Entrepreneurship and Urban Growth

A city's industrial mix, and the size and types of firms in it, can have very long-lasting effects on its entrepreneurial culture.

Cities with a high level of entrepreneurship experience more job growth than cities with few entrepreneurs, but exactly why is not known. In Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines (NBER Working Paper No. 18333), authors Edward Glaeser, Sari Pekkala Kerr, and William Kerr search for an answer by comparing cities located near versus far from mineral mines in the year 1900. They conclude that, even decades later, cities that were close to mines at the turn of the century are populated by large-scale businesses that encourage executives but crowd out entrepreneurs. "[A] city's historical proximity to mineral and coal deposits [in 1900] is strongly correlated with larger average establishment size for manufacturing in 1963 and subsequently." Their findings suggest that a city's industrial mix, and the size and types of firms in it, can have very long-lasting effects on its entrepreneurial culture.

Glaeser and his co-authors observe that employment growth in start-up firms is lower in cities close to mines than in cities farther from mines. This relationship lasts for generations, and even occurs in industries unrelated to mining. "Proximity to mines in 1900 predicts larger establishments, less entry, and less urban growth in trade, services, and finance today," they write.

The authors investigate whether their findings are attributable to a general decline in cities built around mines, such as Pittsburgh, that occurred during the 1960s, and if that may have made it difficult to begin new entrepreneurial ventures. However, they find the same phenomenon in cities in warmer climates with booming employment as in older Northern cities: proximity to historical mines still dampens their job growth. Their results hold when they model a variety of growth projections for cities, or when they separate out effects by whether cities are growing faster or slower than expected, based upon initial traits. They conclude: "These results and their stability suggest that mines influenced modern entrepreneurship with a much deeper foundation than U.S. regional evolution."

As a final step, the authors investigate how the legacy of past industrial structures influences how dynamic the city's economy is today. They show that cities with greater initial entrepreneurship exhibit an up-or-out dynamic in their economies -- similar to that recently observed for the employment growth of young businesses. This process results in much of the employment growth from start-ups ultimately being retained in larger businesses, rather than in an endless replication of small firms. Higher entrepreneurship in 1982 also is associated with a younger average age of firms in 2002, even among a city's top 25 employers.

--Laurent Belsie