Saturday, March 20, 2010

What Makes a City Entreprenurial?

February 2010

Harvard Kennedy School

What Makes a City Entrepreneurial?
By Edward L. Glaeser (Harvard University) and William R. Kerr (Harvard Business School)

Recognizing the powerful correlations between
entrepreneurship and regional economic
growth, state and local policymakers may well
want to do more to encourage entrepreneurship
in their communities. They should, however,
proceed cautiously because economic research
is only just beginning to fully understand key
issues, like the causes of spatial variations in
entrepreneurial activity.

However, the available evidence does suggest
a few tentative policy conclusions. First,
investing too much in attracting large, mature
firms may not be good policy. These fi rms may
provide an immediate headline associated with
new jobs, but growth is more reliably correlated
with small, independent fi rms.

Second, there is little reason to have much
faith in the ability of local governments to play
venture capitalist. Classic economic research
found that Japan’s Ministry of International
Trade and Investment, which was staffed with
Japan’s best minds, generally picked losers.
Why should local investment funds be able to
do any better? Moreover, the evidence linking
growth in local finance and entrepreneurship
suggests that the best role for government is
simply to encourage competition among local
banks and financiers. Finally, while venture
capitalists are highly concentrated in three
large areas—San Francisco, New York, and
Boston—they seem quite capable of investing
outside of those places.

Third, there is much to be said for the strategy
of focusing on the quality of life policies that
can attract smart, entrepreneurial people. The
best economic development strategy may be to
attract smart people and get out of their way.
This approach is particularly appealing because
the downside is so low. What community ever
screwed up by providing too much quality of

Finally, there is a robust link between
educational institutions and certain types of
high return entrepreneurship. The history
of Silicon Valley would be totally different
without Stanford. Good universities have
faculty members who are involved in
local start-ups and train students who may
become entrepreneurs and the employees of
entrepreneurs. These facts do not imply that
universities should be locally subsidized, but
they do suggest that imposing costs that restrict
the growth of such institutions can be costly

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