Local and social: entrepreneurs, information network effects, and economic growth

Abstract

Information is an essential input to the entrepreneurial process. Information based on the trials of past entrepreneurial projects can be particularly useful as it reveals details about the local market, benefiting subsequent ventures. Through a formal model of entrepreneurial search characterized by information flows and networks, we hypothesize a diminishing returns relationship between entrepreneurial information, in the form of births and deaths of entrepreneurial projects and economic benefits in the form of employment growth. We leverage the natural experiment contexts of regional economies to explore the role of information as it varies across market scale. In addition, given that networks, an important channel for information, are most powerful and effective in localized settings, we use the regional socio-demographic variation to explore the role of networks defined by gender. We indeed find statistically and economically significant evidence for the information-growth relationship in terms of both market scale and gender, with larger positive employment effects in less dynamic markets and less-networked market contexts. After building the empirical case for the importance of information flows and networks, we conclude with policy implications with particular attention to broadening and deepening entrepreneurial ecosystems.

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Notes

  1. 1.

    In our view, informationally thick markets are both the cumulative result of dynamism over time as well as the immediate (or cross-sectional) result of a larger and denser region. In this paper, we offer empirical insights on dynamism through our specification which explicitly includes dynamic variables. In calculating the marginal effects, we gain insight on the cross-sectional sense of market thickness, as marginal effects incorporate a region’s level of entrepreneurial activity.

  2. 2.

    The instruments for our measures of entrepreneurship are primarily deep lags of entrepreneurial and small business activity. Historically high levels of entrepreneurship are a signal of an entrepreneurial culture that likely persists over time leading to more business activity in the future. Usefully, in contrast, historical entrepreneurship likely has no relationship to future employment growth. Given these characteristics, our instruments, specifically the proprietor’s share of employment (1979) and the share of employment in small businesses (1974), can usefully disentangle the relationship between entrepreneurship and employment growth.

    However, the deeps lags of entrepreneurial activity are not adequate instruments by themselves across the variations of our focal explanatory variables. Therefore, we also include the employment–residents ratio (1980) and exploit the gendered aspects of entrepreneurship for additional instruments, in particular the female employment–population ratio in 1950 (both from Haines 2010). The lagged employment–residents ratio indicates a region that was relatively employment dense, which in turn would have crowded out demand for new entrepreneurial niches while also stifling the supply of potential entrepreneurs through the density of relatively stable wage and salary jobs (Low and Weiler 2012). The female employment–population ratio corresponds to regions that may have had relatively significant male job losses, which is likely to have negative repercussions on the local business environment including those seeking niches to start enterprises.

  3. 3.

    Based on the first stage test of weak identification, the instruments are strong for births, deaths, and the interaction. First stage results are available from the author upon request. The relatively high Cragg–Donald statistic also provides evidence of strong instruments. Hansen’s J statistic suggests that the instruments are exogenous. Last, we cannot the reject the null of exogenous regressors based on the GMM distance test.

  4. 4.

    Please see “Appendix” for details on definitions and methodology.

  5. 5.

    Alternatively, the baseline gender blind regressions using the establishment birth rate, establishment death rate, and their respective quadratic terms yields the diminishing returns posited by the theoretical motivation. However, using the interaction of births and deaths in place of squared terms more directly reflects our theoretical priors and performs more consistently in the empirical analysis.

  6. 6.

    Deconstructing the metric into its high human capital component versus the actual creative arts component as in Bunten et al. (2015), allows us to both use the insights of Florida yet also assess the fundamental critique of McGranahan and Wojan (2007) and others that the broader measure simply captures specialization in high human capital occupations rather than any effect of “creativity.”

  7. 7.

    Please see “Appendix” for details on definitions and methodology.

  8. 8.

    The measures of male and female entrepreneurship are likely to each require their own set of instruments, since the surge of women entrepreneurs in recent decades represents a different trend than the long-standing presence of male business owners (Conroy and Weiler 2016). Women likely faced unique barriers to entry based on historical gender roles including a male-dominated business network. The evolution of women’s role in the labor force during the last 60 years, alongside a much larger sociocultural shift in women’s rights, roles, and opportunities, clearly created the preconditions for women’s advancement as business owners. While the cultural shift conceivably lowered barriers to female entrepreneurship, it is likely unrelated to future employment growth—thus suggesting a potentially valuable category of instrumental variables (IV).

    The twin developments of women’s role in the labor force alongside broader sociocultural shifts indeed prove to be fertile ground for the needed IVs. Growth in female labor force participation (1950–1970) and the divorce rate (1980) show themselves to be particularly good instruments for women’s entrepreneurial activity in our model of employment growth (Haines 2010). Increases in female labor force participation may signal growing opportunities in more stable wage and salary positions and also as business owners. Since most entrepreneurial financing is derived through family networks, a higher divorce rate may cut off critical credit, especially during an era when men controlled most assets and women had remarkably little recourse to formal credit channels.

    In the final statistical models, we combine the growth in female labor force participation and divorce rate with the proprietor’s share of employment in 1979 and the share of employment in small businesses in 1974 for the IV mix. In both cases, the first stage tests of weak identification suggest that our instruments are strong across the establishment birth rate, death rate, and their interaction.

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Appendix: instrumental variable analysis

Appendix: instrumental variable analysis

See Tables 7, 8.

Table 7 Key variable comparison
Table 8 Employment growth

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Conroy, T., Weiler, S. Local and social: entrepreneurs, information network effects, and economic growth. Ann Reg Sci 62, 681–713 (2019). https://doi.org/10.1007/s00168-019-00915-0

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