The IPL newsletter: Volume 18, Issue 372

The City and Innovation

Patrick Adler, Richard Florida, Karen M. King, and Charlotta Mellander, Martin Prosperity Institute
Theory and research on innovation and entrepreneurship focus on the firm as a unit of analysis. This paper argues that the city, or place and space, has emerged as a key organizing unit for both innovation and entrepreneurship. The city organizes the key inputs for the processes of innovation and entrepreneurship, by concentrating human capital, firms, knowledge, knowledge-based institutions and other key inputs. The authors advance this framework by exploring the geographic clustering of a key indicator of commercially-relevant innovation and entrepreneurship – venture capital investment in high-tech companies. They chart the geography of innovation both across and within cities, at both the metro level and the district or neighborhood level for all venture-capital backed startups and for startups in digital industries. The findings indicate that such commercially relevant innovation is concentrated at two key geographic scales. At the macro-level, it is highly clustered and concentrated in a relatively small number of global cities or metro areas. At the micro-level, it is highly concentrated at tight neighborhood level micro-clusters within these leading cities and metro areas.

The Geography of Firm Dynamics: Measuring Business Demography for Regional Development

OECD
New businesses are not only vital for the creation of employment but also for the development of new ideas that simplify work and production processes and increase productivity. Consequently, business dynamics contribute to regional development and prosperity. Yet, the local reality across the OECD presents a picture of large regional disparities which needs to be understood. While some regions experience a high degree of business births and deaths, other regions only observe low levels of changes in their business population.

Filling the Business Demography Data Gap
So far, the lack of a consistent and comprehensive database for OECD regions has been a major impediment for assessing differences in entrepreneurship across places. This report contributes to fill that void. It enables policy makers to compare business demography between different OECD regions and also highlights various place-specific factors that are more successful in stimulating the creation and development of businesses. Regions showing higher levels of entrepreneurship have on average better local governance, spend more on R&D activities, and have a more educated local workforce. Similarly, regions have on average higher firm creation when they have business-friendly regulations (ease of doing business) and a higher quality of governance (i.e. low levels of corruption). Financing constraints of firms appear to be related to higher rates of business deaths and lower rates of new business creation, while additional resources via EU Cohesion Funds can increase both the births and deaths of businesses.

Key Findings

• New firms constitute, on average, 10% of all firms across OECD regions, demonstrating that business dynamics in the form of firm births are considerable in the OECD. However, both within as well as across countries, regions differ considerably in business dynamics. At the top end of the range, business birth rates can reach up to 25%, whereas regions with the lowest business creation rates only recorded birth rates of around 5%. These dynamics are partially driven by non-employer firms for which birth rates are larger than for employer firms (on average 9%).
• Urban regions show the largest levels of business dynamics, both in terms of business creation and destruction rates, which is particularly pronounced for mostly urban regions at the frontier of national productivity. They account for 24% more business births, among all types of firms, than would be expected given their share of active firms.
• Using enterprise-level data to monitor employment growth from business creation can be susceptible to a headquarter bias, a deviation from a region’s actual share of national employment of, on average, 1.4 percentage points. Capital-city regions tend to concentrate headquarters of large firms. On average they control 7 percentage points more employment than is located in their region.
• New firms and small and medium enterprises (SMEs) contribute significantly to regional employment growth and can be stimulated by the right set of regional conditions pertaining to local governance, financing availability and education. Based on data on employer enterprises, new businesses can create up to 8% new employment in regions, though regions across the OECD differ substantially in this regard. Similarly, in a subset of four countries, regional employment growth in small and medium-sized plants between 2010 and 2014 ranged from 30% to a loss of 27%. Regions with on average smaller existing firms also record higher firm birth rates. For those reasons, tailored policies that facilitate and encourage entrepreneurship can boost regional development and employment.
• Ad hoc analysis on micro-data is a possible alternative way to build comparable and robust evidence on the dynamics of businesses and related employment. By means of consistently performed micro-aggregation of business registers data in the context of Costa Rica, Finland, France and Sweden, young plants are shown to disproportionately contribute to regional net creation and employment growth. After controlling for firm-level characteristics, population density appears to significantly enhance both entrepreneurial activities and post-entry employment growth.

The Way Forward
One main lesson emerging from this report is that robust and internationally comparable regional business demography indicators require further harmonization efforts across countries on the capacity to distinguish employer-only enterprises from those of non-employer ones and to enhance the capacity to track enterprises and their establishments in order to better assess the geographical dimension of employment creation.