The Quantitative Dimensions of Diversity

This week we look at a fourth indicator of entrepreneurial vibrancy in a given ecosystem: diversity.  It marks the final commentary on the recent Kauffman report.  Comments are welcome.

Diversity of educational background, gender, and industry is commonly cited as important to healthy entrepreneurship ecosystems.  However, while this appears to be self-evident for any creative activity, how do we know this?  The Kauffman Foundation has now offered three ways to capture diversity in a quantitative manner looking at: economic diversification, immigration, and income mobility.

Multiple Economic Specializations

Both inside and outside the United States, many policymakers and startup community leaders have focused on developing a “specialized” ecosystem that offers a high concentration of rock star startups and scale-ups innovating in one particular industry. At face value, that strategy makes a lot of sense. Specialization brings a comparative advantage and economic efficiencies, and those driving local economic development have always wanted to start with their strengths.

Yet specialization is rarely a product of planned ecosystem building.  It happens more likely due to variables around spinoff rates and the presence of dominant firms. A recent discussion on this blog examined the risks of creating such a startup monoculture where programs narrow the definition of an entrepreneur who then inadvertently perpetuates biases as he or she becomes a mentor or investor. But how can we quantify this?

To collect data on economic diversification, we must look at specialization in a given sector, and in a given geographic area as compared to a larger encompassing region. In the United States, the Bureau of Labor Statistics offers this data through the Quarterly Census of Employment and Wages.

The recent Kauffman research on measuring entrepreneurial vibrancy recommends a diversity of specializations. “Cities and regions that specialize in multiple economic areas should enjoy greater entrepreneurial outcomes than those that only specialize in one or two industries”, suggests the analysis.

Immigrant share of the population

Another measure of diversity in an entrepreneurial ecosystem is the location’s appeal to and assimilation of immigrants. Historically, immigrants have a very high entrepreneurial propensity. Data shows that immigrants to the United States start businesses at twice the rate of native-born Americans. Not surprisingly, over half (52.4 percent) of Silicon Valley startups established between 1995 and 2005 had one or more immigrants as a key founder.

Clearly, the extent to which cities and regions can attract immigrants and include them in the entrepreneurial ecosystem constitutes an important progress indicator.

Data collected for this purpose should look at the immigrant share of the population (all types of immigrants), and that share’s growth rate over time. The American Community Survey of the Census Bureau offers such data.

In terms of policies and programs, political grandstanding in Washington over broader immigration issues has made doing anything about increasing diversity within startup communities very difficult in the short run.  As more entrepreneurial communities around the world start to demonstrate how it was immigrants that enabled them to better compete with the United States, action will come eventually.  There are many nations successfully loosening their immigration laws for this purpose. For example, the Netherlands now offers a route to temporary national residence for those launching and developing innovative businesses.  This new startup residence permit, is valid for 12 months and requires finding an experienced mentor based in the Netherlands to guide the firm. Italy in turn has been offering startup visas to non-Europeans since June 2014, with €50,000 funding committed by investors as a condition.

In the meantime, the Policy Digest on Immigrant Entrepreneurs explores other ways to capture the economic benefits from entrepreneurial immigration. At the state level, the creation of university-affiliated programs that allow immigrant entrepreneurs to contribute to state economic development could yield positive results in terms of diversity. Leaders at the local level could in turn design initiatives to train, connect and assist immigrant entrepreneurs.

Economic mobility

To capture how well your entrepreneurial ecosystem diversifies opportunity, the probability of moving up or down the economic ladder between different income quintiles is key data to monitor. After all, the purpose of fostering entrepreneurial economies is to improve quality of life, expand opportunity, and breathe prosperity into society at large.

Entrepreneurship enables upward economic mobility through wealth creation and through job creation for the entrepreneurs themselves and the people they hire. Moreover, the growing entrepreneurial firms generate mobility opportunities for the younger workers they tend to hire compared to bigger firms.

The relationship between economic mobility and entrepreneurship has long been a subject of research. For example, an Inter-American Development Bank study of income persistence coefficients for Colombia, Ecuador, and Uruguay indicate that entrepreneurial activity is a channel of intergenerational mobility, while the estimates of asset persistence for Mexico show that entrepreneurship increases mobility across generations.

Policymakers interested in seeing entrepreneurship drive upward mobility should consider the importance of building social capital. In cultures such as Mexico, for example, the father’s occupation remains an important determinant of the son’s likelihood of becoming an entrepreneur. Besides working with ecosystem players (universities, networks, etc.) to create a culture that is conducive to entrepreneurship, government policies should identify and eliminate entry barriers to entrepreneurial activities.

For ecosystem leaders in the United States, capturing the probability of mobility is possible thanks to the work of Raj Chetty and his colleagues at the Equality of Opportunity project who produced an assembly of Income Tax Records. The New York Times hosts this data in interactive map form that is well worth examining.

Whether examining how to measure diversity or any of the other ecosystem vibrancy indicators I have discussed these past few weeks, it is clear that the work is just beginning. With more time, talent and treasure being directed at fostering healthier ecosystems, we have an increased responsibility to develop more robust evidence around where to channel it.  While assessments of entrepreneurial vibrancy will vary by city or by region based on each location’s priorities and idiosyncrasies, these ideas provide a baseline for knowing where an ecosystem stands and which data can be collected and tracked to measure progress over time.

However, as the authors of the report that inspired this series stress, we invite ecosystem leaders at the national, regional and local levels to question the causality implied by these indicators and to share any others that have allowed you to consistently take the pulse of your entrepreneurial ecosystem over time.  

We look forward to your comments and ideas.