If Hamilton wants jobs, it needs to support the creation of high-growth companies and foster the conditions that lead to them.
By Adrian Duyzer
Published April 27, 2010
Broke, indebted, with a high rate of unemployment and large numbers of people living below the poverty line. That's the United States in 2010. That's also Hamilton.
It's no surprise that in both places, job creation is of paramount importance.
In Hamilton, most efforts seem focused on convincing large, established companies that they ought to move here. We have acres of "employment lands" just waiting for companies like Canada Bread.
However, our efforts to bring large employers to the city are misplaced. We would actually gain many more jobs by focusing on creating new, high-growth companies right here in Hamilton.
A study by the Kauffman Foundation released in the beginning of March, High-Growth Firms and the Future of the American Economy (PDF), points out that in any given year, about 40 percent of all new jobs are created by just the top-performing one percent of all companies.
Further, companies that are between three and five years of age comprise less than one percent of all companies, but they generate 10 percent of all new jobs each year.
Moreover, a certain percentage high-growth companies will grow to employ as many as ten thousand people, becoming the major brands that we're all familiar with. Look at what RIM has done for Kitchener-Waterloo, and imagine the effect a success like RIM would have on Hamilton.
The study concludes that:
The prevailing policy discussions around unemployment and job creation in the United States and elsewhere overwhelmingly focus on the recovery or restarting of job growth in existing companies. Because of their apparent dominance — in the public eye if not the real economy — large, established corporations are perceived by policymakers as the engines of innovation and job creation. Even the emphasis placed on “small business” defaults to those companies already in existence — measures aimed at expanding access to credit for small businesses assumes that the desired audience is currently established and operating. Mostly invisible on the radar screen are the new companies — the startups, the “nonemployer” firms that transition to employer companies, the spinoffs — that truly embody new job creation.
In fact, the positive relationship between young companies and job creation is mathematically inevitable, as Paul Kedrosky, a colleague of study author Dane Stangler, points out. His reasoning is simple: drunks tend to fall down eventually.
Let me explain.
Imagine someone who's just left one of a dwindling number of Hess Village bars that has drinks at reasonable prices. They're standing on the sidewalk alongside a wall. On the other side of the sidewalk is Hess Street, with a curb that's just high enough to pose a significant challenge to the balance of our inebriated Hess Villager.
Suppose that each step our partier takes is completely random, based on a coin toss. Heads, they step towards the wall, tails, they step towards the street.
The only direction they can go for their first step is towards the street, since they're already right next to the wall. After that, coin tosses might see them heading towards the wall or towards the street. But in every case where they go towards the wall, they are eventually stopped by it. The same is not true of Hess Street.
If enough time elapses, our drunk is guaranteed to end up in the street.
This probabilistic idea is called the Drunkard's Walk. As Kedrosky explains, it applies to job creation:
[In the beginning, young companies] stand at the bar wall facing the gutter. They can’t lose jobs because they haven’t created any yet. All they can do initially, other than fail, is stagger away from the zero employment wall. Now, we know that about half of young companies last five years, more than enough time for companies to stagger back and forth such that, even if we assume no managerial skill, the drunkard’s walk model tells us they will grow and add jobs, even if only because that left bar wall prevents them from going below zero jobs.
The same doesn’t hold for older companies. They have been in business long enough that at t=0 they are already some distance from the bar wall, staggering back and forth. They can create jobs, of course, but they can also lose many jobs, the latter being something young companies mathematically cannot do given how they start at the left wall of zero employment.
Given that it is young, high-growth companies which have the greatest potential to create jobs, what should Hamilton be doing to help them?
There are two things that Hamilton could do that would help these companies immensely.
First, improve access to capital. Hamilton does not have the venture capitalists or the pro-startup mindset that new companies enjoy in entrepreneur-focused cities. Here, creative, technology-driven, innovative companies find it difficult to access the capital that would enable them to leap from startup to major company status.
In spite of our fiscal problems, Hamilton continues to find the millions of dollars for projects like Aerotropolis, stadium construction, road building, and so on.
Some of this money could instead be spent on creating an innovative public-private partnership focused on funding and fostering high-growth companies. This partnership should include the city as well as businesspeople and advisors from local colleges and universities.
Selection of a variety of participants from different sectors will help avoid creating a slush fund for well-connected insiders and ensure that good ideas are recognized and bad ones discarded. More than that, a true partnership would see matching funds from each participant. Perhaps participants could choose which ventures they personally wanted to support.
More than just money, a network like this would provide new businesses with crucial advice and connections.
What would happen if we allotted several million dollars per year to funding startups at ten or twenty thousand dollars apiece?
What if companies that needed fifty thousand dollars to help them leapfrog from small- to medium-sized could get it?
The second thing Hamilton could do - must do - to help create these companies is improve Hamilton's attractiveness to skilled, creative, educated individuals.
This is important because those individuals are the ones who are creating these companies, and because once these companies have been started they need to be able to hire employees with those characteristics as well.
Not everyone who works in the firm will need to fit these criteria, and a high-growth company will also spin off many jobs (and possibly other companies) that will utilize lower-skilled workers. But when it comes to leadership and core talent, these people are necessary.
Hamilton needs to start becoming a much more attractive place to these people than it is currently. We need to have dense neighbourhoods with mixed uses. We need excellent light-rail transit. We need more interesting options for entertainment and leisure.
We don't need sprawl, dreary warehouses by the airport, or truck routes. In fact, these have a directly negative impact on our chances of attracting and retaining creative people. They'll just move to Montreal, Vancouver, or Toronto instead.
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