Who Wins When Location Matters Less?

The local bias of entrepreneurship matters because location changes what a founder can finance and build, but it does not produce the same payoff as location in wage work. This chapter compares local and moving entrepreneurs with local and moving wage workers across financing, scale, and income. The aim is not to declare a universal winner; it is to identify when local embeddedness is an asset, when mobility is valuable, and what a lower LBE might conceal.

The local path builds a different kind of firm

The strongest case for local embeddedness is not that local founders are more numerous. It is that the businesses associated with them look different. In the Italian evidence, LBE grows with employment and firm value. The gap is larger among bigger start-ups, and local firms have greater employment, more capital, and higher capital-labor ratios than firms created by non-locals. Local start-ups also obtain more bank financing relative to the capital they invest.

Those outcomes line up with a particular constraint. A founder who can obtain only a small amount of credit may choose an activity that can be run alone, with limited equipment and little inventory. A founder with more workable financing can purchase productive assets, hire employees, and withstand the delay between spending and receiving revenue. The local advantage therefore shows up on the intensive margin: not only who starts, but how much capacity the resulting business can assemble.

The study reports an average employment advantage of about 37 percent for local start-ups, about 40 percent more capital, and a capital-labor ratio roughly 38 percent higher than for non-local start-ups, after its controls. It also reports about 45 percent more bank financing per unit of capital invested. These are not measures of founder virtue. They are differences in observed firm outcomes that are consistent with local access to credit and soft information relaxing a financing constraint.

The distinction is important for a region deciding what “more entrepreneurship” should mean. A rise in the number of self-employed people can come from businesses with little capital and few employees. That may be valuable as a source of livelihoods, but it is not the same outcome as a rise in capital-intensive firms that employ more people. LBE alone cannot tell us which of these is occurring. The Italian results show why firm scale and financing must accompany any interpretation of a local-founder gap.

Local finance also changes the probability of entry. In the Italian models, regional credit availability is positively related to starting a business mainly through local individuals once the interaction between local status and credit is included. For an average individual, the study reports a roughly 35 percent increase in the predicted probability of starting a business when moving from the least to the most developed local financial market. The same local-credit interaction appears in employment size, capital stock, and capital intensity.

This makes local finance a relevant lever in the model, but not a magic solution.