Tag / Entreprenurship

by Katie Bawden

Understanding Job Creation: Part 1 Place

Introduction

This four-part literature review examines how jobs are created to identify consistent themes, dynamics and determinants that government can apply to develop meaningful policy and initiatives. Part 1 which examines how places create and destroy jobs. It finds that agglomeration is a driving force behind structural change, economies of scale and how places grow and create jobs. Part 2 examines new research into the specific role of industry in job creation, noting that the traded industries bring wealth into an economy that flows through to increase local demand and create new jobs. This effect is known as the job multiplier and the more skilled a traded industry is, the higher the multiplier will be. Part 3 examines the age and size of different business segments to determine which firms have the greatest impact on job creation. It finds that small and young businesses, disproportionality create new jobs. Finally, Part 4 identifies the consistent themes emerging from literature and presents a framework to support government policy and initiatives.

Dynamics and determinants:

Dynamics and determinants (2)

 

PART 1: Place

Geography Matters

Geography matters for the future of job creation, as jobs are becoming increasingly concentrated in certain places (OECD, 2018). In particular, small and rural towns are distinctly shrinking as residents relocate to more prosperous areas such as cities.

As nations become more developed, the economy shifts from agricultural to industrial to service-oriented and to technology automation. With new ways of production focused on the generation of ideas (rather than goods) and economies of scale, fewer workers are required in rural areas where traditional production remained concentrated (World Bank, 2009; OECD 2018). This dynamic is known as structural change and it leads to structural unemployment – the worst type of unemployment. Over time, displaced workers typically shift to labour markets where there are more job opportunities, higher wages and access to retraining (Bivens, 2018). Places that are not able to adapt to changing technology and create new jobs, will begin to decline as they often lack the skill profile to transition their economy (OECD, 2018).

Structural unemployment is a “longer lasting form of unemployment that is caused by fundamental shifts” in an economy caused by factors such as technology, competition and government policy (Kenton, 2018). Due to this shift, workers lack the right skills demanded by their current employer or the local labour market and live too far from other regions where jobs are available (Bivens, 2018; Kenton, 2018).

However, structural change can also be desirable as it can enable an economy to transition from low skill to high-skilled, high-value production. Structural change can facilitate a wave of “creative destruction” which supports productivity improvements at the firm level and drives long-term economic growth and job creation at a macro level. However, early recognition of the opportunities and risks is required to develop a range of innovative initiatives that build economic capacity to respond and restructure (Henry & Medhurst, 2011). Foray (2015) suggests that it is important to look at the aggregation of production in a region to identify where industry and government can work together to shape new opportunities or support the restructuring of industry through new ‘entrepreneurial discoveries’.

Creative destruction “refers to the incessant product and process innovation mechanism by which new production units replace out-dated ones. This restructuring process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets (Caballero, N.D)”.

Why Do People Move?

Larger and denser settlements such as cities offer more diverse and higher paid jobs; and talented people are more able to move to take up opportunities (Florida, 2008). The more educated you are the more able you are to move for work, with 1 in 4 university graduates doing so. While there are personal drawdowns from relocation such as family relationships, most people will earn higher wages, access new networks and other opportunities (Florida, 2008).

In addition, people who move, such as immigrants tend to be more entrepreneurial and are natural risk takers, born out of either choice or need. They are more open to new opportunities, resilient and importantly, they bring their unique perspectives and experience – a winning combination for innovation and venture creation. Wines (2018) notes that “over 40 per cent of firms in the United States (US). Fortune 500 list were founded by immigrants or children of immigrants.” While a United Kingdom (UK) study found that “immigrants are twice as likely to be entrepreneurs” and that “one in five UK tech start-ups is founded by immigrants (Wines, 2018).”

Thus cities become a mixing pot of entrepreneurs, designers and creative people, engineers, financiers, industry professionals and academics – all highly skilled and motivated to share ideas (Florida, 2008). And it is these entrepreneurial people, who create jobs twice as fast as established firms (Wines, 2018).  In combination with the productive advantage that cities offer through production and distribution economies of scale, they are primed to become a “hub for innovation” and an “engine of prosperity” (Duranton, 2012; Moretti, 2012).

The Agglomeration of Jobs

Places that are able to build an economic advantage based on high-value industries become a hotbed for job creation because of the benefits gained from workforce capacity and industry co-location and proximity to markets. These benefits include concentrated and varied infrastructure, strong networks to support market access, increased venture creation, higher wages and an attractive lifestyle and culture through diversity of service offerings (Moretti, 2012). These dynamics form what is known as agglomeration and agglomeration is strongly linked to job growth, high productivity and innovation (Clarke & Xu, 2013; Goswami, Mevedev & Olafsen, 2018; Moretti, 2012).

Agglomeration is derived from the benefits that are gained from co-location and proximity and include:

  • localization – being near other producers of the same commodity or service;
  • urbanization –  being close to producers of a wide range of commodities and services; and
  • capacity – the size of the local market, the national market, access to international markets  (Clarke & Xu, 2013; Glaeser, 2010; World Bank, 2009).

The World Bank’s Comprehensive Worldwide Business Survey found that agglomeration forces were more important to job growth than the overall business environment (Clarke and Xu, 2013). This is not to dismiss the business environment, as elements such as labour regulation, access to finance and local skill levels were also found to be important to business expansion and employment.

Agglomeration is a reinforcing dynamic that generates ‘increasing returns’ through increased concentration of activity, skills and infrastructure. As workers and entrepreneurs are attracted to places because of job opportunities, higher wages, networks and market access, it builds the economic capacity of a place though diversity of skills, increased resources and services, knowledge spillovers and economies of scale (Duranton, 2012). These positive externalities lead to the economy as a whole becoming more productive, innovative and driving up wages. Thereby, continuing to attract more people and increase firm and job creation.

However, agglomeration does not happen automatically and jobs need to be continuously created to address creative destruction, import competition and compensate for the natural the turnover of firm entries and exits (Foray, 2015). Thus, the dynamics of firm and job creation is also shaped by places functionality (Duranton, 2012). According to Polèse (2009) there are seven determinants of agglomeration, these include:

  1. Economies of scale in production and production processes – concentration of production facilities and firms close to their workers and suppliers;
  2. Economies in scale for trade, transportation and distribution facilities – infrastructure that supports more accessible networks and lower unit costs;
  3. Proximity to markets and opportunities to access new market – to enable firm expansion and market growth;
  4. Industrial clusters – benefits that firms receive by being located close to other firms in similar or interconnected industries such as labour pools, specialisations, branding, spillovers;
  5. Diversity – to enable reliance, spillovers and spinoffs;
  6. Centrality – creating a centre and density for trade, collaboration and networking; and
  7. Creativity and culture – innovation and sense of place that draws people to each other.

Skills, Spillovers and Scrabble Theory

While agglomeration draws workers and entrepreneurs together to support productivity, innovation, and firm creation, workers need to have the essential skills and capabilities in the first place to respond to opportunities. Although this relationship has been well understood for a long time, there are many dynamics involved.

The more educated a city is, the more able it is to adapt to structural changes and identify new opportunities (Cortright, 2017). This is because the more educated workers are, the more productive, knowledgeable and adaptive they are. In addition, skilled workers are able to command a high wage premium as they are critical to a firm’s competitiveness. Thus at a place level, the more skilled jobs a place has, the larger the employment multipliers are (derived from high wages) and innovation spillovers (derived from knowledge and learning) that flow on to other industry sectors to support job creation (Gonzalez-Pampillon, 2019; Muro, 2012).

Hausmann et al (2007) have likened this dynamic to a game of scrabble. They note that a place’s economy is made up of different letters (skills) and the more letters you have the more words you can make (products). Some letters (skills) are also worth more (higher skilled) and therefore are more valuable as they help make more words (products) and more complex words (higher value products). As a result, the more diverse and higher skilled a place becomes, the more that place is able to drive innovation, job creation and offer high wages.

by Katie Bawden

Part 3: the Innovation Ecosystem – Roles and Responsibilities

To drive an innovation-led approach to economic growth, it is essential to understand the roles of both the public and private sector, including academia; and how each can enhance to the ecosystem.

Innovation ecosystem: is the flow of technology and information among people, enterprises, and institutions central to an innovative process. It contains the interactions between the actors needed in order to turn an idea into a process, product, or service on the market (OECD, 1997).

PUBLIC SECTOR

The public sector has responsibility for creating an environment that ignites innovation and supports entrepreneurs. Yet, as Isenberg (2016), notes “there’s no exact formula for creating an entrepreneurial economy; there are only practical, if imperfect, road maps”.

However, it is generally acknowledged that government have various tools at hand. Governments can create ‘demand factors’ for innovation such as policy, regulation and innovation targets the cause the market to change direction (this is essential to enable economic structural change). While Innovation ‘supply factors,’ may include research and development (R&D) credits, academic partnerships and university graduates.

In Mazzucato’s book, The Entrepreneurial State (2014), she argues that government has a bigger role beyond tax credits and the enabling environment. That is, government can also invest in transformational R&D where there is a public good, the risk is high and long term investment is. Marzzucato suggests that such investment by government often leads to transformational change that can create entirely new sectors and markets. Examples of these types of investment include the nuclear energy, the internet and GPS. For government to take this approach it needs to have a long term agenda for technology change; and work with in partnership academia and the private sector so they too can seize the opportunity along the way to add new information to develop spinouts.

Workforce development is also directly linked to the future of businesses creation and economic growth.  Government set the policy, run many of the programs and fund many academic institutions that develop skilled workforce essential to the capability to develop innovation commercialise but to also enable economic transformation when required (Fetsch , 2016).

Fetsch (2016), Moretti (2012) and (Sandbu, 2017) all argue that government can also drive immigration policy that supports innovation policy through three main factors:

  1. importation of skilled workforce to compliment or build a competitive advantage;
  2. immigrants “play a disproportionate role founding companies that make a big economic impact” because they are naturally risk takers having immigrated in the first place; and
  3. Foreign Direct Investment (FDI) flows often through the expat community to enable innovation and business growth

Isenberg (2010) provides a localised perspective and suggests that many government efforts focus too narrowly on building ecosystem determinants. Instead he suggests that government should focus on the following nine principles to “turbocharge venture creation and growth”. Isenberg’s principles include:

  1. Stop emulating Silicon Valley. Rather you can develop your own culture and practices that underpin entrepreneurship and innovation. Also see the ‘rules’ described in the Hwang and Horowitt (2012) book the Rainforest: the secret to building the next silicon valley;
  2. Shape the ecosystem around local conditions. Home grown solutions that compliment “local entrepreneurship dimensions, style, and climate” (Isenberg, 2010);
  3. Engage the private sector from the start. Reach out and understand industry needs;
  4. Favour the high potentials. This is through focusing on gazelles (high growth firms) and applying economic gardening approaches, as noted in Part 2;
  5. Get a big win on the board. Celebrate successes as success can spur more innovation and entrepreneurship;
  6. Tackle cultural change head-on. Governments can help to promote the benefits of innovation, the opportunities entrepreneurship through setting values that celebrate innovation and entrepreneurship, encourage collaboration and by building a tolerance of failure;
  7. Stress the roots. Let the market determine value – be careful propping up ventures;
  8. Don’t over engineer clusters; help them grow organically. Clusters occur naturally when an opportunity exists and are an important element of an ecosystem. However, government shouldn’t be picking winners, just backing them; and
  9. Reform legal, bureaucratic, and regulatory frameworks. Over regulation at all levels can stifle innovation and entrepreneurship. Examining the institutions and incentives is essential to ensure an ecosystem is guided by positive regulation.

 

PRIVATE SECTOR

The private sector is the main agent of innovation and value creation. They are the ones that take the risks, commercialise the products and services, and create jobs. Yet private stakeholders are often multifaceted, holding many roles along the innovation pipeline.

Entrepreneurs are the people with the ideas and are risk takers. In his book, Worthless, Impossible and Stupid, Isenberg (2013) notes that entrepreneurship is defined by an individual’s ability to perceive, create and capture extraordinary value.

A Start-ups is an early stage business that is beginning to scale rapidly. Angel investors “Incubators, accelerators, universities, and public agencies” typically provide the majority of help establishing the business in its early stages (Startup Europe India Network, N.D). Most start-ups die in their first two years in a period called the valley of death.

Valley of death: is a common term in the start-up world, referring to the difficulty of covering the negative cash flow in the early stages of a start-up, before their new product or service is bringing in revenue from real customers (Forbes, 2013)

While Small to Medium Enterprises (SMEs) are small businesses that have overcome the valley of death, tested the viability of their product of services, established a customer based and achieved growth that has allowed them to employ staff. Yet SMEs often lack the knowledge on how to scale-up and lack the resources to invest in innovation to fuel productivity and development (OECD, N.D). Once a business has gotten to this stage of its development, it has greatest potential to become a gazelle (see Part 2).

Investors are typically defined based on the capacity they can invest.  Most types of investors provide more than capital, also offering business support, networks and sometimes markets.

Typically early stage investors offer small amounts of capital and include business angels, incubators and accelerators[1], and some seed stage venture capital funds. As the start-up grows, it requires more investment to fund its expansion and will seek an investment from the venture capital investors who are considered growth-stage investors. Private equity investors and corporates are typically investors at a later stage business growth which may include business merges, stock market listing and buy-outs (Startup Europe India Network, N.D).

Hwang and Horowitt (2012) put forward a softer model in their analysis of the innovation ecosystem and identify:

  • Business leaders: who have a reputation of being innovative. What culture, process and strategy does individual business set to in place to innovate within their business to support innovation?
  • Keystones: individuals or businesses who serve as agents that connect people, ideas and investment to catalyse diverse action. Keystones can also exist in the private sector.
  • Stakeholders: anyone who is an entrepreneur, investor, support organisation or participates in the innovation ecosystem.
  • Role models – local entrepreneurs that are visibly successful in the community and offer examples of success and failure. They are people that promote a positive innovation and entrepreneurship culture. They challenge aspirations and values.
  • Community – the industry sectors, services providers and collective human capital that underpin an ecosystem.

 Industry: However ecosystems are also place-based, in that innovation, R&D and spill-overs are happen in a place, that is proximity is important for knowledge diffusion and is primary influenced by local innovation capacity (Rodríguez-Pose & Crescenzi; 2008). As a result a places industry base and industrial clusters become another important organising principle and stakeholder group for analysis.

Industrial cluster: “are geographic concentrations of interconnected companies and institutions in a particular field. Clusters encompass an array of linked industries and other entities important to competition. They include, for example, suppliers of specialized inputs such as components, machinery, and services, and providers of specialized infrastructure (Porter, 1998)”.

Crescenzi & Iammarino (2016) note that “economic and innovation trajectories do not depend exclusively on localised productive and knowledge assets but need to combine ‘local buzz’ and ‘global pipelines’”. Thus looking at a places external linkages through the lens of FDI flows, global supply chains and multinational corporations offers the opportunity to extract information and opportunities to leverage innovation, build capability and establish new markets.

Finally, academia, which provides an institutional framework for developing workforce skills and values that support and drive innovation and enable agglomeration forces which drive productivity. Academia can even compensate for some businesses that are not as well-equipped to do under take R&D through the production of skilled workers; public-private partnerships; and the generation of patents that diffuse into the local innovation ecosystem (Cauce, 2016).

CONCLUSION

No matter how you analyse your ecosystem, fundamentally what drives success it is how we join up and collaborate to create value. Hwang and Horowitt (2012) note that ecosystems “thrive because of normative culture that accelerates the evolution of human organisation into ever-increasing patterns of efficiency and productivity”.  In other words, we need to create value systems and networks that enable collaborative and symbiotic behaviours across all actors if we are to achieve well-functioning innovation ecosystems. No single individual or stakeholder group can do it alone.

 

Book References

Isenburg, D (2013) Worthless, Impossible and Stupid. Harvard Business Review: Boston.

Hwang, V. and Horowitt, G. (2012) The Rainforest: the secret to building the next silicon valley.
Regenwald: California.

Mazzucato, M (2015) The Entrepreneurial State. PublicAffiars: New York.

Moretti, E (2012) The New Geography of Jobs.  Houghton Mifflin Harcourt Publishing: New York.

 

[1] private incubators and accelerators are often owned by investors who use the structure as a mechanism to identify investment opportunities.