High growth companies are not the same as high-tech

A new study from the Kauffman Foundation on high growth companies (The Ascent of America’s High-Growth Companies) reminds us of a very important fact:

So-called high-tech sectors constitute only about a quarter of fast-growing Inc. firms: IT (19.4 percent) and Health and Drugs (6.5 percent). Other major sectors include Business Services (10.2 percent), Advertising and Marketing (8.5 percent), and Government Services (7.3 percent). Thus, innovations and growth of firms come from a wide range of industries.

And high growth companies are located in various places. The Washington DC area has the highest concentration of high growth firms. As the study points out:

There are innovative, high-growth companies outside of the usual suspects of technology places, like Silicon Valley. Such surprise regions include Salt Lake City (second), Indianapolis (sixth), Buffalo, N.Y. (eleventh), Baltimore (fifteenth), Nashville (eighteenth), Philadelphia (nineteenth), and Louisville, Ky. (twentieth). These clusters of Inc. firms, including those in the area’s so-called Rust Belt Region, suggest that population growth in the region is not necessarily a factor for growth of firms.

One point I found very interesting is that only 46% of the Washington high growth companies are in government services. Having watched the changes in the DC area economy for a couple of decades, this confirms the fact that the Washington economy is no longer just a government town. Yes, the Federal government remains the dominant economic player in the area. But surprisingly, the DC area has a higher than expected concentration of business services and human resources related companies.
Other sectors, such as bio and life sciences, are important as well – even though they don’t seem to contribute that much to Washington’s ranking in the report. Of course, the importance of this sector may have a lot to do with the fact that the National Institutes of Health and other government bio and health related agencies are nearby — which draw people in these fields to the area.
Which brings me to another point of the report. It’s people who matter the most:

While regional development literature suggests the presence of venture capital investment, high quality research universities, federal R&D funding (such as SBIR), and patents are good sources for growth, Inc. firms had no correlations with these factors. In contrast, we find that the presence of a highly skilled labor force is important for concentration of Inc. firms.

That human capital is the most important has major policy implications. As the report points out:

we further introduced an additional measure in the university role, namely, how many science and engineering graduates reside in the population. This factor is significant, so the Inc. score is not associated with university R&D, but with how many high-skill workers the university has produced or attracted. Therefore, while the literature in economic development has called attention to the importance of research universities, we find that the university’s teaching and training role is more important.(emphasis added)

We need to start paying more attention to the teaching role, which includes community colleges and non-research intensive universities. Maybe it is time for local economic development to start to take on the issue of college affordability. Not sure what can be done at the local/regional level. But we need to start thinking creatively about this.

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