Article originally published on Medium. Published here with permission – from myself 😉
Economic Dynamism — if you’re not an economist it’s a term that you probably haven’t heard often, if ever. It’s an esoteric term that might trigger warning bells of boredom in the brains of any non-economist. Warning! Boring economics stuff alert! But it’s integrally tied to entrepreneurial ecosystem building.
Economic dynamism, business dynamism, or if you prefer, a dynamic business environment, essentially means that there’s a high rate of births and deaths of new companies. It’s an environment in which the creative force of new startups and businesses, as well as the failure of others, results in a creative destruction where new ideas and technologies are constantly disrupting the status quo and exerting pressure on older businesses. And crucially, economies with higher company births than deaths tend to have higher business dynamism.
It might be a bit of an oversimplification, but I like to think of economic dynamism as a condition where there are higher rates of startup and entrepreneurship activity that makes the business environment more dynamic. As it turns out, this creative destruction dynamic is crucial to strong local, regional, and national economies.
And unfortunately, the converse is also true. Low rates of business dynamism lead to economic distress.
“High rates of dynamism are associated with economic expansion. Without it, an economy trends towards stagnation” ~ Dynamism in Retreat — Economic Innovation Group
The startup rate in the U.S. has continuously fallen since the late 1970s and the Great Recession exacerbated the trend, damaging business dynamism and as a result, economies. Some may point to national economic data and say that the economy is doing great. But looking at the economic details of communities across the U.S. tells a different story. Since the Great Recession, a handful of high dynamism metro areas have expanded their economies and these metro areas have lifted the national economy as a whole. Meanwhile while low dynamism cities’ economies have suffered.
More than two thirds of U.S. metro areas have seen a decline in business dynamism as they experience more company deaths than births. According to Economic Innovation Groups report, Dynamism in Retreat:
“From 2010 to 2014, five metro areas alone produced the same net increase in firms as the rest of the country combined: New York, NY; Miami, FL; Los Angeles, CA; Houston, TX; and Dallas, TX.”
They further found that “the country’s most economically distressed zip codes continued to experience a deep and enduring recession while the nation as a whole enjoyed years of recovery.”
So, while a handful of tech hubs are doing great economically and thereby lifting the national economy, the majority of metro areas remain mired in recession and economic stagnation.
As the images above show, it’s a vicious cycle. How do we break out of it? While economists and policy wonks debate what can be done to jump start economic dynamism, I’d like to offer an idea — entrepreneurial/startup ecosystem building.
Since increasing business dynamism in a community is associated with a healthier economy, focus on increasing business dynamism. How? Business dynamism is increased by increasing the rates of new firms, i.e. increasing startups and entrepreneurship. How do we increase the rates of startups and entrepreneurship? Ecosystem Building!
Startup Genome reached this same conclusion in their 2017 report, recommending that to mitigate economic inequality, “regions need to focus on building stronger ecosystems.”
Ecosystem building is an activity that any community can adopt. By rallying your community around supporting startups and entrepreneurs, aka ecosystem building, you’ll be working to increase business dynamism in your city and you’ll start moving the needle to improve your local economy.
To close, I’ll offer a final prediction, or rather, echo a prediction from Startup Genome. Those areas that fail to increase their business dynamism will continue to suffer.
“Those places that fail to boldly and immediately invest in startup ecosystems, and thus fail to produce startups, will experience economic stagnation.” ~ Startup Genome report
Build entrepreneurial ecosystems to increase your business dynamism and give your economy a boost!
Learn more about Economic Dynamism
Learn more about Ecosystem Building