Operationalizing the Entrepreneurial Pipeline Theory

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An Empirical Assessment of the Optimal Size Distribution of Local Firms

This article analyzes the relationship between local economic growth and the distribution of businesses across size categories. The distribution is measured by the employment share in businesses of various sizes and by a business distribution index. The index provides a measure of the extent to which the local economy deviates from an equal employment share in each of nine business-size categories. The authors find strong links between a county’s business-size distribution and its economic growth rate and also a difference between the optimal income and job growth-enhancing distributions. In addition, the results indicate that the optimal growth-enhancing distribution of employment has a higher share of the smallest businesses (with one to four employees) than the current average. The results support increased policy emphasis on encouraging small business start-ups and development; however, the optimal development strategy depends on the initial distribution of businesses within a local economy.

Encouraging entrepreneurship has been a subject of concern in the economic development literature for some time (Birch, 1987; Hanham, Loveridge, & Richardson, 1999; Johanisson, 1991; Walstad, 1994) but has generally failed to capture substantial resources from mainstream local economic development practitioners (Loveridge, 1996). The main focus of practitioners and state economic development programs continues to be industrial recruitment and business retention. These traditional approaches must be reassessed as increased competition from countries with lower wages in both manufacturing and services makes successful recruitment and retention ever more difficult. These new challenges are shifting the focus of regional development to the role of amenities in creating jobs (Florida, 2002; Green, 2001) and fostering renewed attention to the role of entrepreneurship in local development (Von Bargen, Freedman, & Pages, 2003; Walzer, 2004, in press).

Much has been written on how to make it easier and less risky to start businesses (Sohl & Rosenberg, 2003; Watson,  Hogarth-Scott, & Wilson, 1998) and on identifying start-ups with high growth potential (Birch & Medoff, 1994). However, whether a community has enough  entrepreneurs remains an unanswered question. The expression “too much of a good thing” might well apply to the supply of small businesses in some communities; meanwhile, other communities rely heavily on employment by a small number of large businesses. Neither of these extremes is likely to be good for sustainable growth in the long run.