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More Research About Cities and Economic Growth

28 Jan

The influential Alfred Marshall described urban economies and entrepreneurship as working in unison through parallel movements between localization and growth of the capitalist “undertakers”, or entrepreneurs.  Community is a form of currency in the global marketplace and cities matter more than ever. The most recent report from the Kauffman Foundation—authored by Yasuyuki Motoyama, Ph.D. and Jordan Bell-Masterson—measures the rate of business creation in 356 metropolitan areas across the United States. Using three sets of data for metro areas including the startup rate for all industries, high-tech sectors, and high-growth firms, the report assesses the regional factors are associated or unassociated with entrepreneurship. Specifically, the authors seek to understand what drives entrepreneurship at the regional level in high-growth sectors.

The authors find that population size and the rate of population growth within a metro area are the two most important factors in determining start-up rates. Simply put, cities have a more diverse set of sectors and bringing in a greater number of businesses and startup opportunities. Of course, this is firmly supported in the literature on urban economies through studies on agglomeration in cities (i.e., firms benefit when locating near one another). For example, an important study comparing New York City and Pittsburgh, Benjamin Chinitz (1961) found the measure of inputs, such as independent suppliers and capital, have linked to a stronger “suppler schedule of entrepreneurship.” In short, New York City was a better place for starting and operating a business due to its size, diversity, and network of suppliers.

The most interesting finding from the report, and contrary to multiple previous studies, the authors find few significant factors for the public sector to influence entrepreneurship. The presence of government- and university-funded research and patents has no correlation to start-up rates, even within high-tech sectors. The one public sector factor that is associated with higher start-up rates is education, namely high school and college completion. However, the authors note that their previous findings have shown 52.6 percent of entrepreneurs having less higher education than a college degree, and thus an exclusive focus on college education and completion suggests a linear relationship between education and entrepreneurship is not likely to be true.

The authors conclude by noting the presence of high-tech sectors leads to higher rates of high-tech start-ups, but not for all kinds of new firm. While the authors’ research shows that higher start-up rates for high-tech sectors does not necessarily induce greater overall rates of entrepreneurship, their conclusion comes with the recommendation that policymakers shouldn’t promote high-tech companies. This is an odd recommendation, especially when comparing the results of this research to the Milken Institute’s annual Best Performing Cities report. The most recent iteration finds that cities known for their technology hubs take more than half of the top-25 best performing cities. In addition, technology growth propelled a number of other metros to improve their rankings compared to the previous year. Talk to the mayor of a major U.S. city and ask what they want: it’s high-growth companies and job creation.

Larger cities are able to support a more diverse set of start-ups across all sectors. However, drawing upon the authors’ conclusions about high-tech start-ups, further study should examine what factors lead to greater start-ups in different sectors and industries. These findings go against research that shows government- and university-funded research and patents are correlated with greater innovation more generally in industries such as pharmaceuticals.

Start-up companies and small businesses look to cities to start their businesses because access to the market is more immediate and demand is greater. Cities are best suited in attracting the diverse skills, abilities, materials, and processes that are required for the birth and growth of entrepreneurial small firms. Growth, new business formation, and free enterprise will do more for a city’s economy than any economic development policy can induce on its own. This is another significant study in the importance of cities to economic growth.

Immigration Reform 2013: A Huge Opportunity to Grow the Economy

30 Apr

The Senate plans to begin mark up on the overhauling the maze that is the American immigration system on May 9. Our immigration system is in dire need of modernization and the 844 page bill [PDF] introduced by the so-called “Gang of Eight” is not lacking in motivation (read a summary here). The Washington Post calls the bill “the most ambitious overhaul of the nation’s immigration system in three decades.” The Senate appears to have majority support for the bill, with some claiming the legislation will sail through the chamber with 70 votes.

All roads for the legislation lead to the uncertain fate when it meets the GOP-controlled House. However, the bill does have key support from Rep. Paul Ryan (R-Wisc.). Rep. Ryan, like many others, makes the argument that reforming immigration is pro-growth economic policy and for the betterment of our long-term prosperity. And he’s right. Modernizing the American system of immigration is as close to a “free lunch” as any public policy issue. The evidence and data supporting comprehensive immigration reform is overwhelmingly positive.

Economic Benefits of Reform:

Immigrant populations will increase the size of economic opportunity by creating new businesses and expanding the scope and quantity of economic production. These activities translate to positive affects on the broader economy. When reform was first introduced in 2007, the Congressional Budget Office analyzed President George W. Bush’s proposed immigration overhaul. The CBO, as Ezra Klein notes, found that modernizing the system would increase federal revenue by $48 billion while costing only $23 billion in increased public services — before even considering the broader economic benefits. There is general consensus across the ideological spectrum that the economic benefits to immigration reform will be a boon for the U.S. economy.

Factoring in broader economic benefits, research from the left-leaning Center for American Progress finds reform would add $109 billion additional tax revenue, create 121,000 jobs due to increased consumer spending, and add $832 billion in U.S. GDP over 10-years. Further, an analysis from the right-leaning American Action Forum illustrates that benchmark immigration reform would raise the pace of economic growth by nearly a percentage point over the near term, raise GDP per capita by over $1,500 and reduce the cumulative federal deficit by over $2.5 trillion. Think tanks compete with numbers and ideas. Finding two on as far on the opposite side of the spectrum as Center for American Progress and American Action Forum in agreement on an issue is a rare occurrence. The data and facts supporting immigration reform simply do not lie.

Contributions of High-Skilled Immigrants & Entrepreneurs:

Numerous studies on entrepreneurship among high-skilled immigrants compliment these findings as well. High-skilled immigrants have provided one of America’s greatest competitive advantages and a consistent source of innovative mojo for our economy. Immigrant entrepreneurs have brought us Chobani, Intel, Google, Yahoo, and others. An analysis of U.S. Fortune 500 companies shows that 40% were started by immigrants or the children of immigrants.

Immigrants have displayed entrepreneurship rates above that of the native born population. Vivek Wadhwa, et al. found that immigrants make up just 12% of the U.S. population yet have started 52% of Silicon Valley’s technology companies, while contributing more than 25% of U.S. global patents. Additional research shows that for every 100 additional foreign-born workers in STEM (science, technology, engineering, mathematics) jobs created 262 additional jobs for native U.S. workers. Nationwide, companies with at least one foreign-born founder employed roughly 560,000 workers and generated $63 billion in sales in 2012 [PDF].

Cost Claims Overstated:

Opponents of reform are leading with claims that costs of the system would be too prohibitive on government programs. The Heritage Foundation, who played a key role in derailing the 2007 effort, is close to releasing a reprise of its costs analysis of the reform. These numbers will certainly serve as the basis for the rallying cry against reform for the opposition. But here’s the problem: Heritage’s 2007 cost analysis relied on a severely flawed methodology producing grossly exaggerated costs to federal taxpayers and significantly undercounting economic contributions. The Cato Institute’s Alex Nowrasteh offers 11 reasons why the Heritage’s analysis is severely flawed. The release of the Heritage analysis is expected to be heavily scrutinized.

Embracing the Next American Economy:

The introduction of comprehensive immigration reform ensures that legacy will endure for our next American economy. The quantitative research and data supporting the case for overhaul is overwhelmingly positive. America has achieved greatness due to the diversity and talents of our population. The American legal system that encourages risk and a culture of innovation are what makes America great. We need the keep the door open to individuals to ensure that continues.

This article first appeared on PolicyMic.

Quick Fix: FastCompany’s United States of Innovation

15 Apr

FastCompany just released a fantastic new analytical series ranking innovation across 50 states and the District using factors such as entrepreneurial activity, start-up rates, new firm creation, and funding for new companies. The project also features viewpoints from local entrepreneurs across the country to tell us why Florida is excelling, what West Virginia and Oklahoma are doing to catch-up, and the start-up surprises in Alaska. There are also perspectives on entrepreneurial density in the city and in the prairie.

Here’s how they did it:

“We crunched the numbers, beginning by assessing the Bureau of Labor Statistics’ launch rate of all private-sector businesses, as well as the Kauffman Index of Entrepreneurial Activity’s percentage of people who are starting new businesses and how that percentage changed over time. Then, to see the health of young firms in particular, we tallied the percentage of jobs contributed by those less than three years old and how that percentage changed over the past five years. To analyze the self-described startup community, we incorporated the health and growth rate of Startup America members and a tally of AngelList and Fundable members.”

 The overall rankings for the states (and a District) for innovation:

1 // Florida 2 // Texas 3 // Maryland 4 // Arizona 5 // Alaska 6 // California 7 // Colorado 8 // New York 9 // New Jersey 10 // Washington, D.C. 11 // Nevada 12 // Connecticut 13 // Georgia 14 // Delaware 15 // New Hampshire 16 // Missouri 17 // Rhode Island 18 // Utah 19 // South Carolina 20 // Kentucky 21 // Vermont 22 // South Dakota 23 // Wyoming 24 // North Carolina 25 // Montana 26 // Washington 27 // Idaho 28 // Virginia 29 // Hawaii 30 // Maine 31 // New Mexico 32 // Wisconsin 33 // North Dakota 34 // Oregon 35 // Ohio 36 // Indiana 37 // Arkansas 38 // Illinois 39 // Michigan 40 // Tennessee 41 // Massachusetts 42 // Nebraska 43 // Pennsylvania 44 // Alabama 45 // Iowa 46 // Minnesota 47 // Kansas 48 // Louisiana 49 // Mississippi 50 // Oklahoma 51 // West Virginia

Stay tuned for a longer analysis of FastCompany’s project later in the week.

JOBS Act One Year Later: Think Long-Game

4 Apr

Last year, Congress and the President worked together (collective gasp!) to pass the Jumpstart Our Business Startups Act (JOBS Act) with much fanfare. Lots of organizations were behind the push for the legislation including the Kauffman Foundation, AOL co-founder and Revolution CEO Steve Case, and the tech community. The goal of the law to was to drive support for startup funding by allowing individuals to become investors through crowdfunding platforms and foster small business growth by easing federal regulations for IPOs. Kudos to Congress and the White House for being somewhat up on the innovation and new ways of doing business in the tech space. However, the promises of the bill have failed to meet lofty expectations of many.

One-year later, the herd of IPOs from fresh, new startups have yet to appear, crowdfunding rules have failed to be finalized by the Securities and Exchange Commission (SEC), many funding platforms are jumping through regulatory hoops, and some are wondering what the hoopla was all about. Since enacting the law, IPOs of companies aided by the legislation are likely to fall 21%, from 80 to 63 in 2012, according to Jay Ritter, University of Florida professor who tracks IPOs. House Republicans have chastised the SEC for failing to move forward on quickly on rules. So, what gives? Continue reading