Operationalizing the Entrepreneurial Pipeline Theory: An Empirical Assessment of the Optimal Size Distribution of Local Firms

Abstract

This article analyzes the relationship between local economic growth and the distribution of businesses across size categories. The distribution is measured by the employment share in businesses of various sizes and by a business distribution index. The index provides a measure of the extent to which the local economy deviates from an equal employment share in each of nine business-size categories. The authors find strong links between a county's business-size distribution and its economic growth rate and also a difference between the optimal income and job growth-enhancing distributions. In addition, the results indicate that the optimal growth-enhancing distribution of employment has a higher share of the smallest businesses (with one to four employees) than the current average. The results support increased policy emphasis on encouraging small business start-ups and development; however, the optimal development strategy depends on the initial distribution of businesses within a local economy.