Harvard University professors Edward Glaeser and William Kerr recently published an article detailing their long-standing research that contradicts the generally accepted notion that regional economic growth is highly correlated to the number of large employers.
The professors call the systematic approach of local governments offering economic incentives (usually in the form of tax breaks) to large, developed corporations “smokestack chasing.” However, in contrast to generally accepted political theory, their research proves that incentives for the creation or growth of a greater number of smaller or start-up firms is more attributable to regional economic growth.
The authors of the article highlight a study in which major U.S. metropolitan areas were examined between 1977 and 2000. In metro regions with a higher number of firms-per-worker there was also a higher employment growth rate. In fact, the employment growth rate was nearly 10% higher. Even discounting such factors as tax policy or other special circumstances that would perceivably skew results, the relationship remained the same.
Perhaps expecting to contradict the results of Harvard research, a similar study was conducted by Barcelona’s Pompeu Fabra University, which took special consideration of outside forces which may have skewed data. However, the study confirmed the results of earlier research that industries marked by higher levels of entrepreneurial activity (smaller firms and more start-ups), experienced faster employment growth.
The results seemingly directly challenge what modern politicians tout as the means to create economic prosperity within a community. While politicians celebrate large companies relocating or expanding within their districts, established corporations often grow at a much slower rate than smaller firms still in their growth stages. The article points to reasons for the disparity that include the use of well-established networks to source goods or transferring employees from other locations.
You can find more on Professors Glaeser and Kerr’s research at the Harvard Business Review.
Their research supports what we have always known here at The National Puerto Rican Chamber of Commerce: Innovation and entrepreneurial growth is the key to successful, long-term economic growth.
If more of our elected representatives understood the need to support and develop that which is advantageous to the entrepreneurial sector in place of larger projects that create short-term, unsustainable economic stimulus, the American economy would have a much brighter economic outlook.
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