Whether we like it or not, the economy dictates our lives.
It determines the value of our dollar, the number of jobs available to the citizens of our cities, the interest rates we pay, and how much we can get away with spending.
On a smaller scale, our regional economies can be responsible for helping a city thrive or for throwing a county into turmoil.
There are tons of factors popularly blamed or cited for causing the sharp positive and negative turns in regional economic development: among these are government policy, federal interest rates, and external factors like product costs or international affairs. While all these economic factors can play a role in regional economies, there is one factor that often goes overlooked: the number of startups that emerge in the region.
Why Startups Drive Economic Growth
According to the Small Business Administration, the United States has experienced 57 consecutive months of job growth, ending up with more than 10.9 million new jobs added over the course of the past five years. And while there are a number of factors influencing this increased job availability, 7 million of these 10.9 million jobs were created by startups and small enterprises.
Further demonstrating the value of startups to supporting a broader economy, SBA loans have been on the rise consistently since the recession. In 2013, small business lending reached an all-time high of $19.2 billion, allowing more entrepreneurs the chance to start companies and drive hiring in underdeveloped areas.
Startups tend to demand new work more than larger, better-established companies. That’s not to say that older, bigger companies dampen the economy—in fact, companies that evolve into long-term contributors can contribute even more than their smaller, nimbler counterparts—but entrepreneurship solves new problems, drives new spending, and most importantly, more new jobs. When more citizens are employed and more people are actively spending money, the economy performs better.
According to a study by the Kauffman Foundation, startups are actually the most appropriate metric for determining economic growth. While companies of all sizes habitually create and destroy jobs in response to market cycles, the study indicates that between 1977 and 2005, the majority of existing firms were “net job destroyers,” responsible for the elimination of more than one million jobs every year. Startups in their first year, on the other hand, create more than 3 million jobs every year, making up for the destruction of older firms and then some.
Why Regional Economic Initiatives Fail
Many city and state initiatives to support or facilitate economic growth revolve around putting additional capital or additional incentives into large, pre-existing businesses. Because these businesses are well-established, they are seen to be more economically stable, and therefore a safer bet when it comes to driving job creation, commonly seen as the pivotal step in improving the regional economy.
According to the statistics from the SBA and the Kauffman Foundation, the logic in these initiatives is sound but the approach is flawed. Using initiatives to drive job growth and therefore, economic recovery, is a wise and effective tactic, but the initiatives shouldn’t be targeted toward existing firms. Instead, they should be focused on new entrepreneurs and small businesses.
The Culture Factor
Perhaps one of the most important qualities of startups that fuel regional economic development is the fact that startups fuel the growth of other startups. In fact, there’s a name for it when a city becomes a useful facilitator of startup development; it becomes a startup hub, like the all-too-familiar Silicon Valley, perpetually ripe with new tech companies.
There are many reasons why startups breed other startups. First, there’s the trend factor. In an environment where startups are rare, individuals with ideas are less likely to try to do anything with them. In an environment where startups are constantly thriving, the culture drives more individuals to see those ideas through.
Second, people in startup cultures care. Older entrepreneurs with successful startups a few years old constantly look to new entrepreneurs and go out of their way to help them along. Startups know the difficulties of running a startup, and try to help out others in similar positions whenever they can. This leads to a much more intricate, startup-driven economic climate that sustains itself and grows over time.
Economic growth can’t be solely attributed to startup development, but facilitating the birth and growth of new startups is a positive move for almost any region. Startups create new jobs, promote new spending, and drive innovation more than their older counterparts, and when lots of startups start popping up, they can even drive more entrepreneurship.
If regional governments want to do their part to improve job growth and the economic outlook of their city or state, they shouldn’t be looking to big businesses or consumer-level spending initiatives; instead, they should be focused on cultivating entrepreneurship.