Cities are the places which provide the backdrop for innovation players and their inhabitants and structures strongly influence business creation; as does the level of tertiary education.
What role does the town play in the entrepreneurial ecosystem? A study* published by Small Business Economics analyses the factors which favour business creation in European cities. Andrés Barreneche, a researcher at Université Paris Sud, one of the universities in Paris, who authored the study, has identified three elements based on 21 indicators drawn from 184 cities in 20 European countries over the years 1999–2010. His survey found that city size and the amount of self-employment both have a positive impact on the number of new businesses registered. However the most significant factor is the level of tertiary education. Andrés Barreneche explained to L’Atelier that “These three factors together explain 60% of the amount of business creation.” He believes that higher education, which opens the doors to knowledge, fosters the growth of both skills and an entrepreneurial mindset.
Key role of education confirmed
Cities which have larger numbers of university students see higher numbers of new business registrations. Another study, which looks at the first eleven years of the Rice Business Plan Competition run by Rice University, Houston , Texas, confirms this finding, underlining the role of catalyst that universities play in the entrepreneurial ecosystem. It follows therefore that if a city with a lower level of business creation activity wants to increase entrepreneurship, one of the solutions might be to implement policies to encourage institutes of higher learning to set up or re-locate there. Regarding the impact of city size on business creation, the study throws up no real surprises since it is fairly obvious that the number of inhabitants a city has will impact on its economic activity. Nevertheless, “what’s really interesting is that when we look at major cities, we observe a phenomenon of accelerated business creation,” points out Andrés Barreneche. This is due to the fact that major cities function as hubs for economic activity. However, the findings suggest that capital cities tend to have an advantage over other urban centres, however large these may be.
German cities out in front
The study also highlights the role of self-employment. Self-employed people are the main business creators and cities need such people in order to foster an entrepreneurial spirit. When a city has a relatively low level of self-employment, this means that the population is dependent for its daily bread on existing employers. But on the other hand, where there are too many self-employed people in a city, that might well be a sign that the local economy is stagnant. The data show that German cities such as Berlin, Hamburg and Frankfurt strike the right balance here – confirming the assertion of Gabriel Matuschka, Senior Associate, and Head of the German office of Partech, a leading investor in high growth companies in Europe and the United States. London, Paris, Stockholm and also Budapest rate highly as well. Aside from the factors mentioned, the study found that the cities of eastern Europe show the highest levels of entrepreneurship, followed by those in western and northern Europe. In contrast, southern Europe is the least active region in terms of new business registrations. The study recommends that the European Union should introduce homogeneous entrepreneurship policies in order to get the best out of the opportunities offered by the single market.
*Analyzing the Determinants of Entrepreneurship in European Cities, by Andrés Barreneche García, Pilotage Economique et Social des Organisations section of the Management Science Lab, and the Chaire Européenne de Management de l’Immatériel (which specialises in promoting training, ideas exchange, and research in the virtual world) at Université Paris Sud.