Economic Outlook - October 2005

Study links ideas and taking risks to growth

The Cassopolis, Mich.-based Edward Lowe Foundation and the U.S. Small Business Administration’s Office of Advocacy recently studied the link between innovation and entrepreneurship for 394 Census Labor Markets. Researchers found those rich in both traits were more likely to have strong economies. Raleigh ranked No. 2 and was the only North Carolina region in the top 20. (Lower rankings in the study were not made public.) But some other Tar Heel labor markets got high rankings for the number of business startups, says Washington-based Office of Advocacy economist Brian Headd.

BNC: What was this study trying to determine, and how did it measure innovation and entrepreneurship?

Headd: Certain areas have innovation; certain areas have entrepreneurship. But you really need both to get good, solid economic growth. Variables were used to measure both of them between 1990 and 2001, and then they were modeled against economic growth to find out determinants of growth. The com-bination had a synergistic effect.

What were the variables?

One was average annual new-business births — new companies with new employees — per capita from 1990 to 2001. What that’s really trying to capture is: Per person, does your area have new companies? The second variable was average annual change in new-business births from 1990 to 2001. What we’re trying to measure there is: Is there an increase in entrepreneurial activity or a decrease in entrepreneurial activity? The third variable was percentage of companies growing rapidly. For this, entrepreneurial growth was measured by the proportion of businesses launched in 1991 that had grown to more than five employees by 1996. Are the companies that you have growing?

How does growth figure into the mix?

If you just have a bunch of new companies that go out of business and don’t hire and don’t grow, then you’ve really just got this spinning and churning without any kind of momentum. New companies tend to struggle to survive for a couple of years. Sure, they grow a little. But to grow rapidly, you often need experience and networking and solid customers. In the first year or two, percentagewise, you actually have a lot of growth. But numberswise, you may not. You often start very small. But once you get to 10 employees, you’ve been around three or four years, you can really grow.

How do you distinguish entrepreneurship from innovation?

Entrepreneurship you can think about as individuals, risk takers, expanding a business. Innovation you can think about as individuals coming up with new good ideas. So you want a new good idea for your business venture and a platform to utilize it. Without both, you can’t have growth.

What makes Raleigh so innovative?

A reasonable amount of the innovation is university-based. Obviously, the Raleigh area is a hotbed for university thinking. A lot of places did well in one area but struggled in another. You need to work with the resources you have, like a strong university setting such as Raleigh-Durham or a strong financial center like Charlotte.

Can you describe the strengths of some cities in North Carolina?

For the top three North Carolina cities — Wilmington, Charlotte and Raleigh — their best attribute was average annual change in new-business growth. But they struggled with regard to average annual new-business birth per 1,000 people in the labor force and with regard to the percentage of new businesses growing rapidly. Hickory is the same thing — strong new-business growth.

Is there something particularly appealing about North Carolina for people who want to start businesses?

It’s because of an idea out there from Richard Florida, a professor from George Mason, that creative people go to where creative people already are. Creative people are attracted to certain areas, and it’s having an impact. You’re seeing North Carolina become more of a hot spot for transplants. You think in terms of Seattle and Denver, places that recent graduates want to go. Raleigh and Charlotte also fall into that mix.

What value does this study offer to the individual regions, and how would you recommend that they use it?

It helps local individuals in regions to understand how their community is doing with regard to entrepreneurship and innovation compared with other areas. And it’s giving a recipe for success for individual areas. They may not necessarily want to copy the first or second or third area. But they may notice that there’s a town that’s very similar to them toward the top and say, ‘All right, they have similar resources that we have’ — be it a university, an airport, a good banking area — and then use that as a model. So it’s to let areas know where they stand and let them see what areas are doing well, so they can maybe learn from those areas. Also to let people know that entrepreneurship and innovation separately don’t produce results that entrepreneurship and innovation produce together with regard to local economic growth. There’s a synergistic effect.