Geographic location and regional variation in entrepreneurship
David L. Deeds
Entrepreneurial activity does not exist within a vacuum; rather, it is activity which is firmly rooted in the context in which it is being under taken. Ventures are created and grown and succeed or fail within specific geographic contexts that may be more or less munificent along a number of dimensions. These dimensions include risk capital, skilled labor, technical and scientific knowledge, specialized suppliers, supportive cultural norms and values, and social capital/networks. The idea that the munificence of the geographic location of a venture matters is supported by findings that the level of relevant activity occurring within the venture’s geo graphic location complements the venture’s on going R&D (Zucker, Darby, and Brewer, 1998), increases its ability to develop new products (Deeds, DeCarolis, and Coombs, 1999), and makes the venture more attractive to investors (DeCarolis and Deeds, 1999). Each of these findings highlights critical benefits that a geo graphic location can provide to entrepreneurial ventures. However, research has also documented declining and even negative effects of concentration on venture research productivity (Deeds, DeCarolis, and Coombs, 1999) and the rate of venture IPOs (Stuart and Sorenson, 2003). It appears that competition for resources within a highly concentrated geography reduces ventures’ ability to create new products or access the resources required to become a public company.
Research shows that the rate, scope, and success of entrepreneurial activity vary across regions. Silicon Valley has achieved inter national renown as a hot bed of entrepreneurial activity, but metropolitan areas as diverse as Seattle, San Diego, Washington DC, Atlanta, Austin, Minneapolis, and Boston have also achieved notoriety as hot beds of entrepreneur ship. Alternatively, cities such as Cleveland, St. Louis, Buffalo, Detroit, Houston, Birmingham, and others have such low levels of entrepreneurial activity and success that fostering entrepreneurship has become a major focus of policy makers in these regions. The remainder of this essay explores both what we know about the roots of regional variation in entrepreneurial activity and what we do not know, by examining several streams of literature, including agglomeration economics, social networks and social capital, cultural norms and values, and amenities, culture, and bohemians.
The tendency for ventures in an industry to cluster has been noted in economics for decades. Marshall’s troika of benefits – labor pooling, specialized suppliers, and knowledge spillovers – underpins most of the research in this stream. The basic idea is that as ventures with similar needs and pursuits cluster in a specific geo graphic location, competitive benefits accrue to those ventures because of a larger pool of labor with the skill base required. This provides ventures with more flexibility to adjust their labor base to market demands and improves their ability to recruit skilled labor. An active job market, which provides numerous alternative employers to potential hires, may be particularly important to new ventures, given their high risk of failure. Highly skilled employees are unlikely to uproot their lives to move to a region where there are few alternative employers. Thus, geographic areas with clusters of new ventures are likely to have higher rates of formation, growth, and success because they have access to a superior labor force.
Ventures in a geographic cluster benefit from specialized suppliers of the inputs needed by entrepreneurial ventures: risk capital, legal know how, experienced value added investors, and even landlords familiar with the needs and requirements of new ventures. The clustering of venture capitalists and suppliers of risk capital, advice, and contacts has been well documented. What is less well documented is the specialization of the suppliers of legal services, consult ants, educational institutions, and landlords. As a simple example of the benefits of specialized suppliers, landlords familiar with the needs and challenges of new ventures in areas such as Sil icon Valley frequently waive deposits or tenant improvement fees, in exchange for warrants, options, or future payments. This immediately lowers the cash outflow of the venture, allowing it to focus more of its resources on the important early stage process of product or service development.
Perhaps the best researched benefits of clustering are knowledge spillovers. The localization of knowledge transfer is well documented. There is strong evidence that firms and universities tend to acquire new knowledge from within their own region (Jaffe, Trajtenberg, and Henderson, 1993). There is also evidence that alliances and supply contracts are localized (von Hippel, 1988), as are social networks (Rogers and Larsen, 1984). Research has also found that industries in which new knowledge is critical have a greater propensity to cluster than other industries (Audretsch and Stephan, 1996).
Geographic proximity of organizations with similar interests and expertise promotes the natural exchange of ideas through both formal and informal networks (Deeds, DeCarolis, and Coombs, 1999; Saxenian, 1994) and creates opportunities to capture knowledge spillovers. Knowledge spillovers have been credited for the relationship between venture proximity to major sources of scientific research and venture productivity (Zucker, Darby, and Armstrong, 1998). A locally bounded network has advantages in both costs and ease of knowledge trans fer. Bounding the network locally restricts the search for partners and in turn decreases search costs, as well as travel costs and communication costs. Each specific geographic location gener ally has a common set of cultural norms and values, practices and terminology which serve to facilitate the flow of information between parties (Saxenian, 1994). Geographic proximity also reduces the costs and increases the frequency of personal interactions that create social relations and enhances trust among the participants in a network (Porter, 1998).
The assumption that localized knowledge spillovers are freely available to ventures has come under question (Zucker, Darby, and Brewer, 1998). Locating in the right area may not be sufficient to benefit from the region’s knowledge; rather, tapping knowledge external to the venture requires the venture to establish a network of relationships with the sources of knowledge. Knowledge may not be freely avail able; knowledge may be available primarily through network connections between ventures and the sources of knowledge (i.e., scientists, university departments, research institutes, etc.). Given the importance of knowledge acquisition in the entrepreneurial process, the munificence of a geographic location is likely to influence the amount of entrepreneurial activity, size, and scope of the ventures created, and their rate of success and failure.
Recently, work on geography and entrepreneurial activity has expanded beyond the boundaries of the work of Marshall to consider both regional culture and the attractiveness of the region as a place to live and work. Busenitz, Gomez, and Spencer (2000) developed and validated a three construct profile of a country’s institutional profile for entrepreneurship. Their constructs of the regulatory, cognitive, and normative characteristics of a country provide a basis for examining the effects of various institutional arrangements within a country (per haps even a region) on entrepreneurial activity. The regulatory dimension considers the legal and governmental aspects that affect the costs and risks of entrepreneurship. The cognitive dimension is an attempt to assess the knowledge and skills possessed by the people in a region or a country about the establishment and operation of a new business. Finally, the normative 136 geographic location and regional variation in entrepreneurship dimension is an attempt to assess the region’s cultural support for entrepreneurship by looking at the level of admiration for entrepreneurs, as well as the value placed on innovation, risk taking, and creativity. While validated, these measures provide an opportunity for serious re search into the role of cultural and institutional arrangements in regional variation in entrepreneurship. This is an area that is ripe for additional research, with the potential to have an important effect on public policy.
Recently, significant work in the field of eco nomic geography has focused on the quality of a region’s labor pool, and the requirements for creating, attracting, and maintaining high quality/skilled labor in a region. For example, work by Florida (2002) on diversity and ‘‘Bohemians’’ argues that tolerance of diversity is critical to the attraction and retention of knowledge workers at the center of today’s entrepreneurial economy. While still evolving, this stream of research indicates that a tolerant and diverse region with significant amenities will attract the type of creative labor force and provide the type of cultural values that support entrepreneurial activity.
Regional variation in entrepreneurship is a complex phenomenon and difficult to explain. Beginning with the work of Marshall (1920), economists and more recently management scholars, economic geographers, and sociologists have all begun to examine this regional variation. While we are a long way from explaining the variation, Marshall’s troika of labor pooling, specialized suppliers, and knowledge spillovers remains the basis for much of what we know. The more current areas of research, such as culture, social networks, diversity, and amenities, do not refute Marshall’s ideas, but rather extend our understanding of how areas develop a regional advantage in the quality of the skilled labor pool and the mechanisms by which know ledge spillovers are captured. Future research is likely to entail longitudinal studies on the interplay between regional characteristics and entrepreneurial outcomes that examine not only the relationship between regional characteristics and entrepreneurial activity, but also explore the causal relationships among these variables.
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