Entrepreneurial Innovation and Economic Development
August 6, 2001
Why do we see uneven economic development within a country or a state or even within a metropolitan area? Among many factors that drive economic development, the obvious one is local entrepreneurial activity and innovation. But why do we see regional differences in entrepreneurial activities and innovation?
These questions are the subject of a new book on the dynamics of new firm formation. Economist Vinod Sutaria collected time-series panel data from 27 Texas metropolitan areas for a period of 16 years. Sophisticated data analysis, used in this study of Texas Manufacturing, helps explain the role of local or regional factors in fostering entrepreneurial innovation.
Among the findings:
- A well-educated and skilled labor force are central to a region's ability to foster new firms.
- A 1 percent increase in the number of people having a college degree is associated with a 0.31 percent increase in the rate of new firm formation.
- Large metro areas gave birth to more new firms as compared to small metro areas; moreover, geographic isolation seems to deter formation of new firms.
- The level of local government spending had no impact on new firm formation.
Since regional factors influencing new firms are not easily amenable to policy intervention, the author concluded government does not appear to have any direct role in influencing new firm formations. Government can, given its powers, influence the process of new firm formation, albeit indirectly, by minimizing bureaucratic complications, simplifying complex rules and regulations, reducing delays, and by promoting a general entrepreneurial environment. Further, these policies would also enhance the capacity for all businesses to operate effectively and efficiently.
Source: Vinod Sutaria, "The Dynamics of New Firm Formation," Bruton Center for Development Studies series (Aldershot, U.K.: Ashgate Publishing Company, April 2001).
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