Entrepreneurship and Urban Success: Toward a Policy Consensus

From the introduction:

This essay provides a guide to policymakers and citizens to what is known about the effects of various local and state policies aimed at fostering entrepreneurially driven growth. There is also much we do not know; thus, the essay identifies subjects that require further research. Before discussing these topics in further detail, we recommend keeping in mind several broad lessons from the academic literature.

First, there are no "silver bullets" or "one-size-fits-all" policies for creating entrepreneurial clusters. The varied histories of clusters within and outside the United States attest to this.

Second, although conventional wisdom suggests that having a strong research university is a key to stimulating local growth, this bit of "wisdom" needs qualification. Clearly, strong universities can stimulate growth by cultivating enterprising faculty, educating students who become entrepreneurs and those entrepreneurs' employees, and transferring ideas that are commercialized by local area entrepreneurs. But having a strong locally based research university is not a necessary condition for such clusters (the emergence and rise of Microsoft, Amazon, and Starbucks in Seattle, for example, had little to do with the University of Washington), nor is it sufficient (the Boston area, host to some of the nation's leading universities, has not been as vibrant in incubating high-growth businesses as Silicon Valley has been).

Third, localities and states should pursue sound "build it and they will come" policies—building strong local educational systems and institutions, and developing supporting infrastructure—because these components are important for citizens and businesses, regardless of whether they stimulate the formation or growth of new companies. All people, whether they work for themselves or others, want to live where their children will be well educated, other government services are efficiently delivered, roads are well-constructed and maintained, and there is ample access to the latest technological infrastructure. That some new enterprises may be attracted in the process by all of these things should be viewed as a bonus. But it is important to recognize that waiting for serendipity to strike under any set of policies requires a tolerance for uncertainty (it may not happen) and patience (it may not happen for a long time).

Fourth, there is little evidence that governmental expenditures or targeted tax credits aimed at developing clusters from scratch have been successful (at least to date). Rather, as we elaborate more fully below, the general regulatory and business climate seems to be a far more important factor (The Economist, October 13, 2007).

Fifth, successful entrepreneurial clusters tend to develop new sets of problems that, left unaddressed or inadequately addressed, can threaten their continued growth. As more firms and employees are attracted to a given locale, it is possible, if not likely, that traffic congestion, pollution, and rapidly increasing real estate prices, among other issues, will follow. Eventually, successful locations can price themselves out of the market, with prices and wages so high that productive activity, including entrepreneurial activity, moves elsewhere. This isn't necessarily bad for the entire economy; it even may be healthy as economic activity becomes more evenly distributed throughout the country. But the peaking and subsequent decline of a particular cluster may entail a national loss as well, if it fragments the talents and other resources that once contributed to its success.

In what follows, we elaborate on these themes. But first we review relevant evidence relating to entrepreneurship across regions or metropolitan areas, and linkages between entrepreneurship and urban/regional success. Such information provides a useful background for assessing specific policy issues.

While evidence on the effectiveness of various policies is relatively thin, we find that the strongest consensus supports streamlining of local regulatory approvals and limits on progressive taxation at the state and local levels. Several other local policies also should facilitate entrepreneurial growth: congestion pricing to relieve traffic congestion; investments in local schools, amenities, and transportation infrastructure; and limited recognition by states of non-compete clauses in business contracts. There is as yet little evidence to support the targeted government support of research, particular industries, or firms.