Externalities or Experience? Localization Economies and Start‐up Business Survival

Abstract

AbstractThis study examines whether spatial variations in the human capital of business owners help explain why the failure rates of new businesses tend to be lower in areas where similar businesses are concentrated. More specifically, I test whether the prior industry experience of the firm's owner/founder has a mediating influence on the relationship between industrial localization and new business failure for six industry sectors. Localization is found to have either a beneficial or a damaging relationship to new firm survival, depending on the industry in question. Localization reduces the likelihood of failure in two sectors, while competition effects prevail in two others. When industry experience is added to the models, the benefits of localization diminish, but only for entrants in the business, professional, and information services sector and only by a small amount. This suggests that at least some of the observed benefits of localization are due to regional differences in embodied human capital, but localization economies remain significant. Further study is needed to see if such mediating effects are common among a wider array of more narrowly defined industries and for other forms of entrepreneurial human capital.