Most Jobs Are Created by Businesses That Start Up or Are Already in a StateAnother key insight made possible by the data tracking firms’ job creation over time is that the vast majority of jobs created in every state are “home grown” — they are produced by firms already located in that state.
With regard to startups, this is again true almost by definition. Although a firm could open multiple business locations in multiple states before reaching its one-year anniversary, this is likely to be rare. Most startups, from restaurants to biotech companies, are likely to operate from a single location in their first year. Even if they operate more than one establishment (for example, an administrative office and a factory or lab), the limited staff and other resources available to a small firm to coordinate these activities means that the establishments are likely to be in the same state.
Further, entrepreneurs on the cusp of starting a new business typically do not relocate prior to doing so. That is, entrepreneurs tend to start their business where they already live. A study of 150 founders of “Inc. [magazine] 500” companies (the fastest-growing companies in the United States) by the Endeavor Insight consulting firm found that “entrepreneurs at fast-growing firms usually decide where to live based on personal connections and quality of life factors many years before they start their firms . . . 80 percent of them had lived for at least two years in the city where they started their companies. . . .” The most commonly cited reason among the entrepreneurs for starting the companies where they did was that it was where they lived at the time. Academic research on the location decisions of entrepreneurs supports these findings.
Beyond startups, another large share of job creation results from the expansion of employment at existing business locations. Firms squeeze in additional cubicles, factories add a second shift, and office-based businesses lease additional floors of their buildings. Later, if the business grows enough, it may open a new establishment nearby. For example; a successful downtown restaurant may open a second location in the suburbs, and a manufacturer may open a new facility to make for itself a component whose production it previously outsourced. But again, these new establishments are likely to be located in the same state as their parent firm.
As Figure 1 shows, fully 87 percent of all 1995-2013 gross private-sector job creation was “home grown” — it came from startups, the expansion of employment at existing establishments, and the creation of new in-state locations by businesses already headquartered in the state. Although much discussion by elected officials of economic development is framed as “attracting businesses from other states,” only 11 percent of the new jobs created in the median state were the result of the creation of new in-state business establishments by companies headquartered out-of-state. And an even smaller share of new jobs — a miniscule 3 percent — resulted from the actual relocation of pre-existing positions from one state to another.
The relative shares of these three types of job creation vary relatively little among the states. (See Figure 2.) For example, startups and expansions of in-state businesses accounted for between 82 percent (Delaware) and 91 percent (New York) of total job creation. Relocations generally accounted for between 1 percent and 4 percent of job creation, with only five states falling outside that range. Job creation from the opening of new branches in a state by businesses headquartered out of state varies somewhat more, ranging from 7 percent (New York) to 14 percent (South Carolina).
Moreover, as Figure 2 illustrates, the majority of jobs created by interstate branching came from businesses that were headquartered out-of-state but already had facilities in the state. In every state except one (Vermont) at least half of the jobs created by the branching of out-of-state firms into the state were created by businesses that were already present in the state, and in some 30 states at least two-thirds of “new branch” jobs were created by already present firms. Firms tend to branch into states where they already are familiar with the market for their products, know that the labor force generally has the skills their industry needs, and can realize managerial, transportation, and other logistical efficiencies and cost savings by remaining close to their existing facilities.
MANY STATES PURSUE FAILING ECONOMIC DEVELOPMENT STRATEGIESState policymakers too often pursue economic development strategies that are bound to fail because they ignore the fundamental realities about job creation revealed by the new data and research discussed above.
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