: J2, L0, L1, L2, L6, O3, R2. Key Words: Entrepreneurship, Industrial Organization, Chinitz, Agglomeration, Clusters, Cities.

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Introduction

Economic growth is highly correlated with an abundance of small, entrepreneurial …rms. Figure 1 shows that a 10% increase in the number of …rms per worker in 1977 at the city level correlates with a 9% increase in employment growth between 1977 and 2000. This relationship is even stronger looking across industries within cities. This relationship has been taken as evidence for competition spurring technological progress (Glaeser et al., 1992), product cycles where growth is faster at earlier stages (Miracky, 1993), and the importance of entrepreneurship for area success (Acs and Armington, 2006; Glaeser, 2007). Any of these interpretations is compatible with Figure 1’s correlation, however, and the only thing that we can be sure of is that entrepreneurial clusters exist in some areas but not in others. We begin by documenting systematically some basic facts about average establishment size and new employment growth through entrepreneurship. We analyze entry and industrial structures at both the region and city levels using the Longitudinal Business Database. Section 2 con…rms that the strong correlation in Figure 1 holds true under stricter frameworks and when using simple spatial instruments for industrial structures. A 10% increase in average establishment size in 1992 associates with a 7% decline in subsequent employment growth due to new startups. Employment growth due to