Local Industrial Conditions and Entrepreneurship: How Much of the Spatial Distribution Can We Explain?

by Edward L. Glaeser & William R. Kerr

Overview — Some places, like Silicon Valley, seem almost magically entrepreneurial with a new start-up on every street corner. Other areas, like declining cities of the Rust Belt, appear equally starved of whatever local attributes make entrepreneurship more likely. Many academics, policymakers, and business leaders stress the importance of local conditions for explaining spatial differences in entrepreneurship and economic development. This paper uses data from the U.S. Census Bureau to characterize these entry relationships more precisely within the manufacturing sector. Key concepts include:

  • Local costs and relevant natural advantages (e.g., coastal access, energy prices) are very important for new manufacturing start-ups.
  • Manufacturing start-ups are particularly drawn to cities with suitable labor forces in terms of occupational distributions. This labor dependency holds across all sizes of start-ups.
  • New start-ups are drawn to areas with smaller, more entrepreneurial suppliers. Local customers are less important for manufacturing startups.
  • Measures of general entrepreneurial culture did not predict manufacturing entry well.

Author Abstract

Why are some places more entrepreneurial than others? We use Census Bureau data to study local determinants of manufacturing startups across cities and industries. Demographics have limited explanatory power. Overall levels of local customers and suppliers are only modestly important, but new entrants seem particularly drawn to areas with many smaller suppliers, as suggested by Chinitz (1961). Abundant workers in relevant occupations also strongly predict entry. These forces plus city and industry fixed effects explain between sixty and eighty percent of manufacturing entry. We use spatial distributions of natural cost advantages to address partially endogeneity concerns.

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