29 Aug 2012Working Paper Summaries

Entrepreneurship and Urban Growth: An Empirical Assessment with Historical Mines

by Edward L. Glaeser, Sari Pekkala Kerr and William R. Kerr

Does entrepreneurship cause urban growth? Economists and policymakers often argue yes, but it is remarkable how little is known about what lies behind this relationship. This paper investigates the connection more closely using a link between historical mineral and coal deposits and modern entrepreneurship observed in US cities today. Because the process of bringing ores out of the earth is a capital-intensive operation that often benefits from large-scale operations, cities with a historical abundance of nearby mineral and coal mines developed industrial structures with systematically larger establishments and less entrepreneurship. These early industrial traits persisted long after the initial conditions faded through intergenerational transmissions, path dependency, and similar. Using this variation, the study finds the strong connection between a city's initial entrepreneurship and subsequent economic growth is still observed after removing the most worrisome endogeneity. This connection works primarily through lower employment growth of startups in cities that are closer to mines. Key concepts include:

Entrepreneurship plays an important role in modern urban growth. Entrepreneurship is systematically related to local employment growth over the past three decades for American cities. The casual relationship behind this correlation, however, has been hard to discern due to endogeneity of entry decisions (can be biased upwards or downwards).
Proximity to historical mines provided past benefits to cities. Indeed, cities may have been founded precisely to exploit these deposits. These initial conditions, however, created industrial legacies that are not conducive to entrepreneurship today.
Looking at US cities from the 1970s onwards, cities built near historical mines in 1900 have larger establishments, less entry for entrepreneurial firms, and less urban growth. This is relationship is true even in industries that are not directly related to mining, such as trade, finance, and services. These effects also hold in many different regions of the US.
Using this empirical link to past mines, the causal nature of entrepreneurship for city growth can be more accurately assessed. The link holds up very well, usually suggesting that the basic correlation is approximately right. There are some limits, however, that the paper discusses that leads to cautious conclusions.
The primary mechanism behind the linkage of entrepreneurship to urban growth is that it creates in cities an up-or-out dynamic for firms.

Author Abstract

Measures of entrepreneurship, such as average establishment size and the prevalence of start-ups, correlate strongly with employment growth across and within metropolitan areas, but the endogeneity of these measures bedevils interpretation. Chinitz (1961) hypothesized that coal mines near Pittsburgh led that city to specialization in industries, like steel, with significant scale economies and that those big firms led to a dearth of entrepreneurial human capital across several generations. We test this idea by looking at the spatial location of past mines across the United States: proximity to historical mining deposits is associated with bigger firms and fewer start-ups in the middle of the 20th century. We use mines as an instrument for our entrepreneurship measures and find a persistent link between entrepreneurship and city employment growth; this connection works primarily through lower employment growth of start-ups in cities that are closer to mines. These effects hold in cold and warm regions alike and in industries that are not directly related to mining, such as trade, finance and services. We use quantile instrumental variable regression techniques and identify mostly homogeneous effects throughout the conditional city growth distribution.