European Regional Science Association
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European Regional Science Association
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The abstract for paper number 39:
Vinod Sutaria, Independent Consultant, Irving, USA
Determinants of Regional Variation in New Firm Formation in the United States
Explaining uneven economic growth and development within a country or a state or even within a metropolitan area has drawn attention of many scholars as well as public officials around the world. Most of the theories proposed so far have not been able to explain clearly the processes that underlie economic development and growth, making them unsuitable for policy actions. Regional planners and government officials are more interested in identifying factors that drive economic growth and development at the local or regional level.
This paper explores regional factors as determinants of new firm formations (hereafter, NF2) that are central to the phenomenon of economic growth and development. Specifically, it explores regional factors as determinants of NF2 in the United States for the 1990-99 period. All three hundred and ninety four (394) Labor Market Areas (LMAs) of the United States have been used to account for the variation in NF2 over time and space. The results are of practical importance to policy makers, economists, and would be entrepreneurs alike.
In the absence of specific theories of new firm formations, this study draws on neoclassical theory as well as ideas of Adam Smith, Alfred Marshall, and Joseph Schumpeter.
The problem of appropriate data with which one can measure the key processes undergirding economic dynamism and change is explained in detail. In this context, relative superiority of the data set used in this study to the data sets used in most of the previous empirical studies is explained in greater depth. The issues of: (1) the treatment of missing data, (2) the selection of referents for regional and time dummy variables, and (3) violations and remedies of OLS assumptions (heteroscedasticity, multicollinearity, and serial correlation) are addressed to maximize the reliability of regression models developed for further analysis. Several multiple regression models were developed to test for the presence of any relationship that may exist between new firm formation and regional factors. Initial findings suggest positive and significant relationships between new firm formation and (1) new firm formation, lag 1 year, (2) firm termination, lag 1 year, (3) change in population, lag 1 year, (4) establishment density, lag 1 year, (5) per capita bank deposit, lag 1 year, (6) percentage of small establishments, lag 1 year. A negative and significant relationship was found between new firm formation and ‘change in unemployment in the current time period’. No any relationships were found between new firm formation and (1) unemployment rate, lag 1 year, (2) share of proprietors, lag 1 year, and (3) share of service sectors jobs, lag 1 year. The empirical findings provide strong support for the role of deep churning – turnover and replacement in a business base – in understanding the forces shaping economic development and growth. Moreover, the findings indicate a positive role for ‘small establishments’ in promoting formation of new firms.
Unfortunately full paper has not been submitted.