Sometimes entrepreneurship does best when the local economy appears to have taken a turn for the worse
IT DOES SEEM A BIT STRANGE. There they are, Austin and Dallas, suffering through a two-year, Texas-size slowdown, right up there among the top 10 on INC.'s ranking of metropolitan areas. And from the Indiana Rustbelt come South Bend and Indianapolis and Fort Wayne, edging out such Sunbelt boomtowns as Miami and Santa Barbara. How is it that INC. is so bullish on cities that everyone knows are laying off, cutting back, and watching the price of real estate drop?
Actually, it is not as strange as it may look. The explanation is often quite simple: entrepreneurship thrives on adversity. The INC. metropolitan ranking, after all, is not a general measure of this year's prosperity. Instead, it attempts to capture the economic yeastiness of a community -- the extent to which it has offered a good climate for starting and growing companies over a five-year period. And as the results bear out, sometimes a severe problem in one part of a city's economy -- a major plant shutdown or a shakeout in a dominant industry -- can actually stimulate the process by which companies are started.
The correlation is not statistically precise, I admit, but from the standpoint of human motivation, it makes plenty of sense. What do you do when you've been laid off by your company or forced into early retirement, and every other company like yours is also cutting back? You can stay unemployed. You can take a job you really don't want simply to stay alive. You can leave. Or you can start a company. And in some places, this last option has been taken up with enthusiasm.
Seattle was one such place. When The Boeing Co. laid off some 50,000 aircraft workers, engineers, and managers in the early 1970s, many people who lived in the area were reluctant to move. The resulting surge in entrepreneurship created a much more diversified economy that today serves as the base of a healthy region, #40 on this year's list.
Much the same thing happened in Boston when cutbacks in defense outlays and contracts took the unemployment rate close to 11% in 1975. Today's prosperity in Massachusetts can be traced to several thousand companies that formed during that period and the years following, about 3,000 of which are now categorized as fast growth. Boston is ranked #23 this year.
Detroit had a similar experience following the 1981 to '82 automobile industry cutbacks, as companies sprang up to sell parts and services that previously had been provided in-house at General Motors, Chrysler, and Ford. Other companies ventured into the hot new field of factory automation, spurred by hundreds of millions of dollars in contracts from the Big Three. Today, as last year, Detroit holds the #50 spot on the metro ranking.
Indeed, the response-to-adversity phenomenon can be generalized to national recessions as well as local ones. One of the great strengths of our economy -- especially as compared with those of Western Europe -- is the penchant for entrepreneurship as a safety valve that builds the groundwork for a speedier and more lasting recovery. Many of the seeds for the enormous growth and prosperity of the past five years were sowed during the 1981 to '82 recession, when new corporate formations hit all-time highs. Similarly, the 1976 to '80 surge was based in great measure on record-level corporate-formation rates during the difficult period between 1973 and 1975.
This countercyclical explanation would be an easy one if it happened in every place every time. But it doesn't. While Dallas, Austin, San Antonio, and El Paso continue to rank well, enterpreneurially speaking, such oil-dependent cities as Midland, Tex., Oklahoma City, and Shreveport, La., languish near the bottom of the list. Nor has adversity spurred on Duluth, Minn., in the same way as it has helped to spur on Lincoln, Nebr., Dayton, or Des Moines. Why?
One important difference seems to be that some places have a stronger entrepreneurial culture than others. By that I mean they are relatively "open" economies that are not controlled by a small number of families or large companies. They tend to have a large university or corporate research facility that generates new ideas and new technology and attracts new people. Their banking and business environment is competitive, their social structure fluid.
In contrast, the cities without a culture of entrepreneurship tend to be in the mold of the old company towns. Newcomers are not so welcome, and growing companies that bid up wage rates are not always viewed with enthusiasm in business circles. In these places, people sitting around the dinner table tend not to think of starting a company as an option because virtually nobody they know has done it. The models for success in these cities are decidedly "corporate." Banks tend to export their capital rather than risk it locally. Newspapers rarely write about entrepreneurs, even if they succeed. Company founders are rarely asked to join the right clubs or to sit on bank boards or to chair economic-development committees set up by city government.
John Kasarda at the University of North Carolina calls cities like these "upas tree cities." The dense foliage and numerous roots of the upas tree prevent any other form of vegetation from growing under it. In the same way, upas tree cities stifle entrepreneurship by providing it little nourishment or encouragement. People inclined to start businesses tend to leave such places and take their talents where they are appreciated, and where they can find the resources they need. The accompanying "Business Climate Test" might give an indication whether your own city is such a place.
Obviously, any city can cite its list of 10 prominent entrepreneurs. But the question is whether those 10 are the list or simply top it -- whether those enterpreneurs have succeeded because of the city's business climate, or in spite of it. A city cannot thrive on exceptions. In the long run, it will thrive only if it is a place that responds to hard times with hustle -- a place in which energetic people with new ideas feel comfortable branching out on their own.