Clusters of Entrepreneurship and Innovation

by Aaron Chatterji, Edward Glaeser & William Kerr

Overview — For many decades, the common wisdom among local officials pursuing employment growth for their areas was to attract a large firm to relocate. This "smokestack chasing" led to many regional governments bidding against each other and providing substantial incentives to large plants making their location choice decisions. The success of entrepreneurial clusters in recent decades, however, has challenged this wisdom, and now many policy makers state that they want their regions "to be the next Silicon Valley." This has led to extensive efforts to seed local entrepreneurship, with today's politicians routinely announcing the launch of an entrepreneurial cluster in a hot industry, such as biotechnology, nanotechnology, or advanced manufacturing. In this paper, the authors explore the rationale for and efficacy of policies to promote local entrepreneurship and innovation and reflect on recent initiatives in this domain. Key concepts include:

  • Entrepreneurship is often linked to local economic growth, and economic theory provides rationales for why governments may want to support entrepreneurship and innovative activities in their local areas (e.g., spillover benefits to neighboring firms). Economic theory and practice also identifies potential pitfalls in these efforts.
  • Policies supporting the emergence of clusters of small-scale entrepreneurs allow policy interventions to touch many entrepreneurship simultaneously, providing important scale to interventions, and appear to respect the empirical tendency of economic activity to cluster. Such approaches can also avoid the dangers of targeting specific firms for support.
  • Despite this foundation and the tremendous current policy interest for entrepreneurship, the optimal formulation of entrepreneurship policy is not yet known. Indeed, relative to our understanding of how to craft policies for mature fields like international trade and monopoly, we have very little experience evaluating policies towards start-up clusters.
  • The best path forward involves extensive experimentation and evaluation. Without advances in these dimensions, we cannot be confident that policies to promote entrepreneurship will have their intended impact.

Author Abstract

This paper reviews recent academic work on the spatial concentration of entrepreneurship and innovation in the United States. We discuss rationales for the agglomeration of these activities and the economic consequences of clusters. We identify and discuss policies that are being pursued in the United States to encourage local entrepreneurship and innovation. While arguments exist for and against policy support of entrepreneurial clusters, our understanding of what works and how it works is quite limited. The best path forward involves extensive experimentation and careful evaluation.

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