The Road through the Rust Belt: From Preeminence to Decline to Prosperity

9 - Barriers and Opportunities for Entrepreneurship in Older Industrial Regions

215 9 Barriers and Opportunities for Entrepreneurship in Older Industrial Regions Ziona Austrian Merissa C. Piazza Cleveland State University Manufacturing served as the main source of economic activity in many of the cities of the Midwest until its decline led to the creation of the term “Rust Belt.” While entrepreneurship offers the promise of economic growth, Midwest regions need assistance to foster a sustainable entrepreneurial ecosystem and launch new businesses. Postwar prosperity was built on the production of goods needed to satisfy pent-up demand from Americans, who wanted to improve their lives after World War II, and demand from Europe and Asia, where the populations were physically rebuilding their countries. This period of economic growth was concentrated in several leading industries —automobiles, steel, aluminum, tires, and chemicals—each with large dominant companies with significant market shares. The role of small businesses and entrepreneurship was diminished during the postwar decades; small companies were found to be less productive and innovative than larger corporations, and they offered lower wages. The industrial revolution of the early twentieth century, characterized as an entrepreneurial and individualistic era, had been replaced by an environment of large, structured, and hierarchical corporations. However, even with these developments, U.S. policy still tended to preserve small enterprises, and in 1953 Congress created the Small Business Administration . This policy was in stark contrast to Europe and the Soviet Union, which discouraged such ventures in order to focus on national industrial policies. Bowen.indb 215 Bowen.indb 215 12/16/2013 2:14:26 PM 12/16/2013 2:14:26 PM 216 Austrian and Piazza The recovery of Japan and Europe and the ensuing movement of labor to cheaper markets outside of the United States through globalization brought to an end the complete advantage the nation had enjoyed after World War II. Since the 1970s, the United States and its regions have been undergoing a dramatic transformation from manufacturing to knowledge- and information-based economies, shifting the focus from physical to human capital. By the 1980s, innovation and entrepreneurship emerged as the main components in the engine of economic growth, causing many scholars and policymakers to look to the factor of knowledge as a primary source of competitiveness. With this paradigm shift, national and regional decision makers needed to change public policy to ensure a more hospitable and nurturing environment for innovators and entrepreneurs. This chapter links the assertion that entrepreneurship is associated with regional growth to the need for public policy that stimulates entrepreneurship in declining industrial areas. The discussion reviews some of the literature on the general role of innovation and entrepreneurship in economic growth, the barriers to entrepreneurship in older industrial regions, and the role that the nonprofit and public sectors play in accelerating entrepreneurship in these regions. Then examples are given of how private-sector-led organizations encourage the development of an entrepreneurial ecosystem and culture that could lead to economic growth in older industrial regions. Entrepreneurship has been investigated as a potential means for economic growth throughout economic history. But with the recent framework of endogenous growth theory showing that technology advances lead to higher economic output, many people today are increasingly looking to entrepreneurs to facilitate these advances. In addition, some authors find that higher participation rates of entrepreneurial activity are strongly positively correlated with higher growth rates, even when establishment size and agglomeration effects are statistically controlled (Caree and Thurik 2010). Moreover, additional studies show that entrepreneurs are needed to bring new ideas to market because large existing firms do not have the capabilities to take advantage of the innovations that address market gaps (Audretsch, Bönte, and Keilbach 2008). With this concept in mind, it is important to ask what happens to regions that have been dependent on large firms throughout their recent economic history and that do not have the entrepreneurial culture to take advantage of innovations because individuals are risk averse. Bowen.indb 216 Bowen.indb 216 12/16/2013 2:14:27 PM 12/16/2013 2:14:27 PM Entrepreneurship in Older Industrial Regions 217 These issues lead to the examination of the entrepreneurial makeup of lagging regions in the United States, specifically older industrial regions with a legacy of large and declining manufacturing firms. Much has been written about this topic in the literature for economic development practitioners, but little has been published in the academic literature . It is the hope that this chapter...