Why Some Communities Foster More Entrepreneurs Than Others

Self-employment is a riskier bargain in places with weak social ties.

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Wikimedia Commons

The hard-charging entrepreneur has become something of a trope these days. From Steve Jobs to Mark Zuckerberg to Jack Dorsey, the image of the self-made man striking out on his own has become an updated, 21st century version of the old Horatio Alger myth.

But new research shows there's clearly more to the story than just individual skill, pluck, and ambition. The study, by Temple University’s Seok-Woo Kwon, the University of Missouri’s Colleen Heflin, and Duke University’s Martin Ruef, examines the relationship between self-employment levels and community support structures across America’s metro areas. Published in the December issue of the American Sociological Review, the authors argue that the strength of local social networks and trust — using the term “social capital,” popularized by Harvard sociologist Robert Putnam — plays a major role in whether a city is able to foster a culture of self-employment and entrepreneurship.

The study measures entrepreneurship using data on self-employment from the Census, and compares that to data from Putnam’s own Social Capital Benchmark Survey and the General Social Survey. The results get at how key aspects of social capital, such as membership in voluntary organizations or variation in trust across communities, affect rates of self-employment and entrepreneurial activity.                                              

Overall, the study finds that a “community’s social context” can be harnessed as a sort of “public good,” as entrepreneurs take advantage of higher levels of community trust and well being, as well as more robust social networks, in high social-capital communities.

Community activism has two related effects. First, the diverse and extensive social networks of high social-capital communities help entrepreneurs get the word out about their new businesses. Second, social trust in general can help entrepreneurs and small businesses establish the kind of reputation required to secure financing, attract employees and customers, and build a viable business. Membership in local community organizations, one of the hallmarks of high-social capital communities, is particularly important, putting members in touch with an ever-wider social network. In one of their models, in fact, they found that high levels of membership in communal organizations could, all else being equal, more than double the amount of self-employment. With these personalized connections, smaller businesses could flourish.

The strength of these community networks may, in fact, play a major role in answering a puzzling question: Why do some cities have far higher levels of entrepreneurship than others? The overall proportion of Americans who report that they are self-employed hovers somewhere north of 10 percent, but there’s a wide range across the country, from more than a quarter of all workers to well below 5 percent in some cities.  

This makes intuitive sense. Venturing out on your own is a risky proposition, and one that takes a huge amount of effort and ingenuity to build a business — even if it’s just you — from the bottom up. That’s why certain personalities are thought of as more “entrepreneurial” than others. But, as the authors note, there’s a snowballing effect as well, as more diverse and widespread social networks bring everyone, regardless of their own connectivity, into contact with far more people. These effects can spread beyond the very local level, and metros with more engaged citizens provide the right context for self-employed workers to make it.

Community is clearly key to creating an atmosphere where risk-taking is, in essence, less risky. But a couple of caveats, which the authors note themselves, should give us at least slight pause.

First, and perhaps most obviously, entrepreneurship itself is an extremely tricky thing to measure and track. For this study, as for many others, researchers use the number of people who report that they are “self-employed” as a proxy for entrepreneurship. But this is a broad catch-all category, including many less skilled workers — from handymen to housekeepers — who might well prefer regular salaried jobs but have been unable to find them, or who move between salaried work and self-employment. In fact, the authors found that these were the individuals most likely to benefit from high levels of community social capital, not high-flying high-tech entrepreneurs who create new technologies and transform whole industries.

And even more worryingly, it seems that the benefits of social capital fall incredibly unevenly, as white, non-immigrant communities see substantially larger benefits from strong social networks. As the authors note:

The level of community social capital increases the probability of being self-employed for marginal members of a community—those who recently relocated to the community, immigrants, and ethnic minorities—to a smaller degree than it does for a community’s dominant members.

This is in part a result of the kinds of organizations, often religious or ethnic, that are most likely to thrive in minority and immigrant communities. These inward-focused organizations tend to be isolated, limiting the number of social contacts, and by extension potential business contacts, that an entrepreneur can reach.

When it comes to entrepreneurship, social capital can be a double-edged sword. It can provide networks of relationships and connections that help entrepreneurs get off the ground. But on the flip side, it can also mean that similar people engage with similar people, stifling the diversity of social connections that entrepreneurs need to succeed. My own research has found that communities rich in social capital tend to have lower rates of high-tech innovation, while innovation and entrepreneurship tend to thrive in more diverse communities with lower levels of social capital. The kind of social capital that is truly essential to innovation and entrepreneurship tends to be bridging (occurring across groups) as opposed to bonding (occurring within insular communities).

That said, the study cuts through the worn-out myth that entrepreneurship is the product of unique and uniquely motivated people. Entrepreneurship of all sorts — from the creating cutting edge, high-tech enterprises to building a small business — is in fact a social process, depending upon teams of people working together and broad social networks. And community itself, the place where entrepreneurial activity happens, is a crucial part of the mix.

Image courtesy Wikimedia Commons.

About the Author

  • Richard Florida is Co-founder and Editor at Large of CityLab.com and Senior Editor at The Atlantic. He is director of the Martin Prosperity Institute at the University of Toronto and Global Research Professor at NYU. More
    Florida is author of The Rise of the Creative ClassWho's Your City?, and The Great Reset. He's also the founder of the Creative Class Group, and a list of his current clients can be found here