Abstract
Entrepreneurship is often seen as the cure-all solution for poverty reduction. Proponents argue that it leads to job creation, higher incomes and lower poverty rates in the cities in which it occurs. Others argue that many entrepreneurs are actually creating low-productivity firms serving local markets. Yet, despite this debate, little research has considered the impact of entrepreneurship on poverty in cities. This paper addresses this gap using a panel of US cities for the period between 2005 and 2015. We hypothesize that the impact of entrepreneurship will depend on whether it is in tradeable sectors, so likely to have positive local multiplier effects, or non-tradeable sectors, which may saturate local markets. We find that entrepreneurship in tradeables reduces poverty and increases incomes for non-entrepreneurs, a result we confirm using an instrumental variable approach, taking the inheritance of entrepreneurial traits as the instruments. In contrast, while there are some economic benefits from non-tradeable entrepreneurship, we find these are not large enough to reduce poverty.
Highlights
Entrepreneurship is sometimes portrayed as a panacea for economic development
We investigate the impact of entrepreneurship on poverty in a panel of US metropolitan statistical areas ( ‘cities’) for the period 2005–2015
Lee and Rodrıguez-Pose research question is: (1) does entrepreneurship in a city reduce poverty for nonentrepreneurs? As theory suggests that new firm creation can vary according to which share of entrepreneurship is in tradeable – which might lead to multiplier effects in local economies – versus non-tradeable sectors – which may saturate local markets and reduce the incomes of incumbents – we address a second research question: (2) does the distinction between entrepreneurship in the tradeable and non-tradeable industries matter? As far as we are aware, we are the first to test the influence of entrepreneurship on poverty in urban areas and how this potential impact varies according to type of entrepreneurship
Summary
Often deemed to have a direct effect on the local economy – creating new jobs in the firm itself and introducing new products and technologies into the local economy (Acs and Storey, 2004; Fritsch, 2013; Fritsch and Noseleit, 2013). Lee (2017) focuses on US cities in the two decades to 2003, and shows that increases in the number of small businesses are associated with higher employment and wages in around 10 years, with this effect extending beyond those directly employed This literature offers little guidance on the potential impact on poverty. Data are equivalized to reflect the number of dependent children up to the age of 17 and the higher living costs associated with larger families This is a tightly defined measure (Greenberg, 2009) and we follow Lee and Rodrıguez-Pose (2016) in reporting our results at different percentiles of the poverty line. New firms in non-tradeables may saturate local markets and lead to a negative impact on wages for other workers in the same sector.
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