Debunking the Myth of the Startup Hub

This article originally appeared in The Wall Street Journal

A common misconception in the United States is that high-tech firms exist only in a few cities that coalesce around the coasts. The reality couldn’t be further from the truth. Yes, it’s true that places like Boston, Seattle, San Francisco and Silicon Valley are important hubs of high-tech activity, but so are places like Boulder, Colorado, Huntsville, Alabama and Wichita, Kansas.

The Bay Area Council Economic Institute published a report in December that details recent trends of high-tech employment and wages throughout the United States. The report found not only that high-tech jobs are a critical source of employment and income in the U.S. economy, but also that growth in the high-tech sector has been increasingly occurring in regions that are geographically and economically diverse.

As evidence of this, one of the report’s findings was that a statistically significant relationship could not be established between the concentration of high-tech jobs in a region and whether employment in the high-tech sector had grown in the last half-decade or the last year. In other words, high-tech jobs have been growing outside of the well-known tech hubs.

Regions should want high-tech firms in their communities because they pack a lot of economic punch. This can be illustrated by the multiplier effect, whereby the creation of one high-tech job in a region creates an additional 4.3 jobs in the local services economy of the same region in the long run. Compare that with the manufacturing sector, long a darling of regional development authorities. It has a local multiplier of 1.4. Although this is quite large, it is still just one-third the size of the local multiplier stemming from high-tech.

So, what does all of this have to do with startups? The short answer is that high-tech firms are an important source of entrepreneurship in the U.S. economy. While this probably isn’t a controversial statement for most, the actual magnitude of the high-tech sector’s share and distribution of startups remains largely unmeasured. This is a topic my colleagues and I are currently researching and intend to publish in a companion report to Technology Works within the next few months.

For now, let me provide a few data points from our preliminary analysis. Though high-tech businesses existed in 98 percent of U.S. counties in 2010, new high-tech companies were born in 62 percent of counties during the same year. What is more, high-tech startup growth is occurring in regions outside of the traditional tech hubs. For example, 70 high-tech startups were formed in Fort Collins, Colorado in 2010, while 88 were started in Baton Rouge, Louisiana and 162 in Columbus, Ohio. All marked increases in excess of 60 percent over the year. A total of 117 major metros increased high-tech startups by at least 20 percent in 2010 from the year prior, and 50 did so compared with five years earlier.

This analysis of the high-tech sector will help inform how business formation and job creation patterns for innovative and growth-oriented “startups” differ from those for “new businesses” generally.  As innovation pioneer Paul Graham noted, startups have fundamentally different business goals and should not be lumped together with new businesses broadly. Research by economists at the University of Chicago backs this assertion, finding that three-quarters of nascent entrepreneurs have no intention of innovating or growing substantially.

Differentiating potentially high-growth startups from other new businesses is important for public policy too. Ronnie Chatterji, a Duke University business school professor and former Obama White House adviser, points out that potentially high-growth firms like those in the high-tech sector command an entirely different set of policy priorities. According to Engine Advocacy, a non-profit that connects startups with policymakers, reform is required in areas like education, immigration, intellectual property, and financial regulation. State policymakers can create investment-friendly environments through tax incentives and regulatory reform.

To summarize, high-tech jobs are important to the economy and are growing in a wide and diverse set of regions. The same is true of high-tech startups. The issue of whether high-tech startups are able to survive outside of well-established tech hubs is one of many important questions that we are currently working to answer in our research. We hope to have that answer to you shortly. Stay tuned.