Local Industry Agglomeration and New Business Activity

Abstract

New businesses are highly involved in innovative activity, which enhances worker productivity and leads to increased economic output. This paper investigates the effects of industry concentration on the incidence of new business openings in the 5,504 Maine county‐industries. Empirical findings indicate that new business activity increases with the number of incumbent establishments in a county‐industry and its concentration level relative to the U.S. economy. Model simulations show that raising county‐industries, with no initial industry presence, to concentration levels similar to that of the industry in the U.S. economy results in a 1.7 to 8.9 percent increase in the expected number of business openings over a three‐year period. Empirical results also suggest that industry clusters comprised of young and small establishments are more conducive to new business formation than clusters made up of mature and large companies.

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