San Diego is proof positive that entrepreneurial activity is critical to economic development. Most of our region's growth, especially over the past two decades, has been fueled by the success of "home-grown" companies rather than by attracting companies from outside the region.
Recent research by the Kauffman Foundation underscores this relationship. In their report, "Entrepreneurship and Urban Success: Toward a Policy Consensus," ten of North America's leading urban economists find a strong correlation between entrepreneurial activity and job growth in U.S. Cities. While the authors are quick to point out that they cannot determine the causality of this relationship (e.g. do high rates of self-employment cause growth or do high rates of growth encourage more people to go out and start new businesses), they note that the correlation is one of the strongest that has been found.
There are several straightforward policy proscriptions that follow. First and foremost, the report underscores that economic development efforts to recruit businesses from outside a region are likely to be much less important than efforts to foster the "serendipitous" creation of new enterprises. Admittedly, trying to foster conditions that give rise to new start-ups is politically challenging because it is an activity that does not lend itself to ribbon cutting, credit claiming and patting oneself on the back. But it is a policy effort that is much more likely to lead to positive growth and prosperity.
In addition, the report notes the critical importance of building educational and physical infrastructure. Clearly the role UCSD has played in San Diego's modern economic history is testament to the importance of this connection. However having a world class university is neither an absolute perquisite nor an iron-clad guarantee. As the authors remind us, there are centers of strong entrepreneurship, such as Seattle, where local research universities did not play a leading role. Though the University of Michigan and the Ohio State University are consistently ranked in the top 20 public research institutions in the country, southern Michigan and central Ohio continue to experience sluggish economic growth. Thus it is critical to move beyond the simple story that it is all about research institutions or the quality of life often associated with college towns.
What the authors of the Kaufmann report find more critical is the regulatory framework that confronts small businesses. That is not, principally, because of how regulations increase the cost of doing business. Instead it is because large firms can often more easily absorb government-imposed costs. What is a minor irritation for bigger firms can be the straw that breaks the back of a startup.
Consider, for instance, land use policies in our region. It is not uncommon that it takes years to navigate through the process and that firms must hire "on retainer" high-priced lobbyists to help navigate through the process. For larger firms, these are "the costs of doing business." For smaller enterprises, it is a barrier to entry that cannot be easily overcome. With fewer firms able to have the capacity to undertake such projects – sellers of inputs (land, labor, materials) bargain with members of an oligopoly from a position of weakness, while the buyers of products (renters or home buyers) pay a premium because of reduced competition.
There are concrete applications in our region that flow from this finding. One is that municipalities throughout the region would be wise to adopt formal "sunset clauses" in new regulations. In their cleanest form, such provisions automatically rescind a new regulation after a period of time unless the legislative body conducts hearings and determines that the benefits of the regulation continue to outweigh its cost.
A second policy reform would be to enact "sunrise provisions" that would provide opportunities for impacted businesses and entrepreneurs to sound fire alarms and call attention to regulations that are stifling opportunities. Such open forums have precedence. During early 1990s the City of San Diego had open meetings in which individuals could come before the Council and call attention to regulations that made little sense and were adding tremendously to the cost of doing business. Importantly, such efforts, as well as direct outreach to specific firms impacted by regulation, help ensure that all voices are being heard, not just larger firms that are better able to influence government processes.
Ronald Reagan once stated that "entrepreneurs and their small enterprises are responsible for almost all the economic growth in the United States." San Diego's economic history especially bears that out. It is critical that in regional policy lawmakers do what they can so that new ideas can be acted upon and new businesses can thrive.
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