February 2014 Greater Boston’s Economy and the Entrepreneurial Age Executive Summary area into a city of big corporations. This Policy Brief is based on “Greater Boston’s As entrepreneurship vanished, so Greater Boston has been resilient Economy and the Entrepreneurial Age” did economic vitality. As Figure 1 working paper by Edward Glaeser, Steven amidst the whirl of the Great Poftak, and Kristina Tobio. illustrates, using metropolitan level Recession, and the region’s data, an abundance of small scale Edward L. Glaeser technological prowess has been part establishments predicts economic Edward L. Glaeser is the Fred and Eleanor of its success, but will technology Glimp Professor of Economics at Harvard success. Dominance by a few large start-ups continue to be an economic University and Director of the Rappaport fi rms predicts failure. Boston should Institute for Greater Boston and the engine in the future? Moreover, even Taubman Center for State and Local worry that despite a growing number if technological success endures as Government at Harvard’s Kennedy School of of small startups, Suffolk County’s Government. a mainstay of the Boston economy, average establishment has over 28 will technology start-ups provide Steve Poftak employees, which is more than 80 employment for ordinary workers Steve Poftak is the Executive Director of the percent above the national average. without advanced degrees? Are Rappaport Institute for Greater Boston. there sensible steps that state and In this policy brief, we review Kristina Tobio local government can take to further the current state of technology Kristina Tobio is the Assistant Director of strengthen the region’s technology entrepreneurship in greater Boston. the Taubman Center for State and Local Government. eco-system? The technology sector remains in remarkable fl ux. In 1998, computers © 2014 by the President and Fellows of Relatively high wages make it diffi cult Harvard College. The contents refl ect the and related manufacturing represented for Massachusetts to compete globally views of the authors (who are responsible about half of the technology-intensive for the facts and accuracy of the research manufacturing ordinary, old products, herein) and do not represent the offi cial employment. Twelve years later, that views or policies of the Rappaport Institute but over the past 30 years, greater sector had declined by well over 50 for Greater Boston or The Taubman Center Boston has shown a remarkable ability for State and Local Government. percent and now represents only one- to survive and even thrive through Rappaport Institute for Greater Boston in-seven technology jobs in greater innovation. The economic health of Harvard Kennedy School Boston. Moreover, the technology 79 John F. Kennedy Street the region depends upon the continued Cambridge, MA 02138 sector tends to locate away from the humming of its innovation engine, and region’s poorer neighborhoods and 617-495-5091 ensuring that innovation helps people www.hks.harvard.edu/centers/rappaport tends to employ the disproportionately throughout the income distribution. skilled. These facts limit the ability Detroit’s recent bankruptcy should A. Alfred Taubman Center for State and of the current technology cluster to Local Government remind us of the risks. A century employ less advantaged residents of Harvard Kennedy School ago Detroit was a hotbed of 79 John F. Kennedy Street the region. Cambridge, MA 02138 entrepreneurship—a place where Next, we examine the micro- small fi rms competed and collaborated 617-495-2199 geography of small technology www.hks.harvard.edu/centers/taubman to produce the new, new thing. The fi rms. As of 2010, the two traditional success of a small number of those technology clusters around Kendall fi rms transformed the metropolitan Greater Boston’s Economy Rappaport Institute | Taubman Center POLICY BRIEFS Square and Route 128 remain strongholds of fi rms that did not receive aid, and fi nd no of this sector. These clusters are remarkably signifi cant difference in outcomes between the successful, but it is an open question whether two sets of fi rms. This does not imply that the their success can be reproduced in less MassDevelopment aid didn’t achieve positive privileged places. Kendall Square is anchored results—the data do not come to any fi rm by M.I.T.; Route 128 clusters around well- conclusion—but it does strongly suggest that educated communities. these programs need to be better structured for The policy approach to entrepreneurship must serious evaluation. In particular, all government be radically different from the traditional entities that fi nance private fi rms engage in ex economic development policies of the past. post evaluation and ideally should designate a Supporting technology entrepreneurs does control sample for the purposes of comparison. not mean offering generous tax incentives to While there may be scope for sensible attract a single large employer. It is hard to broadband investment in Boston, the small imagine that any government entity—state physical footprint of most technology or local—will ever have the technological entrepreneurs somewhat limits the ability to expertise to successfully play venture engender entrepreneurship through traditional capitalist, funding nascent companies in such infrastructure. We fi nd little robust relationship an environment of change and uncertainty. between broadband availability and technology Professional venture capitalists have enough start-ups at the zip code level. Still, there are trouble playing venture capitalist. Moreover, potential gains from well-targeted infrastructure the challenge is particularly extreme because investments, especially those that are paid technology is such a moving target. We discuss for by users themselves. Indeed, it is possible the use of tax and fi nancing incentives to boost to see Boston’s Innovation District as a form of infrastructure investment, albeit one that The Innovation District connects is privately funded and aimed primarily at an old approach to business empowering small scale start-ups. development (infrastructure) The Innovation District connects an with an alternative approach old approach to business development that focuses on increasing the (infrastructure) with an alternative approach supply of entrepreneurs either that focuses on increasing the supply of by luring them from other entrepreneurs either by luring them from other areas through quality of life areas through quality of life or education or reducing the barriers to entrepreneurship. or education or reducing the Finally, we discuss four potential policy levers barriers to entrepreneurship. for promoting technological entrepreneurship: (1) strengthening the educational pipeline of technology start-ups, as well as infrastructure- entrepreneurs, (2) cluster creation, (3) reducing a second traditional tool for boosting economic regulatory barriers to entrepreneurship and (4) development. legal reforms that reduce the power of non- We compare the ex post progress of a compete clauses. Regulatory reform that speeds small sample of companies that have the approval of new permits and centralizes the received some form of fi nancial aid from public sector’s administrative interface offers a the Commonwealth’s MassDevelopment possibly lower cost to reducing the costs of new between 2004 and 2008, with a similar set entrepreneurial activity. 2 Greater Boston’s Economy Rappaport Institute | Taubman Center POLICY BRIEFS Introduction There is a similarly strong relationship between employment growth between 1977 Small establishments are seen by many and 2010 and the share of employment in researchers as one proxy for entrepreneurship. small establishments in 1977, as shown in Figure 1 shows the relationship between Figure 2, demonstrating another proxy for average establishment size in 1977 and entrepreneurship. Those MSAs with the employment growth between 1977 and 2010 most employment in new establishments in across America’s MSAs. The fi rst bar shows 1977 (defi ned as those created since 1976) that the one-fi fth of MSAs with the smallest experience an average of nearly 200 percent average establishment size experienced nearly growth. Those MSAs with the less employment 200 percent employment growth over the in such start-ups experienced growth of less 33 year period. The last bar shows that the than 25 percent. Again, these results are one-fi fth of MSAs with the largest average relatively unchanged when we control for a establishment size experienced employment bevy of local characteristics. growth of only about 20 percent. Controlling for area attributes such as initial population Despite Boston’s well-deserved reputation as a level and education do little to reduce this center of innovation, the city is dominated by robust connection. large employers, not small start-ups. Boston Figure 1: Economic Growth and Firm Size MSA Employment Growth (1977 - 2010) by Average Firm Size (1977) Quintiles Source: County Business Patterns 3 Greater Boston’s Economy Rappaport Institute | Taubman Center POLICY BRIEFS Figure2: Growth and New Establishments MSA Employment Growth (1977 - 2010) by Quintiles of Share of Employment in New Establishments, 1977 Smallest share of employment in new establishments in Quintile 1 Dropped outliers of <1% and >99% Source: Longitudinal Business Database has only 2.3 establishments with less than ten as mid-20th century Detroit was lucky to have workers for every hundred workers in Suffolk the Big Three, but for the city to avoid the fate County. America averages 4.8 establishments of Detroit, it must ensure that these entities with less than ten workers for every hundred do not crowd out the small-scale start-ups that workers. Across the U.S., there are on average deliver sustainable growth. only six establishments with more than 1,000 The apparent domination of greater Boston workers for every 100,000 total workers, but in by large enterprises is somewhat misleading, Suffolk County, there are about ten such large because many of those entities are better seen establishments for every 100,000 workers. as loose alliances of potential entrepreneurs. Moreover, while the national trend is towards On one level, M.I.T.