There are many indicators of economic health in a state, including job growth, capital investment and new real estate development to name a few.
But a recent report from the Economic Innovation Group has analyzed economic dynamism through another lens: the number of new firms born versus the number of new firms that die. Essentially, a region is economically dynamic if more firms are born than die. By this measure, we are a nation in decline – and there are broad implications for states like North Carolina.
According to the report, there were more than 117,300 more firms that opened than closed between 1977 to 2007 nationally. Before 2008, at least 80 percent of metro areas saw a net firm gain. Yet the Great Recession precipitated a massive firm decline. Now, even after a period of recovery, 3 out of 5 metro areas are still losing firms and only 1 in 7 metro areas are keeping pace with the average startup rate.
There are bright spots. High population growth areas like the Triangle and Charlotte lead the pack in startup growth as do innovation-oriented startup hubs. High rates of business churn (active firm births and deaths) are also strongly correlated with expanding local economies and subsequent job creation. Again, this is most pronounced in the Triangle and Charlotte, followed by a resurgent Triad.
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However, there are important warning signs for our economy and our job market. The national economy, for example, would have produced 924,000 more jobs in 2014 alone had the startup rate been as high as in 2006. Additionally, new companies have historically created 2.9 million new jobs per year, while established companies tend to shed jobs overall.
A report by the N.C. Department of Commerce shows that the percent of jobs generated by new and high-growth firms in our state declined from 59 percent in the first quarter of 1993 to 45 percent in the second quarter of 2015 (the earliest and most recent dates available). These firms are also usually responsible for positive “creative destruction” in our economy that helps drive innovation and growth. Their decline has some economists worried about the impact this will have on long-term economic growth for our nation and state.
The communities across our state that are suffering economic stagnation and decline are most vulnerable. This includes our micropolitan communities of less than 50,000 people and under-connected metro areas. Unless these communities can kick start firm creation, they are in store for a long, painful economic decline.
As we have shared in past columns, this has significant implications for how we should be approaching our future economy. In short, we need to find ways to help communities across the state foster healthy innovation ecosystems. This includes developing strong talent pipelines prepared to participate and compete in the knowledge economy, creating a comprehensive support environment for emerging entrepreneurs and existing small businesses (i.e. incubators, accelerators, co-working spaces, mentoring programs, etc.), establishing municipal policies focused on stimulating entrepreneurship, such as reducing regulatory barriers to entry and creating targeted incentive programs, and story-telling strategies through the media that help to celebrate the growth of new sectors and reinforce the innovation narrative.
It also means helping isolated communities connect with one another. Micropolitan communities intentionally need to connect with their metro neighbors so that emerging enterprises can tap into larger markets for capital, clients, and talent while helping build their own local entrepreneurial culture. Towns like Wilson, New Bern, Salisbury and Statesville, for example, should continue investing in their downtown areas and attract new businesses – while also forging relationships within the Triangle and Charlotte, respectively, to help strengthen the number of resources available to their business community.
This also suggests that cities need to be paying close attention to neighborhoods where there is a lack of economic dynamism – typically in under-developed commercial corridors and disconnected communities of color (such as southeast Raleigh, NE Central Durham, south Greensboro, east Winston-Salem and the northwest corridor of Charlotte). Should these neighborhoods stay economically stagnant, cities suffer as a whole and economic inequity widens. It’s why efforts to provide business training, micro-loans, mentors and networking opportunities to under-resourced entrepreneurs in these communities through organizations like Launch Raleigh, the Carolina Small Business Development Fund and community college small business centers are so critical.
North Carolina has a strong history of innovation and entrepreneurship, including tobacco, textiles, manufacturing, the life science and biotech fields, and Research Triangle Park among others. Our economic future is now dependent on our ability to increase the state’s economic dynamism and insure it is accessible for all.
Christopher Gergen is CEO of Forward Impact, a fellow in Innovation and Entrepreneurship at Duke University, and author of “Life Entrepreneurs: Ordinary People Creating Extraordinary Lives.” Stephen Martin is deputy chief of staff at the nonprofit Center for Creative Leadership in Greensboro.They can be reached at email@example.com and followed on Twitter through @cgergen.