Entrepreneurship in Big Cities

Considering the endogenous growth model developed by Romer, Braunerhjelm et al. (2010) pinpoints the role of entrepreneurs as the link between R&D expenditures and the growth rate of GDP. In fact, it is entrepreneurs who help to turn the knowledge into the goods, and then increase the growth rate as well as the employment rate of a country. As Figure 1 shows, the employment rate is positively related to the birth rate of entrepreneurship. Therefore, governments will normally encourage citizens to startup their own businesses in the hope that entrepreneurship will boost the market. Take China as an example. According to a report by Shen (2016), the ‘country has funneled $338 billion into startup investment funds’, thus it is regarded as the world’s biggest startup pool at the moment.

Figure 1 (http://link.springer.com/article/10.1007/s11187-009-9235-1)

With the emphasis of the role of entrepreneurship, several arguments also arise. The increased entrepreneurs cannot encourage the overall economic growth of the whole country; instead, it can only boost the market in some specific areas. Glaeser (2007) pointed out that some countries were much more entrepreneurial than others and entrepreneurial activities develop unevenly in a country. Figure 2 shows the distribution of venture capital investment in the US, where the biggest dots are across the Boston-New York-Washington Corridor and Silicon Valley. It can be seen clearly that the dots are distributed unevenly in the map. Why has this situation happened and what is the cause behind it?

Figure 2 (http://www.citylab.com/tech/2016/02/the-spiky-geography-of-venture-capital-in-the-us/470208/)

Firstly, bigger populations in big cities will encourage the existence of startup companies. Bigger populations mean more customers and enough labor. Therefore, on both the demand side and the supply side, big city is normally the optimal place for entrepreneurship.

Also, sufficient venture capital investment plays a key role in the determinations of the entrepreneurs about the place to startup their own businesses. Take the US as an example. As indicated in Figure 2, the biggest dots are mainly concentrated in the East and West coast, where the economy develops well in these areas. This means entrepreneurs will have enough funds to support their businesses, and conversely as there exists amassed entrepreneurial activities, the investment funds will tend to flow into this area. As a result, some developed areas will have much more entrepreneurship, while those developing areas might have less startup companies.

In addition, taking their childrens' further development into account, people are more willing to startup their own businesses in richer areas because of better education system and health care service in big cities. So the development of entrepreneurship is distributed unevenly in a country, which will lead to uneven development of economic growth within the country.

However, the uneven development of entrepreneurship is not a serious problem. According to Glaeser (2007), the number of entrepreneurs will decline with the concentration of an industry in an area. When the market has been saturated with startup companies, some entrepreneurs will exist and move to other areas for better development. Also, in order to alleviate the problems caused by uneven development between areas, the government can encourage entrepreneurship in smaller cities by increasing the investment funds or adjust the interest rate in local banks. As far as there can be a balance between big and small cities, entrepreneurship might be a good way to narrow the gap between rich and poor areas.

References:

Braunerhjelm, P., Acs, Z.J., Audretsch, D.B. and Carlsson, B., (2010) ‘The missing link: knowledge diffusion and entrepreneurship in endogenous growth’. Small Business Economics, 34(2), pp.105-125.

Shen, L., (2016) ‘China is the biggest venture capital firm in the world’, Fortune.

Glaeser, E.L., (2007) ‘Entrepreneurship and the City’. National Bureau of Economic Research. No. w13551.