There is a consensus among academics that the availability of venture capital has a large effect on economic growth in a city. But a new study by Sampsa Samila and Olav Sorenson found that this is only true in the presence of high levels of social integration. Only if a city has an ethnically integrated society will venture capital drive innovation, job creation, and economic growth. This is also one of the reasons why entrepreneurship flourishes mostly in cities: they offer many more opportunities for social connections than rural areas.
- Most financial investments in startups come from local communities. It is also easier for investors to provide other kinds of support (mentoring, networking) to companies in their community. And in the more socially integrated the community, the more interconnected it is, so the success of one company can have a positive ripple effect.
- Diverse groups produce more innovative and creative ideas, which explains why regions where members of different social groups can connect the most easily would present higher rates of innovation.
These findings suggest that economic development depends on more than just financial resources or even human capital. Even if a city is populated with the kinds of people who would thrive in a business environment, social structures set them up for success or failure.
The data shows that cities significantly more integrated than the average enjoyed a much stronger effect of venture capital on growth. San Jose, CA, is highly integrated compared to the average city, and has played a huge role in the Silicon Valley boom. By contrast, Chicago, one of the most segregated cities in the United States due to decades of legal segregation and housing discrimination, has not benefited much from intensive venture capital activity. Social segregation has far-reaching effects not only on society but the economy, and not only on the minorities disenfranchised by segregation but on the entire region. This raises the question of whether segregation births a vicious cycle of social exclusion and sluggish growth.
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Contributed by Emily Lever.
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