I spent half of last week in the US states of Arkansas, Louisiana and Texas. I was there to help the Coordinating and Development Corporation
– an economic development agency serving a region called the Ark-La-Tex, which bridges parts of all three states – launch an Intelligent Community initiative.
The weather was breathtakingly hot. When I returned to New York City, the weather was also breathtakingly hot. It has apparently been breathtakingly hot in Germany, the UK and other parts of northern Europe. Hotter than in Athens, Rome or the other normal hot spots.
Weather is like that. Frequently surprising and always local. Weather connects us all, but the connections are astoundingly complex. If you want to know what tomorrow’s weather will be, find out the direction and strength of the prevailing winds and then look upwind to see what weather they are having over there today. Then feed that information, and a great deal more, into a powerful computer.
Speaking of information processing, the US government has recently released a data set called Business Dynamics Statistics. The Kaufman Foundation has used it as the basis for a new report, “The Importance of Startups in Job Creation and Job Destruction
.” It contains news both surprising and important at the local level.
Given how much time Americans spend claiming that their country is unique and exceptional
, it is proper to ask whether people in other countries should care about this new information. But I believe that the results apply to any place where the barriers to business creation are not too high, and government does not make the destruction of jobs prohibitively expensive (with the unintended consequence of stunting job creation).
Previous studies have shown that, in the US, all net job growth comes from companies less than five years old. More established companies are net destroyers of jobs. This is an astounding statistic, because it means the 80% of economic development resources, which communities typically devote to attracting established businesses from outside, essentially goes to waste. Attracting an employer with 500 new jobs makes great headlines. But if that employer is 10 or 20 or 50 years old, the odds are that its total employment is shrinking – because it has become expert at doing more with less, year after year. That shrinkage may not affect your community in the short term. But then, your weather can be balmy while communities upwind of you are being pummeled by storms. It’s just a matter of time until the weather comes your way.
The headline of the most recent study is even more astounding. Nearly all net jobs in the US since 1977 have been created by start-ups in their first year of business. In every other year of life, companies in the aggregate destroy more jobs than they create. The graph below shows average job creation and loss by company age from 1992 to 2006. Startups created 3 million jobs and destroyed none in their first year. That statistic seems unlikely, until you give it some thought. Startups create jobs by definition, whether it is just a sole proprietor or a venture-backed team. How many burn out in the first year? Effectively, none. It is in later years that success and failure become apparent and job destruction begins. Job creation continues but job destruction proceeds just a bit faster, with new startups in new industries increasing the overall base of employment.
The implications are profound. The way to improve the odds of good economic weather in your community is to make it a hot spot for startups. That’s much easier said than done. In the Ark-La-Tex, there are a few successful examples of incubators for technology and manufacturing companies. Ideally, other communities will see their success and try to imitate them. But this is a region whose economy was based on timber and low-skilled manufacturing, both of which have shrunk drastically in the past decade, not technology and entrepreneurship.
The discovery of natural gas shale is also creating new economic opportunity. That is a more comfortable fit for a place where resource extraction was one of the major industries. If it spurs startups in exploration, production and new gas technologies, it will become a blessing to the entire region. If the mineral wealth is cornered by a few existing companies, it will produce little long-term benefit. A small number of organizations and people will get rich. Exploration and production will produce a number of good-paying jobs for the low-skilled. But little will change in the region’s overall prosperity unless natural gas becomes a driver of widespread innovation.
American author Mark Twain once wrote that “Everybody talks about the weather but nobody does anything about it.” The good news is that, in the Ark-La-Tex as in Intelligent Communities around the world, they are giving it a serious try.