Abstract
The relationship between the rate of business formation and growth has long been a widely accepted but empirically nearly-neglected foundation in economics. Regional economic analysis creates the possibility of a tractable geographic scope to better capture this relationship. Along with the more recent availability of regional data with the necessary depth and breadth to properly evaluate such a framework, these analyses have finally begun to clarify the clear and often surprising links between entrepreneurship and growth. Some of the most intriguing and promising perspectives come from the additional consideration of gender within this entrepreneurship/growth structure. Women are underrepresented in entrepreneurial initiatives even in the most advanced economies, yet are quickly becoming the dominant new entrants in the highly-skilled segment of the labor force. This labor supply is the likely source of the most innovative entrepreneurial initiatives, with the greatest potential for economic value-added and job creation.
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Keywords
- Geographical Information System
- Young Firm
- Computable General Equilibrium Model
- Woman Entrepreneur
- Small Business Loan
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.
1 Introduction
All regions have fundamental economic development goals. Perhaps the most foundational aspiration is that of quality job growth, with continuing streams of new employment in industries and niches that are innovative with high labor value-added. Yet in direct contrast to many of the employment pillars of the nineteenth and most of the twentieth centuries, the most dynamic and intriguing of such jobs now come from small firms. Innovation no longer is the sole purview of major industrial research laboratories, but has spread out to the grass-root garages and workbenches across both rural and urban landscapes. Entrepreneurship has become the primary channel through which innovation tests the market frontier, with survival and growth being the clearest form of success.
Macroeconomic research has made clear the surprisingly dominant role of startups in particular in the job creation process. Yet these individual entrepreneurial projects are difficult to discern in the haystack of aggregate economic activity. Regional science has shed light on the key entrepreneurship-growth nexus by offering a more discerning and natural spatial lens through which to examine that key relationship. Yet answering fundamental questions about entrepreneurship, growth, and innovation has simply led to a more penetrating series of questions. In this essay, we sketch an agenda for regional research in this field, first by exploring the next steps in understanding this nexus, then by outlining the exciting prospects of exploring the rapidly emerging role of women as innovative entrepreneurs opening whole new networks and market niches.
2 Entrepreneurship and Growth
The most recent and compelling vision of entrepreneurship is as the conduit for innovations to shape themselves for the market place. Innovation itself is a process, product, or service that potentially adds new value to the marketplace. But raw innovations, often the product of labs or garages, are rarely immediately ready for the rigors and demands of the market. Entrepreneurs are essential to identify, mold, and maximize a raw innovation’s market value (Weiler et al. 2012). In that sense, Steve Jobs was less an innovator than an innovative entrepreneur, with an unusually keen vision of technology’s potential niche in the broader marketplace. Thus, identifying and assessing entrepreneurs is critical.
However, entrepreneurship, by its nature, is difficult to measure. Quite simply, startups are small, and arguably even smaller than most statistics indicate. In most data, startups are “born” when the first employee is hired. However, the firm may already have existed as a non-employer proprietorship for some time, as the owners develop their business. Yet the latter are rarely counted in formal statistics, precisely because they are especially hard to count, even though they may well be the original signal of an innovation meeting the market (Weiler and Conroy 2014). In that sense, the “birth” of an employer firm is in fact a major growth step for a set of owners, as it involves adding the employee, her payroll, and supervision/management pieces to the emerging business.
Astonishingly, that employment step is in fact the foundation of the largest element of job creation in the entire economy. Recent research on job creation is very clear. Startups, despite their almost universal small size, are themselves responsible for an extraordinarily large portion—roughly one third—of gross job growth. Although firm survival is recognized to be difficult, with barely half of newborn firms reaching their fifth birthday, younger firms nevertheless universally have higher job growth rates than their more mature counterparts (Decker et al. 2014). So not only are startups creating a significant portion of jobs right as they open, surviving young firms make up much of the rest of the job creation process as well. Meanwhile, job growth in older firms becomes progressively slower.
Recent trends in job growth underscore troubling prospects for these young firms. Job creation rates have been falling over the last three decades, particularly sharply during the Great Recession. Given that the latter was clearly rooted in financial markets, small firms critically dependent on early-stage capital suffered particular hardship (Haltiwanger et al. 2013). High-growth young firms in particular are becoming less numerous since 2000 (Decker et al. 2015). Those difficulties are reflected in the especially sharp drop in job creation both during the recession itself as well as early phases of the recovery—which are not being recouped as the recovery continues. These signals matter, as the flow of marketable innovations depend vitally on the vitality of the entrepreneurial sector. And this sector is also the critical driver of job growth.
Interestingly, while this intuitive link between entrepreneurship and growth is clear, it is challenging to discern empirically. The basic problem is one of endogeneity. Entrepreneurship clearly should be a driver of job growth, but job growth itself creates new market opportunities for entrepreneurs. Regional science was instrumental in addressing and overcoming this vexing statistical problem. Macroeconomic views jumble many markets. Regions offer a better empirical lens with which to explore and determine patterns of interaction between growth and entrepreneurship. Recent availability of publicly available regional data on firm births and deaths now provide regional scientists adequate time-series to definitively attack the endogeneity question (Statistics of U.S. Businesses Employment Change Data, United States Census Bureau). While many, including some major journal editors, believed that disentangling the growth-entrepreneurship endogeneity was not possible, innovative use of instrumental variables is finally allowing the illumination to better understand this key relationship (e.g. Bunten et al. 2015; Conroy and Weiler 2016). Entrepreneurship really does drive job growth.
As we embark on the next 50 years of regional research, the entrepreneurship-growth research agenda is an increasingly exciting one. The just-cited research used a geographic informational structure as its theoretical motivation, where establishment births and deaths reveal valuable increments of market viability. The fact that deaths positively predict future entrepreneurial and subsequent job growth is an especially powerful result, with a series of game-theoretic, Bayesian-revealed preference, and a unifying endogenous growth model (Weiler 2000a; Weiler et al. 2006; Bunten et al. 2015) providing the framework for a theory of geographic informational asymmetries. The attractiveness of identical projects will differ simply based on the amount of market-revealing entrepreneurial activity in the form of births and deaths. Thus, marginalized rural and inner-city regions may get caught in a cycle of neglect and stagnation due to the informational imbalance due precisely to their lack of business activity in the first place.
Yet the flipside of these challenges also offers the unusual opportunity to foster market efficiency and equity simultaneously, two goals that are otherwise almost always in opposition. Addressing the informational market failure not only improves the functioning of the market, allowing the clearer and more certain determination of the prospects for entrepreneurial projects, but also fosters equity by leveling the informational playing field between thinner and thicker markets. Universities are unusually well-placed to provide informational public goods, which may also provide a new vision for land-grant universities in particular (Weiler 2000b). In that sense, the research agenda offers the exciting opening for an especially-applied research agenda.
But there is far more terrain to forge in the empirical field as well. Given the recent evidence that information has decreasing returns to evolving networks, as indicated by market scale and gender results in similar growth inquiries, the question of which sectors are most impacted by these network informational effects becomes important. Births and deaths may reveal the viability of a number of different aspects of business success, from local labor pool to supplier networks, but the success of an on-site service such as dining or retail is obviously much more closely linked to the local geographic market itself. In that vein, the information effect should have a stronger manifestation in a retail establishment than an export-manufacturing establishment, for example. This hypothesis could be assessed empirically.
Furthermore, given the obvious constraining role that the recent financial crisis played in handicapping small firms from playing their job creation role, the relative roles of different forms of financing need to be evaluated. In particular, the changing landscape of banking has reduced the relationship-lending role that small community banks used to play in small business development (Conroy et al. 2016). This consolidation trend as well as the flow of small business loans can be explicitly tested against trends in entrepreneurship. Innovative “fintech”—such as crowdfunding—is anecdotally having a significant impact on entrepreneurial loan options; this proposition could also be tested empirically. More in the business-school anecdotal tradition, entrepreneurs may be moving (back to) Friends, Family, and Fools—as well as credit cards—to finance their operating expenses.
The increasing flow of regional-level data on entrepreneurship should help fuel this agenda, as should the incorporation of more methodologies. In particular, Geographical Information Systems (GIS) techniques could be leveraged without endangering privacy through localized aggregations of firms and labor pools. County-level data continue to provide an imperfect but useful standard for market areas, but GIS mapping technology could offer a wider range of aggregations while also being more precise about key networks. Computable general equilibrium models could also be brought into this research arena, with further efforts to explore an entrepreneurial sector within existing industrial and labor market segments. By providing sectoral- and household-level lenses that regional data alone currently cannot offer, the integration of CGE’s could generate a more detailed sense of critical job flows and regional growth.
3 Women Entrepreneurs as the New Pioneers of Innovative Entrepreneurialism
Women entrepreneurs are proving to be an underutilized economic resource with the innovative potential to generate significant regional employment effects. Even based on straightforward statistics, the job creation power of women-owned businesses is evident. In the years preceding The Great Recession, privately held women-owned firms added nearly half of a million jobs to the economy while other privately held firms lost jobs (U.S. Department of Commerce 2010). The number of women-owned businesses has also been growing rapidly, outpacing the growth of male-owned businesses in recent decades. This distinction is particularly noteworthy, given the just-cited recent deceleration of firm and job creation. The accelerated performance of women-owned businesses during a time when other businesses slowed or stagnated testifies to the importance of women entrepreneurs to the economy. Their businesses are a promising source of future job creation, though they are still underrepresented in innovation and entrepreneurship.
In light of the evidence that women entrepreneurs are key to job creation, understanding what drives them and what barriers may impede their innovative potential is critical. The distributions of knowledge, resources, opportunities, and constraints certainly differ between men and women. Given these differences, women can be expected to differ from men in their processes of innovation and business formation even in the same economic environment. While much of the literature focuses on the defining characteristics of the entrepreneur herself, such as her management experience, risk preferences, and network disadvantages, there are relatively few studies of women entrepreneurs in regional science. Yet regional economies are particularly useful units of analyses for understanding the local contextual factors, many of which may be significantly influenced by policy. These milieus and policies could uniquely affect entrepreneurial outcomes for women, as well as their ability to generate tangible economic impacts, particularly in terms of job creation.
Compared to relatively stable trends in male business ownership, the trends in female business ownership have evolved rapidly. Perhaps the most distinct among these trends is the accelerated growth in the number of women-owned businesses. Based on their growth in the 1990s, women-owned businesses were expected to equal male-owned business in number within a decade. Interestingly, the growth trend observed in the late twentieth century appears to have changed course, slowing dramatically since 2000, with women-owned business still far outnumbered and outperformed in terms of sales and employment growth by their male-owned counterparts.
The dramatic changes in the growth trajectory of women-owned business during the last 70 years seem to indicate that there are broad socio-cultural shifts that are continually shaping and reshaping rights and roles for women, including women entrepreneurs. For example, women have gone from a relative minority on college campuses to earning the majority of college degrees, reducing the education barrier to entrepreneurship but only to deepen the gender segregation across fields of study. Similarly, women’s access to institutional financing has changed over time, relaxing an important constraint on their entrepreneurial potential. However, the relatively low share of women entrepreneurs actually using institutional finance may be indicative of the lower risk preferences among women, a less obvious issue before credit was widely available to women. These examples suggest that the factors driving and constraining the growth of women’s entrepreneurship may continue to evolve as women entrepreneurs advance toward gender equality. Perhaps the most insightful future research will treat women’s entrepreneurship as an evolving phenomenon that partly results from unique institutional circumstances that continue to change and influence processes of women’s business formation. Considering women entrepreneurs over time and by cohort may be especially useful for identifying and understanding the factors that drive trends in women-owned business and shape the innovative capacity of women entrepreneurs.
There are likely regional determinants of entrepreneurship that are unique to women, such as child care availability, but even the well-established determinants of entrepreneurship could vary by gender. Human capital has proven an important factor driving entrepreneurial outcomes across U.S. regions, but it also has an important role in explaining the gender differences in those outcomes. Educational attainment at the regional level varies by gender, but recent work suggests that even if educational attainment were the same between men and women, there are important behavioral differences that would still result in wide gender gaps (Conroy and Weiler 2015). Thus distilling behavioral differences will be critical to future assessments of the gender differentials in entrepreneurship and innovation. Understanding these gendered entrepreneurial behaviors will also be essential to transitioning from gender-blind policies based predominately on the male experience to more informed policies better suited to equitably enhancing entrepreneurship for both men and women.
One of the most promising aspects of gendered entrepreneurship research in regional science, both theoretically and empirically, lies in the personal networks of entrepreneurs. The entrepreneur’s social network is important because it can be a source of moral and financial support, but perhaps most importantly, networks are a source of information that could be useful in starting her business. Networks as an information transmission mechanism may be especially critical for women who have historically operated on the economic periphery and consequently have less access to mainstream market information. Yet their networks may also compound the information disadvantage for women entrepreneurs. Generally, men and women have networks with members primarily of the same gender. Given the historically and currently low rates of entrepreneurship among women, it is less likely that women will have entrepreneurial peers and role models in their networks. Consequently, women may find it all the more difficult to access market information and integrate themselves into the business community.
The informational disadvantage for women entrepreneurs may be especially relevant to their financing strategies. Potentially, the information deficit among women entrepreneurs also plays out as bankers and financiers try to evaluate the credit-worthiness of female-led ventures. With relatively few comparable projects to reference, women-led ventures seem relatively risky, and thus less attractive candidates for financing. Relationship lending can mitigate the potential information asymmetries between bankers and entrepreneurs regarding the quality of their businesses. However, with little information based on female-led projects and no personal network connecting women entrepreneurs to decision-makers in the financial community, their projects are less likely to get funding, leading to undercapitalization and lower chances of success. The existing literature focuses on possible gender discrimination in the credit market as an explanation for their small share of women using institutional finance, but as of yet there is little focus on the role of information in the credit market in relation to gender and entrepreneurs. These relationships between information, finance, and women’s entrepreneurial outcomes are an exciting area for future research, particularly in the wake of the most recent recession, which was coupled with a financial crises and tight credit markets.
Considering the social aspect of entrepreneurship might help explain why some places are much more entrepreneurial than others, as well as why men appear much more entrepreneurial than women. According to some social models, utility maximizing agents benefit from a behavior of others (a spillover), and more importantly, benefit from behaving similarly (Brock and Durlauf 2001, 2007). Thinking of entrepreneurship in such a theoretical framework can help us understand highly entrepreneurial places as those settings where, not only do individuals benefit from being surrounded by other entrepreneurs via knowledge spillovers, but they also gain from mimicking the (successful) entrepreneurial behaviors of their peers. Empirically, accounting for social networks has a natural analog in spatial econometrics. Much like we often expect two places located near each other in geographic space to influence each other, we would expect two entrepreneurs who are near each other in “social space” to influence each other. The closer the relationship between two agents, the stronger the behavioral influences between them. With ideal data, it would be possible to set up a matrix that defines the strength of the social influence between any two agents much like a spatial weights matrix does for any two places. In the spirit of Kilkenny and Nalbarte (2000), describing and comparing the structure of the social influences between agents in any region could be insightful, let alone the possible lessons from a fully tractable econometric model.
Gendered networks and information asymmetries are one explanation for the strong regional employment effects from women-owned businesses. The same information disadvantage that creates an obstacle to the success of women entrepreneurs also makes their projects especially valuable. In many ways women entrepreneurs are exploring relatively unknown market terrain, generating valuable information about the market including the viability of new projects and consumer demand. Women have to be particularly innovative as they start their businesses and bring unique products, services, and management styles to the market. As a recent example, a woman in tech who designs new applications specifically for women is innovative in several ways. First, in her sector there are few women available to her as mentors to give advice and share market insights making her role as a business leader in a male-dominated sector a valuable example to those that may follow. Second, given that most apps are developed by men who likely know men’s preferences better than they know and understand women’s preferences, her product is testing the viability of a new idea. The consumer response and success of such new ideas will be a valuable indicator for related projects.
Given recent evidence of decreasing returns relationship between information and regional employment in both regional and gendered networks (Conroy and Weiler 2016), we can expect relatively large payoffs from incremental increases in female entrepreneurship. The persistently low rate of female entrepreneurship compounded by their network disadvantages implies that women entrepreneurs enter a relatively thin market. In the context of the information payoff function, the marginal female-led entrepreneurial project lies to the left of the curve and results in relatively large incremental increases in employment. In contrast, entrepreneurial men enter a thick market with detailed information available based on a long history of past projects led by other male entrepreneurs across all sectors of the economy. With ample market information already available, the marginal male-owned projects would lie much further to the right of the diminishing-returns function and generate small employment effects.
Empirically, the gendered market information hypothesis holds, suggesting that the innovative capabilities of women entrepreneurs, both in terms forging the way for women that may follow as well as in identifying new market niches, can lead to significant job creation. As they become business leaders and grow in economic presence and significance, women entrepreneurs are also building foundational network ties in the business community that will benefit themselves as well as their peers and those they mentor. These new and growing networks can mitigate the information disadvantage for women, allowing them to better evaluate their prospects for success and have an impact on the local economy.
Identifying the specific aspects of women’s entrepreneurship that lead employment growth will be important for future research. For example, their sectoral concentration may partly explain the large employment effects. Women tend to be concentrated in sectors, especially service sectors such as healthcare and education that are inherently local in their activities. Properly assessing such localized markets places an especially high premium on information flows, where growth can be stymied by limited numbers and thus networks among women business-owners. But this situation also implies potentially very high returns for entrepreneurial women pioneers.
In addition to the local aspect, such service sectors are already undergoing major shifts brought on my new policies and rapid technological change. These aspects of women-owned businesses could explain the strong employment effects in the context of the information hypothesis. Future studies that account for industry sector and more precisely identify the contributions of women-owned firms will be valuable extensions of the regional entrepreneurship literature.
The most challenging aspect of furthering gendered research on entrepreneurship is the data limitations. The gendered data that are currently available publicly are typically limited in geographic scope or frequency. The Survey of Business Owners, for example, is available only in 5-year increments, specifically years ending in “2” and “7” which can make it difficult to use with conventional decennial sources. The Current Population Survey is only representative down to the state level, making it difficult to study small geographic areas. To our knowledge, there are no publicly available gendered data on business dynamics (openings, closings, expansions, and contractions), which are often preferable for entrepreneurial research. Until gendered data on entrepreneurial and business outcomes are more readily available, these data limitations will constrain the progress of research in the field.
The importance of collecting and publishing high quality gendered data is even more critical when considered as a component of informed policy. Advances in research on women entrepreneurs and other demographic groups are essential to policy designs that successfully and equitably enhance entrepreneurship. Designing policy based on current research, most of which is at least implicitly based on the male experience, may be ineffective for enhancing entrepreneurship among women business leaders and minority groups more generally. Hence, data improvements together with regional studies, which often lend themselves naturally to informing community and regional development strategies, focused on women entrepreneurs are an important step towards effectively tapping into the job creation potential of women-owned business and spurring regional economic growth.
4 Pioneers of the Twenty-first Century
Our understanding of how regions grow—and equally importantly why regions decline—has evolved rapidly in the last 50 years. Regional science has provided illumination on these core questions of its own discipline, but along the way its regions have also been productive higher-resolution lenses through which to understand aggregate growth (Krugman 1991). Most recently, entrepreneurship has been confirmed as a major driver of job growth, putting yet further into question economic developers’ remarkably myopic focus on “primary” industries, among other implications.
Yet we need to extend this understanding to better inform decision-makers—public, private, and non-profit—about how such an entrepreneurship-innovation-growth nexus can best enhance a region’s opportunities for quality job growth. A major first and obvious step is better utilization of well-educated resources already in place, namely potential women entrepreneurs—and the expanded market they may be uniquely able to access. The emerging stagnation of high-growth firms and their job creation is a troubling trend, interestingly one that is occurring alongside the noted flattening of new women-owned businesses. Both regions and nations would do well to consider more carefully the neglected half of the entrepreneurial-growth puzzle, as jobs, incomes, and quality-of-life trajectories may depend on women even more than we realized.
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Conroy, T., Weiler, S. (2017). Entrepreneurship, Growth, and Gender. In: Jackson, R., Schaeffer, P. (eds) Regional Research Frontiers - Vol. 1. Advances in Spatial Science. Springer, Cham. https://doi.org/10.1007/978-3-319-50547-3_5
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