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3. Entrepreneurship

Entrepreneurs transform their dreams, ideas, and knowledge into new enterprises that employ a region’s citizens and add diversity and energy to its economy. Acs and Armington (2004) have shown that higher rates of entrepreneurial activity are strongly associated with faster growth of local economies.^[1] Entrepreneurs provide the know-how and energy and take the risks required to turn technical and market knowledge into economic knowledge. But entrepreneurs cannot thrive without business infrastructure, capital, educated employees and advisors, a positive business environment, and personal networks. Not surprisingly, many communities seek to attract entrepreneurs and encourage the formation and growth of new enterprises.

This section looks at two indicators of entrepreneurship: new company creation and non-employer businesses.

3.1 New Company Creation

The U.S. Small Business Administration publishes data on establishment births and deaths based on data provided by the U.S. Census Bureau.

Establishment births are an indication of innovation and healthy competition, but many new businesses are very short-lived. The “churn” caused by the continuous birth and death of establishments brings volatility to the labor market, with both positive and negative consequences both for workers and businesses. A positive net change in establishments over a given period of time means that the number of establishments that start up is greater than the number that fail. This positive net change may indicate a business environment supporting the survival of new establishments.

Regional Comparisons

In Figure 8, the light bars represent the rate of establishment births in 2005, while the dark bars represent the rate of establishment deaths. The rate is taken as a percentage of the total number of establishments at the start of the year. The net change is the difference between the births and deaths and is represented by the darker gray bar.

The metropolitan region with the fastest rate of both births and deaths is Las Vegas, with an establishment birth rate of 18.6 percent and a death rate of 13.2 percent. This reflects, in part, its rapid population growth, which outpaced the other MSAs from 2000 to 2008 with a growth rate of 36 percent.

The Portland region appears to have a relatively slow rate of business churn, ranking eighth out of the 11 comparator regions for the rate of establishment births, and 10th in the rate of business deaths in 2005. In that year, the Portland MSA gave birth to 1,383 net new establishments, ranking 4th among comparator MSAs behind Phoenix, Seattle, and Las Vegas.

Establishment formation and death rates in the Portland region have fluctuated over the past decade. As shown in Figure 9, rates of business formation and the net rate of formation were higher in 1997 than in any other year in the past decade. The net rate of business formation fell steadily from 1997 to 2002 and then rose from 2003 to 2005.

3.2 Non-Employer Statistics

New businesses often start very small—so small that they have no employees. While these businesses do not show up in the employment statistics, they can still be tracked. Non-employers are businesses without paid employees that are subject to federal income tax; most are self-employed individuals operating very small unincorporated businesses, which may or may not be the owner’s principal source of income. The Census Bureau notes that while non-employers account for nearly three quarters of all businesses, they account for only about 3 percent of business activity. See the U.S. Census Bureau, Nonemployer Statistics for more detailed information on non-employer business and data collection methodology.^[2]. While many of these businesses stay very small, some are incubating business and technology ideas and will eventually grow into more substantial businesses. Thus, they are sometimes used to measure the potential for growth and innovation.

Regional Comparisons

There is a great deal of variation in the number of non-employer businesses per thousand residents, as shown in Figure 10. Denver has the highest rate with 81.9 non-employer businesses per 1000 people; Phoenix has the lowest with 60.6. The Portland MSA ranked relatively low among the comparator MSAs with only 67.4. Similarly, Portland ranked low in the non-employer business receipts as a percentage of MSA GDP in 2006 with only 6.6 percent (see Figure 11). Austin was the highest with 8.9 percent.

3.3 Small Businesses

While the non-employer statistics give us information about the smallest companies—those with no employees—the picture changes when we look at slightly larger businesses. The U.S. Census and Small Business Administration collect data on enterprise and establishment size. According to the U.S. Census, an enterprise is a business organization consisting of one or more domestic establishments that were specified under common ownership. The enterprise and the establishment are the same for single-establishment firms.

Regional Comparisons

Figure 12 shows that the number of non-employer businesses per capita grew from 2002 to 2005 and then leveled off both for the Portland MSA and for the comparator MSA’s. Throughout this period, Portland stayed below the average for all of the comparator regions.

Despite the Portland MSA’s low rate of non-employer businesses, it does have a substantial small business sector. As shown in Figure 13, Portland had the highest proportion of people working in enterprises with less than 20 employees among the comparator regions in 2006; 19.2 percent of employees in the Portland MSA worked in enterprises with less than 20 employees, followed by Seattle with 18.2 percent of employees working in small enterprises. On the low end, only 12.2 percent of employees in Las Vegas worked in enterprises with less than 20 employees. Figure 14 shows that Portland also had the 2nd highest percent of total payroll from these small businesses, at 15.4 percent, right after the San Diego metropolitan area.

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