Innovation and Entrepreneurship : Framing the Questions in Rural Space

Sarah A. Low Regional Economics and Public Policy University of Illinois October 2007

The Importance of Innovation and Entrepreneurship

Innovation drives the economy, the i innovator t is i th the entrepreneur t (S (Schumpeter h t 1911) Ample work on entrepreneurships contribution to national growth
But what about regional and rural growth?

The Importance of Innovation and Entrepreneurship

Entrepreneurs are innovative users of regional i l assets t What is the link between innovation and entrepreneurship in rural America? Innovation Eship Prosperity? Innovation + Eship Prosperity? Agglomeration + Luck Prosperity???
3

Relevant Literature
Schumpeter (1911) predicts entrepreneurs will ill l lead dt to economic i growth th Larger firms replacing smaller, has negative effect on innovation and entrepreneurship (Schumpeter 1942) Entrepreneurial opportunity higher in urban areas-thicker markets, lower fixed costs (Shane 2003)
4

Relevant Literature
Acs: 2 competing theories Diversity; density not necessary Agglomeration, Agglomeration specialization; density enhances innovation and eship Knowledge Spillover Theory of Entrepreneurship: eship provides mechanism for knowledge spillovers to grow economy (Acs and Armington 2006) Focus on supply side: aligns with Schumpeter, regions, infrastructure, and knowledge
5

Relevant Literature
Eship Supply (knowledge, opportunity) and Demand (backward linkages)
Intensity of e eship ship determined regionally (Casson 2005) Which determines rate of eship will vary regionally

Rural eship and innovation not studied as much

Less patents per capita than metro (Lobo and Strumsky 2006) Our measure of eship has positive impact on factors of production in the rural US (Thompsen et al. 2006)
6

Framing the Question

If we adopt the agglomeration idea
Eship and innov are higher in urban areas

Eship E ship supply must sit in a framework which controls for population Supply side factors needed for entrepreneurship to create growth
Market opportunities-thick markets, people Financial capital-availability capital availability of financing Next best occupation -opportunity cost of selfemployment Infrastructure, amenities-is this a nice place to be and do business?

Research Questions
Does supply side reasoning hold in rural places? l ? Is agglomeration necessary for eship and innovation to drive growth? How do eship and innovation relate to rural employment growth?

Measures of Entrepreneurship
Breadth calculated as:
nonfarm proprietors nonfarm employment

Proprietor Value calculated as:

nonfarm proprietor income nonfarm total income

Entrepreneurship Breadth

< 20% (Mean) 20-27.5% (Mean Mean + 1 St Dev) >27.5%

10

Proprietor Value

< 13% (Mean) 13-17.5% (Mean Mean + 1 St Dev) >17.5%

11

Measure of Innovation
Innovation calculated as:
Patents (1990) per capita

Not a good measure of innovation

Weight g number of p patents for their importance? p ie- incremental patents v. radical patents, # citations
12

Innovation

< .00036 (Mean) Average .00063-.0036 (Mean Mean + 1 St Dev) Average + 1 StDev >.0036 > 1 StDev above Ave
13

Hypotheses
H1: Innovation and entrepreneurship drive rural l employment l t growth th H2: Combining innovation and eship is the best way to produce rural employment growth

14

Hypotheses
H1: Innovation and Entrepreneurship drive rural employment growth
Is I agglomeration l ti necessary for f innov i and d eship to generate growth?

15

Entrepreneurship and Population

.4

Eship by necessity i

Agglomeration Eship

.2

.3 3

1.5 million
.1 0 0

1.00e+07

2.00e+07 pop05

3.00e+07

4.00e+07

Predicted fit for Breadth05 based on County Population

16

Entrepreneurship and Population

.2 Fitted values .15 .25

3.5 Million

.05 0

.1

2000000

4000000 6000000 pop05

8000000

1.00e+07

Predicted Fit for PropValue05 based on Pop05

17

Hypotheses
H2: Combining innovation and eship is the best way to produce rural employment growth
Should rural policy focus on growing the
Entrepreneur Innovator Or both?

18

Patents per Capita and Population

.001 15 Fitted values .001 .002

Patents have positive relationship with population

0 0

.0005

2000000

4000000 6000000 pop05

8000000

1.00e+07

Predicted Fit for PatPC99 based on Pop05

19

Eship and Patents per Capita

.000 05 .0006

.0002

.0003

Fitted values .0004

Interesting because Eship Breadth is highest in rural areas

.2 .4 nf proprietor employment over nf employment, reis, 2005

.6

Predicted Fit for PatPC based on Breadth05, zero patents dropped

20

10

Interaction Variables & Growth

Breadth*Innov: Proprietor Value*Innov:
Each is normalized to one, then multiplied

Growth measured as employment growth over 1991-2001 business cycle

21

Expected Results
H1 : Growth = (+) innov or (+) eship H2: Eship/Innov interaction (+) relationship with growth

22

11

Control Variables
Agglomeration
Population

Human capital/Knowledge
Recast Creative Class, McGranahan and Wojan 2007

Natural amenities
Distance to National Park

Financial capital p
Bank Deposits per Capita

Infrastructure
None, difficulty with 1990 measure
23

Empirical Model
Hausman test detects simultaneity in model
2SLS to reduce the problem I.V. choice is problematic Also: how to control for spatial dependency within 2SLS framework

24

12

Spatial Dependency
Controlled for in all counties model
Queen Q contiguity weights matrix LM error and LM lag tests significant Robust LM-lag test significant for all models
We use spatial lag model

No good solution for rural counties

25

H 1: Growth=Eship or Innov
Rural Breadth PropValue PatPC R-square N .20 to .14 2009 .20 to .14 3105 .22 to .16 3050
26

All-OLS + -

All-LAG + +

13

H2:Growth=Breadth, PatPC, Interaction

Rural PatPC Breadth Breadth *PatPC PatPC R-square N + + + .20 2006 .19 2006 + Rural2SLS AllOLS + + + 0.21 3046 3046 + All2SLS AllLAG + + + 0.22 3105
27

H2:Growth=PropVal, PatPC, Interaction

Rural PatPC PropValue PropValue p *PatPC R-square N 0.14 2006 2006 Rural2SLS + + 0.15 3046 3046 AllOLS All2SLS + + + 0.16
28 3105

AllLAG

14

Conclusion
Research Question: Do rural places with hi h eship higher hi and di innovation ti h have hi higher h growth?
Positive relationship exits
Eship Growth Results of interaction inconclusive

Results dependent upon definition of eship and innovation

29

Conclusion
Little difference b/w all & rural counties
Agglomeration not necessary to create employment growth from entrepreneurship

Human Capital is strongest (+) control variable

Suggests that knowledge is important, not y agglomeration gg necessarily

30

15

Weaknesses of Analysis
Methodological difficulties
Endogeneity Instrumental Variables Measures of Innovation
Not capturing what Id hope it would

31

16