Posted by: Josh Lehner | February 7, 2013

Musings on Corporations: Growth and Clusters

This is a much belated entry that was originally designed to be released in conjunction with a previous post discussing Oregon’s corporate tax structure, around the time of the special legislative session that produced HB 4200 that provided tax certainty for any business willing to make large investments in the state above certain thresholds. The following post provides an abbreviated set of thoughts on job growth by firm size and the economic benefits of industry clusters, both of which play an important role regarding the potential impact(s) of HB 4200. The bottom line takeaway is that while small, growing firms disproportionately create (and destroy) jobs, large firms are also very important for local and regional economies. In particular when you can create an industry cluster that provides a number of economic benefits, such as attracting workers, paying well, generating spin-offs and the like, it positively impacts the local economy in a broader sense.

When it comes to firm dynamics and job growth, one of the best and well-known economists is University of Maryland’s John Haltiwanger who has published extensively on the subject and worked with both the Census Bureau and the NBER on many projects and papers. In a 2011 paper titled “Who Creates Jobs? Small vs Large vs Young”, Haltiwanger, Jarmin and Miranda examine just that question. The conventional wisdom has been and continues to be that small businesses create jobs. This is certainly true but they also destroy a lot of jobs when businesses fail. The figure below, taken from a Haltiwanger slide presentation on his website but based on the 2011 paper, shows the shares of job creation and destruction based on both firm size and age.

Haltiwanger_JobCreationDestruction

As the authors write, “for the most part the fraction of job creation and destruction accounted for by the various groups is roughly proportional to the share of employment accounted for by each group.” This means that firms that have the most jobs generally create the most jobs but also destroy the most jobs. However, the key point for growth and policy is which classes or categories of firms disproportionately create or destroy jobs. Here, it is both startups and young firms that disproportionately create and destroy jobs, relative to their overall share of employment. This is part of the creative destruction process and there is a clear “up or out” dynamic in terms of business growth for new and young firms. Many new firms either take off and experience strong growth in terms of sales and employment (the “up” part) or they fail (the “out” part.)

This general process is also in effect here in Oregon. Charlie Johnson, now a former Oregon Employment Department Economist, wrote back in May 2012 in an article on Oregon’s small businesses:

During the past decade, Oregon’s small firms have played an important role in the economy. According to data from the Business Dynamics Statistics program at the U.S. Census Bureau, firms with fewer than 100 employees contributed 56 percent of net job creation in Oregon during the economic expansion of 2003 to 2007. However, small firms also accounted for 64 percent of the net jobs lost between 2008 and 2010.

Phoebe Colman, also with the Employment Department, writes about firm size and the data available in Oregon. She finds that in 2012, 89 percent of businesses in Oregon had less than 20 employees however the total sum of their collective employment was about 26 percent of the state’s private sector employment. In fact, the top 2 percent of firms in size (100 or more employees) account for about 49 percent of employment in the state and nearly 59 percent of wages paid. What this says is that while the vast majority of businesses in both Oregon and the U.S. are small businesses, half of individuals who have a job, have one with a large or relatively large business.

One of the interesting results of Haltiwanger (2011) is that once one controls for the age of the firm, there is not necessarily a clear relationship between net job creation and size of firm. In fact the authors go so far as the write: “the main point is that, once we control for firm age, there is no evidence that small firms systematically have higher net growth rates than larger businesses.” While this observation may be somewhat counter to, but I’d argue more in conjunction with, the conventional wisdom that small business create jobs, it highlights the key role that the age of the firm plays in job creation. The “up or out” dynamics of the young and lean firms, the so-called gazelles, and the startups are very important to job creation. The takeaway is that it is not sufficient to just say that small businesses create jobs because large businesses do to. Rather it is both the startups and the young, lean firms exhibiting strong growth that disproportionately create the employment dynamics of both job creation and destruction. Haltiwanger (2011) finds that after five years, 40 percent of the jobs created at startup are destroyed by the young firms that fail. However, “conditional on survival, young firms grow more rapidly than their more mature counterparts.” For more information on gazelles, see this recent Federal Reserve Bank of Atlanta post.

All of this highlights the fact that the dynamics of the economy and jobs is highly complex and more nuanced than soundbites alone. Focusing on a firm’s size can both be important but also misleading, depending upon what one is examining. Back to Oregon and the fact that two of the state’s largest private sector employers are expanding or plan on expanding. Based on published reports the combined employment at Intel and Nike is approximately 25,000 here in the state which accounts for about 1.9 percent of statewide private sector employment. Factoring in the stated wages in the news releases (greater than $100,000 per year compared to the statewide average of $42,400 per the 2011 QCEW), these jobs account for about 5 percent of statewide wages. Clearly these two particular firms have a large economic footprint and impact on the state.

Expansions indicate that the firm is doing well and likely looking to expand it’s market share or at least keep up with a growing industry. Generally, along with expansion comes economies of scale as firms are able to produce more at a lower per unit cost and increases in firm efficiencies. The end result of these, if all goes according to plan, would be increased returns to the firm through higher sales or higher profit margins or increased market share. A key question is how does each business distribute these returns and the answer varies firm to firm. Do you hire more workers, increase wages, increase research and development, conduct stock repurchases/share buybacks, save for a rainy day, etc? I think it is safe to say that in Oregon there has been at least a little bit of all of these as employment for these large firms is increasing, they are paying high wages and increasing R&D, among other actions.

One other very important economic aspect relating to large employers is that of industry clusters and their impact. In particular in Oregon both high technology and athletic and outdoor gear apparel are two large and economically vital clusters in the state. Given the recent special legislative session and the proposed/potential Nike expansion, I want to highlight some of that industry cluster’s effects. The athletic and outdoor gear and apparel cluster is discussed in more depth both at the Oregon Business Plan website and the Portland Development Commission website. In a 2010 white paper by Joe Cortright of Impresa, Inc. and also the Chair of the Governor’s Council of Economic Advisors, the cluster consists of more than 300 firms with employment of more than 14,000 and an average wage of more than $80,000 per year. From the paper:

Nike, Columbia and Adidas are the pillars and foundation firms of this cluster. The cluster had its antecedents in pioneering firms like Pendleton and Jantzen. The emergence of Nike in the 1970s helped catalyze the formation of the cluster in Oregon. The tension between fierce market competition among corporations and frequent movement of workers among firms has helped propel the cluster’s growth over time.

Besides these current or former pillars, the industry has many additional, well-known firms such as LaCrosse, Keen, Icebreaker, Merrell, Li Ning, etc. to, admittedly, various degrees of success.

Further into the report, Nike is highlighted and the benefits of industry clusters is laid out clearly:

Nike is important for five key reasons. First, its scale and economic importance are key drivers for the local economy. The company and its operations have a direct economic impact on the Portland area estimated at $1.9 billion per year in 2004. Second, the company attracts skilled workers to the region, as well as developing the skills of its own workers, and many of these workers go on to work at jobs in the athletic and outdoor cluster (and elsewhere in the local economy). Third, Nike provides a business model for other firms, and its former employees have started many spin-off businesses, especially in athletic and outdoor. Fourth, Nike anchors the region’s brand and credibility as a center for athletic and outdoor businesses. Fifth, Nike supports many professional and creative firms as well as self-employed individuals that serve as critical vendors/suppliers to Nike. Over time, Nike’s role has changed; while it was the progenitor of the cluster in the 1970s and 1980s, today, Nike employment is less than half of the cluster total. Most of the job growth today is coming from other firms, including suppliers and vendors, and the cluster is more complex and diverse than in earlier decades.

In conclusion, it is highly encouraging that two of the state’s largest businesses and employers are either currently expanding or looking to expand. This means local firms are doing well, or at least better, even if they really are global firms, and their economic impact on both direct employment and wages in addition to their importance to their industry clusters is important.


Responses

  1. I love this blog very much. I couldn’t have written it better. 🙂

  2. […] off. Thus they become a (relatively) large business. Part of this creative destruction process, as highlighted previously, is that young firms have both a high job creation rate and a high job destruction rate, as many […]


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