Start-ups that are based in cities and towns with low high-school dropout rates and a high percentage of residents with college educations have greater survival rates than those located in areas with less-educated local populations, according to a new study from the School of Public Policy at George Mason University.
"My view has always been that it's hard to get a job if you're unskilled and uneducated than if you're skilled and educated," said Zoltan Acs, lead author of the paper, which will appear in Papers in Regional Science. Why should that be any different for starting a business?"
Although high school and college do not necessarily teach individuals how to start a business, education does provide future entrepreneurs with relevant skills such as how to meet people, perform analyses, and make contacts, Acs explained.
Acs and his colleagues studied the relationship between years of schooling and the ratio of surviving firms to closed firms. Between 1993 and 1995, they found that there was strong relationship between the quality of human capital and survival rates. Yet, for the period from 1990 to 1992, the relationship was less clear. This is likely because recession years prompt people who wouldn't necessarily start a business in a non-recession period to take an entrepreneurial path, Acs explained. "During the recessionary period, more people start businesses because they're out of work," he said. "So the recession years will give you slightly different results than the non-recession."
Another factor that affected survival rates was the intensity of related businesses within a region. "If you're an area where there are lots of firms in a certain industry, it's going to be easy to start a business in that industry," Acs said. "But it's going much harder to survive."
A region that has a thriving industry in one sector, but nothing else, is not necessarily the best place to start a business in that sector, Acs explained, because there is often too much competition and a lack of complimentary assets won't be available.
The paper concludes that city size and diversity may be an important determinant of new-firm survival. Places like Seattle and Boston have high survival rates, not just because they have an educated populace, but because they have big markets and specialized inputs, Acs explained. "You can't grow a big business in a little place," he said.