Entrepreneurship, Small Businesses, and Urban Growth

Entrepreneurship is widely believed to be a main source of economic growth. This paper’s objective is threefold: (1) to estimate the impact of entrepreneurship measured by the birth of businesses on urban employment and income growth; (2) to examine how entrepreneurship supported by government guaranteed loans compares with market entrepreneurship regarding its impact on urban growth; and (3) to examine whether market and government-backed entrepreneurship are complements or substitutes. The study of entrepreneurship and urban growth is hampered by the joint determination of the two. I use the variation in entrepreneurship generated by the homestead exemption levels in state bankruptcy laws in 1975 to examine urban growth between 1993 and 2002. I find that a ten percent increase in the birth of small businesses increases MSA employment by 1 to 1.5% and income by 2.5 to 3.5% after ten years. I next examine whether the federal Small Business Loan program that guarantees loans to entrepreneurs that were unable to finance through the market generates urban growth. I find no growth impact from government-backed entrepreneurship and further find that government-backed entrepreneurship crowds out market entrepreneurship one for one. Nonetheless, a complete assessment of government-backed entrepreneurship requires further examination of equity concerns, such as potential discrimination in small business lending.