Economic growth is highly correlated with an abundance of small, entrepreneurial firms. This relationship is even stronger looking across industries within cities, and has been taken as evidence for competition spurring technological progress, product cycles where growth is faster at earlier stages, and the importance of entrepreneurship for area success. Any of these interpretations is possible, however, and the only thing that we can be sure of is that entrepreneurial clusters exist in some areas but not in others. This paper first documents systematically some basic facts about average establishment size and new employment growth through entrepreneurship, then analyzes entry and industrial structures at the region and the city levels using the Longitudinal Business Database. Key concepts include:
- There is a remarkably strong correlation between smaller average firm size and subsequent employment growth due to start-ups.
- Evidence does not support the view that regional differences in demand for entrepreneurship are responsible for these entrepreneurial clusters.
- Instead, the evidence suggests that spatial differences in the fixed costs of entrepreneurship and/or in the supply of entrepreneurs best explain cluster formation.
Clusters of Entrepreneurship