New Firm Formation and the Region: Empirical Results from the United States

The BITS database constructed for the Office of Advocacy of the U.S. Small Business Administration is uniquely suitable for testing new approaches to explaining regional differences in economic growth rates. Recent theories of economic growth view local externalities, as opposed to scale economies, as the primary engine in generating growth in cities with their closely integrated surrounding counties (Labor Market Areas). While scale economies operate at the plant level, externalities operate at the level of the firm, primarily through entrepreneurial activity.

Using the BITS data we examined the impact of these externalities on regional employment growth from an entrepreneurial perspective by examining the relationship of local economic growth to local entrepreneurial activity. Since higher rates of entrepreneurial activity in an industry sector and region imply lower barriers to birth and greater local competition, this analysis can also be interpreted as an investigation of the impact of local competition on local economic growth. We found that higher rates of entrepreneurial activity were strongly associated with faster growth of local economies.