An Investigation of the Industrial Ecology of New Firm Survival - Executive Summary

This study examines the influence of external economies on the survival and longevity of new independent businesses in the continental U.S. It hypothesizes that new firms with access to the sources of specialized inputs, labor, product markets and knowledge spillovers will outlive those in areas of relative isolation. The size of the region and the diversity of its industrial base are also considered as possible sources of beneficial external economies.The findings show that while external economies have a statistically significant influence on new firm survival, the effects are typically very modest. The most consistently significant effects are found for localization, which lowers the risk of new firm failure in five of the nine detailed study industries examined: farm and garden machinery, metalworking machinery, motor vehicle parts, advertising and computer and data programming services. After controlling for other sources of external economies, the size of the region is insignificant for most industries. By contrast, regional industrial diversity reduces hazard rates for new firms in drugs, advertising, computer and data processing, and research and testing services.Measures representing the specific sources of localization are statistically significant in fewer industries than the broadly defined measures of localization, but when significant they often have a stronger influence on new firm longevity. Among the specific sources of localization, proximity to specialized input suppliers is the most consistently significant, reducing hazard rates for new firms in metalworking machinery, advertising, and computer and data processing services. Proximity to intermediate product markets is only significantly beneficial in the professional services sector. Labor pooling is either insignificant or found to increase new firm hazard rates, but only after the other sources of localization are controlled. Industry knowledge spillovers significantly reduce hazard rates for new firms in the drugs and motor vehicle parts industry, but the accuracy of the variable may be sensitive to industry-specific differences in the economic value of patenting.This study also investigates whether and how the size of the establishment influences new firms' ability to benefit from their external environment. The evidence suggests that smaller businesses are the most common beneficiaries of external economies, but not in all cases. There are several examples, most commonly for urbanization, where external economies increase the failure rates of larger plants while having little effect on smaller ones. There are also several industries where an increase in external economies produces a relative reduction in hazard rates for medium sized plants, but have little effect on smaller plants.Overall the research implies that entrepreneurial development strategies are likely to be more effective if designed to capitalize upon a region's existing strengths and assets. The beneficial influence of localization and diversity are often strongest when estimated at larger spatial scales, i.e. those approximating the size of commuting sheds and labor market areas. That provides some conditional support for rural development strategies aimed at strengthening ties to nearby metropolitan areas.