Entrepreneurship support programs, if done well, have a great potential to alleviate poverty and create jobs. World Bank economists, among others, seem to agree: in 2013, the World Bank’s World Development Report stated that in the past three decades, the share of people around the world living under the poverty line fell from 1.94 to 1.29 billion people, a likely result of millions of additional jobs in Asia.
While firm creation and job creation are related, new research from Endeavor Insight has found that the relationship is more complex. To examine unemployment in a region with many companies, Endeavor Insight looked to the Detroit metro region, which has experienced a steady growth in the number of firms and, simultaneously, also a steady rise in unemployment since 2008.
Once a major economic power due to its successful automotive industry, Detroit’s unemployment levels has remained higher than all comparable metropolitan areas in the United States. Why have the number of firms and unemployment both increased in Detroit? What can be done to recreate economic growth in Detroit and other regions with high unemployment? Endeavor Insight partnered with the New Economy Initiative to answer these questions.
From a dataset of over 600,000 Detroit metro-area companies researchers at Endeavor Insight tracked startup firms, scaleup firms, and firms with lower levels of growth between 2007 and 2012. The growth trends of the three types of firms appear in the graph below.
Based on the data, the report concludes that a lack of scaleups in Detroit is the reason why unemployment is still at record levels, despite the large number of new firms. Below are three main conclusions from the report:
- Startups did not solve unemployment. Despite the creation of more than 3,500 startups between 2007 and 2012 in and around Detroit, unemployment increased from 7.6 percent to 10.1 percent during the same time period.
- Unemployment has risen despite the presence of more firms. Between 2007 and 2012 the number of lower-growth firms increased by 27 percent and the number of startups increased by 4 percent in the Detroit metro-area. Overall, total number of firms in the region increased from 279,000 firms in 2007 to 331,000 firms in 2012. Despite these increases, unemployment still increased.
- Detroit needs more scaleup firms. While the number of lower-growth and startup firms are increasing, there are not enough firms that create jobs. Between 2007 and 2012, scaleup firms–companies with at least 10 employees and 20 percent or greater annual employment growth over the previous three years– decreased by 52 percent. Unlike lower-growth firms and startups, scaleups create jobs and are necessary components of all successful economic ecosystems.
WHAT THIS MEANS FOR OTHER CITIES
Detroit is not the only place where the creation of more scaleups could remedy high unemployment. Studies on countries around the world including: Peru, Mexico, and Kenya, have identified scaleup firms to be powerful tools in reducing unemployment. Outside of Detroit, the report provides a number of insights into the importance of scaleups for job creation:
- Scaleup firms are engines of growth. Between 2009 and 2012, 71 percent of the new jobs in Detroit were created by scaleups, even though they made up less than 1 percent of all firms in the region. In addition, scaleups employed more than 25 times more people than low-growth firms and 76 times as many people as the average startup. Regions looking to lower unemployment should fund programs that specifically target high-growth firms.
- Scaleups firms are durable. In Detroit, scaleup firms last two and a half times as long as low-growth firms and in a four year study only 3 percent of scaleups failed in the four years following high-growth. Local leaders should create channels that connect successful scaleup leaders with early-stage founders who could benefit from mentorship to transform promising new firms into sustainable scaleups.
- The number of scaleups should be tracked. As seen in Detroit, the number of firms does not always indicate whether or not the number of jobs will increase in a region. In order to understand how well a region is tackling unemployment, it is important to measure both startup and scaleup growth.
Contributed by Emily Luepker.