Entrepreneurship and Economic Growth
February 12, 2016
Can Tian, Shanghai University of Finance and Economic
Yong Suk Lee, Stanford University
Does entrepreneurship cause local employment and wage growth, and if so, how large is the impact? Empirical analysis of such a question is difficult because of the joint determination of entrepreneurship and economic growth. In this paper, Lee uses two different sets of variables the homestead exemption levels in state bankruptcy laws from 1975 and the share of MSA overlaying aquifers to instrument for entrepreneurship and examines urban employment and wage growth between 1993 and 2002. Despite using different sets of instrumental variables, the ranges of 2SLS estimates are surprisingly similar. A ten percent increase in the birth of small businesses increases MSA employment by 1.1 to 2.2%, annual payroll by 3.1 to 4.0%, and wages by 1.8 to 2.0% after ten years. Furthermore, an accounting exercise shows that the employment and payroll growth from entrepreneurship are not confined to the newly created businesses but spillover to the aggregate urban economy.
Brian Baugh and Hoonsuk Park, Ohio State University, and Itzhak Ben-David, Ohio State University and NBER
Online retailers have maintained a price advantage over brick-and-mortar retailers since they did not collect sales tax. Recently, several states have required that the online retailer Amazon collect sales tax during checkout. Using transaction-level data, Baugh, Ben-David, and Park document that households living in these states reduce Amazon purchases by 8% after sales taxes were implemented, implying an elasticity of -1.1. The effect is more pronounced for large purchases, for which they estimate a reduction of 11% in purchases and an elasticity of -1.5. Studying competitors in the electronics field, the researchers detect some evidence of substitution of the lost purchases towards competing retailers.
Titan M. Alon, Northwestern University; David W. Berger, Northwestern University and NBER; and Robert C. Dent and Benjamin Pugsley, Federal Reserve Bank of New York
Jorge Guzman, MIT, and Scott Stern, MIT and NBER
Mark Curtis, Wake Forest University, and Ryan Decker, Board of Governors of the Federal Reserve System
Konrad B. Burchardi, Stockholm University; Thomas Chaney, University of Chicago; and Tarek Alexander Hassan, University of Chicago and NBER
Burchardi, Chaney, and Hassan use 130 years of data on historical migrations to the United States to show a causal effect of the ancestry composition of U.S. counties on foreign direct investment (FDI) sent and received by local firms. To isolate the causal effect of ancestry on FDI, the researchers build a simple reduced-form model of migrations: migrations from a foreign country to a U.S. county at a given time depend on (i) a push factor, causing emigration from that foreign country to the entire United States, and (ii) a pull factor, causing immigration from all origins into that U.S. county. The interaction between time-series variation in country-specific push factors and county-specific pull factors generates quasi-random variation in the allocation of migrants across U.S. counties. The authors find that a doubling of the number of residents with ancestry from a given foreign country relative to the mean increases by 4.2 percentage points the probability that at least one local firm invests in that country, and increases by 31% the number of employees at domestic recipients of FDI from that country. The size of these effects increases with the ethnic diversity of the local population, the geographic distance to the origin country, and the ethno-linguistic fractionalization of the origin country.
Jean-Noel Barrot, MIT, and Ramana Nanda, Harvard University and NBER
Barrot and Nanda study a fall in financing constraints for small businesses following the US Federal Quickpay reform of 2011 and estimate its effect on firm-level employment. The reform accelerated payments for a subset of small business contractors to the US government, leading to a large positive cash flow shock for those firms through a reduced need to finance working capital. Authors find that on average, each accelerated dollar led to a 12 cent increase in payroll, with two-thirds of the effect coming from an increase in new hires and the balance from an increase in earnings for new and existing workers. Importantly, however, they find substantial crowding out in the employment growth among non-treated firms in counties with low unemployment, as well as within-state employment flows from low to high treatment industries. Their results highlight the substantial direct and indirect effects of firm-level financial frictions on labor market outcomes as well as point to a channel through which misallocation of capital could drive misallocation of labor in the aggregate economy.
Sabrina T. Howell, New York University
Pitch competitions are new but ubiquitous features of the entrepreneurial financing landscape. These diverse programs provide an opportunity to study the financial frictions facing early stage ventures. Novel, unique data on 2,200 firms competing in 31 competitions in 17 states permit an evaluation of the competitions' effect on financing outcomes. Winning increases the probability a firm raises angel or VC funding by 10-20 percentage points (about 1.5 times the mean). The programs may reduce investor-entrepreneur search costs, either through their convening power or because winning is a signal of quality. Alternatively, the resources provided to winners and participants may be helpful. Howell finds that conditional on win status, scores strongly predict outcomes, and that investor and corporate executive scores are much more predictive than entrepreneur, lawyer, nonprofit, and other judge type scores. Further, while cash prizes are helpful, winning is nearly as useful when there is no cash prize, and in-kind resources like education and mentoring do not appear useful. Winning is more useful when there are fewer winners. Together, these results suggest that pitch competitions serve a certification, or signaling function.