The Suburban Startup

It begins as a one-man or one-woman operation in a downtown loft. It expands to a Market Street headquarters. Then to a pristine, suburban mega-campus, all the while gaining influence and market share. It’s the classic story of an urban start up-turned-global corporation. Or is it?

According to a 2009 article by Henry Renski in the Journal of the American Planning Association, our narrative of entrepreneurship may need some tweaking. Both the story above and many municipalities’ plans to promote growth through entrepreneurship follow the longstanding Urban Incubator Hypothesis. The hypothesis is simple: fledgling businesses take advantage of the large, diverse markets in the city center to grow and then move to the suburbs when they no longer need to rely on the consumers or incur the costs of the city.

What Renski found, however, was that suburban areas are often home to more start-ups per capita and that those companies are more likely to survive than those in the center city. As Renski writes:

Advances in communications technology and declining transportation costs have extended the benefits of urbanization geographically without reducing central-city congestion…[F]irms locating in small and peripheral places on the metropolitan fringe benefit from the size advantages of the nearby city without incurring the same costs…

Renski uses data from the Bureau of Labor Statistics Longitudinal Database to track business entry, expansion, and exit from 1994 through 2002. While much of the previous analysis of the Urban Incubator Hypothesis has characterized a new business as either urban or rural, Renski sorted start-ups into five subregions: metropolitan city centers, suburbs, small cities of less than 50,000, rural areas within a metropolitan region, and rural areas outside of a metropolitan region. While no single subregion proved ideal, suburban areas showed higher-than-expected levels of new firm entry, expansion, and survival in both the manufacturing and service industries.

In support of the Urban Incubator Hypothesis, center cities do produce more new firms on the whole and 14 to 16% more service industry start-ups than their demographics would predict. Unfortunately, the urban core also had higher rates of failure than all other subregions across manufacturing and service industries. This is particularly true in high-tech manufacturing where an urban firm is 24% more likely to fold than one based in a rural part of a metropolitan area.

The urban core does appear to have some advantage in expansion. While urban manufacturing firms equal their peers in growth, urban service industry firms grow faster than anywhere else.

Renski suggests that the high-failure, rapid-growth climate of the center city may be a reflection of its attractiveness to riskier start-ups that are as likely to strikeout as they are to hit a home run. Renski also points to the diversity of alternatives to self-employment that may make entrepreneurs less likely to muddle through the difficult early years of business.

If urban policymakers want to make entrepreneurship a key part of their city’s future, Renski recommends that they examine what regulatory factors are making the surrounding suburban and rural areas more hospitable to start-ups. If cities can replicate those conditions within their boundaries, they will have taken a step toward ensuring that in the true story of American entrepreneurship the first act is set in the city center.