Association for Public Policy Analysis & Management

In this paper, we explicitly incorporate and quantify entrepreneurship within a spatial-equilibrium endogenous growth framework to better understand the role of entrepreneurs in determining economic growth. We emphasize the revelation of marketplace information and a resultant externality, aspects of entrepreneurship that have not been identified previously in the literature. Through the successes and failures of their projects, entrepreneurs generate valuable marketplace information regarding the contours of the geographic and industrial territory in which their projects reside. This externally beneficial information can be utilized by future entrepreneurs, who can emulate successful projects and avoid the pitfalls identified by the failures.

We quantify this understanding by focusing not on the entrepreneur but on her project. To undertake a project, an entrepreneur must assess local and broader demand for her products and services, the necessary supply network, and the feasible financing. Each entrepreneurial action—opening, expanding, or even terminating a project—illuminates a niche of the marketplace. Project financiers must assess these same aspects as well as the suitability of the entrepreneur herself. Through its evolution and possible eventual demise, the project provides information on the viability of similar projects. Each such entrepreneurial project thus generates an externality for potential followers. Regions with greater density of such projects become more attractive for ensuing entrepreneurial activity and economic growth. Systematic differences in regional information depth through such entrepreneurial dynamism create effective geographic informational asymmetries, market failures that we show theoretically can reinforce stagnation in economically-marginalized areas.

Our basic hypothesis is maintained empirically. Spatial differences in entrepreneurial activity, as expressed through the births of local establishments, have a statistically and economically significant effect on local employment growth. This finding is robust to a variety of specifications. Furthermore, local establishment births and deaths are strongly associated with future establishment birth rates—evidence that future entrepreneurs look to past successes and failures when choosing what projects to implement. Finally, we close the loop by identifying twin indirect positive impacts that establishment deaths have on future employment growth— effectively underscoring the likely informational role of entrepreneurial projects on growth. We find similar results when we include establishment births alongside existing measures of entrepreneurship; these results support our contention that establishment births capture a relationship with employment growth that is different from its relationship to alternatives such as proprietorship and business employment. The fundamental relationship between entrepreneurial projects and employment growth remains consistent when using instrumental variable analysis featuring historical mining activity as a first-stage instrument. These results are robust to a variety of specifications of independent variables and remain remarkably strong even after including traditional controls known to influence local growth.