Cities and Entrepreneurship

In a 1961 paper, Benjamin Chinitz examined the differing post-war economic fortunes of  Pittsburgh and New York through the lens of industrial history. Pittsburgh’s proximity to coal and iron ore deposits led it to specialize in steel, an industry where a few big firms dominated due to economies of scale. Chinitz argued that the domination of large firms crowded out the kinds of entrepreneurial activities that sustain job growth. Pittsburgh bred company men rather than entrepreneurs.

New York City, on the other hand, had a stronger history of entrepreneurship. Its pre-war garment industry consisted of large numbers of small entrepreneurial firms rather than a few dominant establishments. New York bred entrepreneurs, entrepreneurs who had ready access to financing and inputs from firms that had grown accustomed to dealing with many small firms because of the apparel industry. As the figures below suggest, more entrepreneurial cities (measured as average firm size or the share of employment in start-up firms) tend to experience stronger urban employment growth.

Source: http://www.nber.org/papers/w18333

If Chinitz was correct, a city’s industrial history can have an enduring effect on entrepreneurial activity. More specifically, he suggested that an initial concentration in extraction-related industries such as steel will lead to the dominance of a few large firms and a relative lack of entrepreneurship. A recent working paper by Edward Glaeser, Sari Pekkala Kerr, and William Kerr puts the Chinitz hypothesis to the test.

The authors consider the proximity of US cities to coal and mineral deposits in 1900. They find that historical proximity to such deposits correlates with larger sized manufacturing establishments from 1963 onward. The relationship is strongest in industries that overlap with mining, such as primary metal manufacturing, but the authors also find that historical deposits are associated with larger firm size throughout the city, even in unrelated sectors like services and finance. Because average firm size is a reasonable, if imperfect, measure of entrepreneurship, this finding supports Chinitz’s hunch that big firms crowd out entrepreneurial activity.

Though tentative, the authors’ results suggest that cities located farther from mines in 1900 should now experience smaller firm sizes, greater entry of new firms, and greater job growth in trade, services, and finance compared to their mine-proximate counterparts. Consistent with Chinitz’s intuition, the authors’ evidence suggests that entrepreneurship plays an important role in urban employment growth.

This paper is interesting in light of the rapid urbanization taking place in many developing countries, some of which also have significant mineral deposits. In devising growth strategies, such countries should be mindful of overemphasizing capital-intensive mineral extraction. Compared to a sector like light-manufacturing, extractive industry is unlikely to draw nearly as many low-skill workers into the formal economy. But as this working paper suggests, an overly minerals-intensive strategy may also limit the potential for unleashing entrepreneurial activity—activity that appears to be critical to sustained growth.

For more on NYC’s entrepreneurial history, see Glaeser’s piece in the Autumn 2010 edition of City Journal.

Tile image by Don O'Brien.