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

life?

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