Entrepreneurship and economic development in cities

Abstract

Policy makers have identified the relationship between entrepreneurship and economic development. Yet, little is known about how this relationship varies over time in cities with different market sizes. This study examines the link between entrepreneurship and economic development using a panel of 127 European cities between 1994 and 2009. We found that the immediate economic development impact of new firm start-ups is positive for both small-/medium-size cities and large cities. The relationship is U-shaped for large cities, with the indirect effect taking 7 years, but the indirect effect does not occur in small-/medium-size cities. We offer useful information for policy makers, practitioners, and scholars.

This is a preview of subscription content, access via your institution.

Notes

  1. 1.

    Formerly known as a larger urban zone (LUZ).

  2. 2.

    A regional capital is the main city of a region, e.g., Leicester (main city of Leicestershire), York (main city of Yorkshire), and Palermo (main city of Sicily). For more, see Eurostat (2011).

  3. 3.

    In 1999, the EU collected data for comparable indicators for 58 European cities. The purpose of this first “Urban Audit” was to test the feasibility of collecting comparable measures of the quality of life in European cities. Over the entire EU (EU-15 at the time), around 480 variables were collected for the 58 largest cities. Therefore, we have only 58 largest cities we were able to include in the sample from the very first period. After completion of the Urban Audit, the Commission decided that there was a clear need to continue and improve this approach of collecting comparable information on urban development. The next data collection waves for Urban Audit data took place in 2003 (for EU-15 cities only) and 2004, respectively, (for the new Member States) and in 2006/2007 (for the EU-27 cities plus cities in Norway, Switzerland, Turkey, and Croatia). We acknowledge a limitation of data as only 127 cities were made available. Having 127 cities in our sample both in EU15 and New member states is adequate; the number of cities and variables available has increased from 58 cities in 1999 to 322 cities in 2011. Although our sample does not capture all 322 cities over time, data collection criteria used by Eurostat and having an almost equal number of cities of various sizes from West and East European countries allow us to consider the data representative for European cities.

  4. 4.

    Some studies exclude companies below a size threshold, e.g., 10 employees (see Fritsch and Mueller 2004). We include new firms with both fewer than and more than 10 employees.

  5. 5.

    Previous research indicates the use of either employment rate (employed residents) or unemployment rate (unemployed residents) as a control variable (Fritsch and Storey 2014; Fritsch and Wyrwich 2014b). Due to multicollinearity between the two variables, we use only unemployment rate (see Table 2).

  6. 6.

    http://ec.europa.eu/regional_policy/sources/docgener/studies/pdf/urban/stateofcities_2010.pdf.

  7. 7.

    For instance, research center cities line up against the rich literature on universities and research institutions playing a key role in producing creative and human capital (Florida et al. 2008). Research centers and knowledge hub cities rely on higher world integration in knowledge finance, and universities are likely positively associated with economic development and have on average higher economic growth (Saxenian 1994; Audretsch 2003; Acs et al. 2009). Other studies also argued that universities lead to spillover of human capital in cities (Faggian and McCann 2009; Belitski and Korosteleva 2011).

  8. 8.

    We acknowledge the possibility that including 126 (\(127-1\)) dummy variables associated with each city exploits our degrees of freedom in a sample of 319 observations and may potentially decrease the quality of estimation.

  9. 9.

    If standardized by national average, this measure would be essentially the same as the measure in Glaeser et al. (1992).

  10. 10.

    This is not surprising because many large European cities, including capitals, have ports and robust activity associated with transportation and shipping—e.g, Stockholm, Barcelona, Helsinki, Athena, Riga, Copenhagen, London, Lisbon.

References

  1. Acs ZJ, Armington C (2004) The impact of geographic differences in human capital on service firm formation rates. J Urban Econ 56(2):244–278

    Article  Google Scholar 

  2. Acs ZJ, Desai S, Klapper L (2008a) What does “entrepreneurship data really show? Small Bus Econ 31:265–281

    Article  Google Scholar 

  3. Acs ZJ, Desai S, Hessels J (2008b) Entrepreneurship, economic development and institutions. Small Bus Econ 31:219–234

    Article  Google Scholar 

  4. Acs ZJ, Braunerhjelm P, Audretsch D, Carlsson B (2009) The knowledge spillover theory of entrepreneurship. Small Bus Econ 32:15–30

    Article  Google Scholar 

  5. Acs ZJ, Autio E, Szerb L (2014) National systems of entrepreneurship: measurement issues and policy implications. Res Policy 43:476–494

    Article  Google Scholar 

  6. Aiginger K (2006) Revisiting an evasive concept: introduction to the special issue on competitiveness. J Ind Compet Trade 6(2):63–66

    Article  Google Scholar 

  7. Andersson M, Koster S (2011) Sources of persistence in regional start-up rates—evidence from Sweden. J Econ Geogr 11:179–201

    Article  Google Scholar 

  8. Andersson M, Noseleit F (2011) Start-ups and employment growth—evidence from Sweden. Small Bus Econ 36:461–483

    Article  Google Scholar 

  9. Andersson M, Braunerhjelm P, Thulin P (2011) Creative destruction and productivity—entrepreneurship by type, sector and sequence. Working paper series in Economics and Institutions of Innovation 256. Royal Institute of Technology, CESIS

  10. Anselin L (2010) Thirty years of spatial econometrics. Pap Reg Sci 89(1):3–25

    Article  Google Scholar 

  11. Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58:277–297

    MATH  Article  Google Scholar 

  12. Audretsch DB (1995) Innovation and industry evolution. MIT Press, Cambridge

    Google Scholar 

  13. Audretsch DB (2003) Entrepreneurship: a survey of the literature. Enterprise paper number 14. Enterprise Directorate-General, Brussels

  14. Audretsch DB, Fritsch M (2002) Growth regimes over time and space. Reg Stud 36:113–124

    Article  Google Scholar 

  15. Audretsch DB, Feldman MP (2004) Knowledge spillovers and the geography of innovation. In: Arrow KL, Intriligator MD (eds) Handbook of regional and urban economics, vol 4, pp 2713–2739

  16. Audretsch DB, Belitski M (2013) The missing pillar: the creativity theory of knowledge spillover entrepreneurship. Small Bus Econ 41:819–836

    Article  Google Scholar 

  17. Audretsch DB, Keilbach M, Lehmann E (2006) Entrepreneurship and economic growth. Oxford University Press, New York

    Book  Google Scholar 

  18. Audretsch DB, Dohse D, Niebuhr A (2010) Cultural diversity and entrepreneurship: a regional analysis for Germany. Ann Reg Sci 45(1):55–85

    Article  Google Scholar 

  19. Baltagi B (2008) Econometric analysis of panel data. Wiley, London

    Google Scholar 

  20. Baptista R, Preto MT (2011) New firm formation and employment growth: regional and business dynamics. Small Bus Econ 36:419–442

    Article  Google Scholar 

  21. Barro RJ, Sala-i-Martin X (1992) Convergence. J Polit Econ 100:223–251

    Article  Google Scholar 

  22. Beaudry C, Schiffauerova A (2009) Who’s right, Marshall or Jacobs? The localization versus urbanization debate. Res Policy 38(2):318–337

    Article  Google Scholar 

  23. Belitski M, Korosteleva J (2011) Entrepreneurship and cities: evidence from the post-Communist world. Front Entrep Res 31(4):3

  24. Bosma N, Sternberg R (2014) Entrepreneurship as an urban event? Empirical evidence from European cities. Reg Stud 48:1016–1033

    Article  Google Scholar 

  25. Brakman S, Garretsen H, Van Marrewijk C (2009) Economic geography within and between European nations: the role of market potential and density across space and time. J Reg Sci 49:777–800

    Article  Google Scholar 

  26. Capello R, Camagni RP, Chizzolini B, Fratesi U (2008) Modelling regional scenarios for the enlarged Europe: European competitiveness and global strategies. Springer, Berlin

    Google Scholar 

  27. Carree MA, Thurik R (2008) The lag structure of the impact of business ownership on economic performance in OECD countries. Small Bus Econ 30:101–110

    Article  Google Scholar 

  28. Cheshire P, Magrini S (2009) Urban growth drivers in a Europe of sticky people and implicit boundaries. J Econ Geogr 9:85–115

    Article  Google Scholar 

  29. Chinitz BJ (1961) Contrasts in agglomeration: New York and Pittsburgh. Am Econ Rev 51:279–289

    Google Scholar 

  30. Crescenzi R, Rodrıguez-Pose A, Storper M (2007) The territorial dynamics of innovation: a Europe–United States comparative analysis. J Econ Geogr 7:673–709

    Article  Google Scholar 

  31. De Groot HL, Poot J, Smit MJ (2009) Agglomeration, innovation and regional development: theoretical perspectives and meta-analysis. In: Capello R, Nijkamp P (eds) Handbook of regional growth and development theories. Edward Elgar, Cheltenham, pp 256–281

    Google Scholar 

  32. Dejardin M (2011) Linking net entry to regional economic growth. Small Bus Econ 36:443–460

    Article  Google Scholar 

  33. Department of Trade and Industry (1998) Regional competitiveness indicators. HMSO, London

  34. Dijkstra L, Poelman H (2012) Cities in Europe: the new OECD-EC definition. Regional focus, 1, 2012. http://ec.europa.eu/regional_policy/sources/docgener/focus/2012_01_city.pdf

  35. Dijkstra L, Garcilazo E, McCann P (2013) The economic performance of European cities and city regions: myths and realities. Eur Plan Stud 21(3):334–354

    Article  Google Scholar 

  36. Douglas PH (1976) The Cobb–Douglas production function once again: its history, its testing, and some new empirical values. J Polit Econ 84:903–915

    Article  Google Scholar 

  37. Estrin S, Korosteleva J, Mickiewicz T (2013) Which institutions encourage entrepreneurial growth aspirations? J Bus Ventur 28:564–580

    Article  Google Scholar 

  38. Eurostat (2011) Regional and urban statistics. http://epp.eurostat.ec.europa.eu/portal/page/portal/region_cities/city_urban. Accessed 26 Oct 2014

  39. Faggian A, McCann P (2009) Human capital, graduate migration and innovation in British regions. Camb J Econ 33:317–333

    Article  Google Scholar 

  40. Florida R (2002) The rise of the creative class: and how it’s transforming work, leisure, community and everyday life. New York Basics, New York

    Google Scholar 

  41. Florida R, Mellander C, Stolarick K (2008) Inside the black box of regional development—human capital, the creative class and tolerance. J Econ Geogr 8:615–649

    Article  Google Scholar 

  42. Fritsch M, Mueller P (2004) Effects of new business formation on regional development over time. Reg Stud 38:961–975

    Article  Google Scholar 

  43. Fritsch M, Mueller P (2008) The effect of new business formation on regional development over time: the case of Germany. Small Bus Econ 30:15–29

    Article  Google Scholar 

  44. Fritsch M, Schindele Y (2011) The contribution of new businesses to regional employment—an empirical analysis. Econ Geogr 87:153–170

    Article  Google Scholar 

  45. Fritsch M, Noseleit F (2013) Investigating the anatomy of the employment effect of new business formation. Camb J Econ 37:349–377

    Article  Google Scholar 

  46. Fritsch M, Storey D (2014) Entrepreneurship in a regional context: historical roots, recent developments and future challenges. Reg Stud 48:939–954

    Article  Google Scholar 

  47. Fritsch M, Wyrwich M (2014a) The long persistence of regional levels of entrepreneurship: Germany 1925 to 2005. Reg Stud 48:955–973

    Article  Google Scholar 

  48. Fritsch M, Wyrwich M (2014b) The effect of regional entrepreneurship culture on economic development—evidence for Germany. Jena economic research papers 014

  49. Glaeser EL, Kallal H, Sheinkman J, Schleifer A (1992) Growth in cities. J Polit Econ 100:1126–1152

    Article  Google Scholar 

  50. Glaeser EL, Sheinkman J, Schleifer A (1995) Economic development in a cross-section of cities. J Monet Econ 35:117–143

    Article  Google Scholar 

  51. Glaeser EL, Kolko J, Saiz A (2001) Consumer city. J Econ Geogr 1:27–50

    Article  Google Scholar 

  52. Glaeser EL, Kerr WR, Ponzetto G (2010) Clusters of entrepreneurship. J Urban Econ 67:150–168

    Article  Google Scholar 

  53. Glaeser EL, Ponzetto G, Tobio K (2014) Cities, skills and regional change. Reg Stud 48:7–43

    Article  Google Scholar 

  54. Jacobs J (1969) The economies of cities. Random House, New York

    Google Scholar 

  55. Klepper S (1997) Industry life cycles. Ind Corp Change 6:145–181

    Article  Google Scholar 

  56. Lucas RE (1988) On the mechanics of economic development. J Monetary Econ 22(1):3–42

  57. Marshall A (1890) Principles of economics. MacMillan, London

    Google Scholar 

  58. Mueller P, van Stel A, Storey DJ (2008) The effects of new firm formation on regional development over time: the case of Great Britain. Small Bus Econ 30:59–71

    Article  Google Scholar 

  59. OECD (2012) Redefining Urban: a new way to measure metropolitan areas. http://www.oecd.org/regional/redefiningurbananewwaytomeasuremetropolitanareas.htm. Accessed 12 Apr 2015

  60. Parker SC (2009) The economics of entrepreneurship. MIT Press, Cambridge

    Book  Google Scholar 

  61. Reynolds P, Storey DJ, Westhead P (1994) Cross-national comparisons of the variation in new firm formation rates. Reg Stud 28(4):443–456

    Article  Google Scholar 

  62. Rosenthal SS, Strange WC (2004) Evidence on the nature and sources of agglomeration economies. In: Henderson V, Thisse JF (eds) Handbook of regional and urban economics. Elsevier, Amsterdam, pp 2119–2171

    Google Scholar 

  63. Rodriguez-Pose A, Crescenzi R (2008) Research and development, spillovers, innovation systems, and the genesis of regional growth in Europe. Reg Stud 42:51–67

    Article  Google Scholar 

  64. Saxenian A (1994) Regional advantage: culture and competition in Silicon Valley and Route 128. Harvard University, Cambridge

    Google Scholar 

  65. Szerb L, Acs Z, Autio E, Ortega-Argiles R, Komlosi E (2013) REDI: the regional entrepreneurship and development index—measuring regional entrepreneurship. Final report. http://ec.europa.eu/regional_policy/sources/docgener/studies/pdf/regional_entrepreneurship_development_index.pdf. Accessed 26 Oct 2014

  66. Schwab K (2010) The global competitiveness report 2010–2011. World Economic Forum, Geneva

    Google Scholar 

  67. Schumpeter JA (1934) The theory of economic development: an inquiry into profits, capital, credit, interest, and the business cycle. Harvard University Press, Cambridge

    Google Scholar 

  68. Schumpeter JA (1939) Business cycles, vol 1. McGraw-Hill, New York

  69. Schumpeter JA (1949) Economic theory and entrepreneurial history—change and the entrepreneur; postulates and patterns for entrepreneurial history. Harvard University Press, Cambridge

    Google Scholar 

  70. Shane S, Venkataraman S (2000) The promise of entrepreneurship as a field of research. Acad Manag Rev 25:217–226

    Google Scholar 

  71. Stam E (2014) The Dutch entrepreneurial ecosystem. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2473475. Accessed 15 Oct 2014

  72. State of European Cities Report (2007). http://ec.europa.eu/regional_policy/sources/docgener/studies/pdf/urban/stateofcities_2010.pdf. Accessed 26 Oct 2014

  73. State of European Cities Report in Transition (2013). http://unhabitat.org/the-state-of-european-cities-in-transition-2013-taking-stock-after-20-years-of-reform/. Accessed 13 March 2015

  74. Van Stel A, Carree M, Thurik R (2005) The effect of entrepreneurial activity on national economic development. Small Bus Econ 24:311–321

    Article  Google Scholar 

  75. van Stel A, Suddle K (2008) The impact of new firm formation on regional development in the Netherlands. Small Bus Econ 30:31–47

    Article  Google Scholar 

Download references

Acknowledgments

We thank Rolf Sternberg, Taylor Aldridge, Stepan Zemtsov, Frank van Oort, Christoph Alfken, Johan Klaesson, Mikaela Backman, and participants in the “Geography of Innovation and Growth” session at the 17th Uddevalla Symposium in Uddevalla, Sweden (June 12–14, 2014).

Author information

Affiliations

Authors

Corresponding author

Correspondence to Maksim Belitski.

Appendix

Appendix

See Figs. 1, 2, and 3.

Fig. 1
figure1

Three effects of new business formation on employment change over time. Source: Based on the results of Fritsch and Mueller (2004, 2008)

Fig. 2
figure2

Average new firm start-up rates in European cities, 1994–2009. Source: Authors’ calculations based on UAS data and the spatial information obtained from http://epp.eurostat.ec.europa.eu/portal/page/portal/gisco/popups/references/administrative_units_statistical_units_1. Note: The legend shows range bands of variation in the proportion of new businesses

Fig. 3
figure3

Average GDP per capita in PPP in European cities, 1994–2009. Source: Authors’ calculations based on UAS data and the spatial information obtained from http://epp.eurostat.ec.europa.eu/portal/page/portal/gisco/popups/references/administrative_units_statistical_units_1. Note: the legend shows range bands of variation in the GDP per capita in PPP

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Audretsch, D.B., Belitski, M. & Desai, S. Entrepreneurship and economic development in cities. Ann Reg Sci 55, 33–60 (2015). https://doi.org/10.1007/s00168-015-0685-x

Download citation

JEL Classification

  • L26
  • M13
  • O18
  • R11
  • R50