Review of Industrial Organization 15: 239–252, 1999.
© 1999 Kluwer Academic Publishers. Printed in the Netherlands.
The Industry Component of Regional New Firm
DAVID B. AUDRETSCH
and MICHAEL FRITSCH
Institute for Development Strategies, Indiana University, Bloomington, IN 47405, U.S.A.
Technical University Bergakademie Freiberg, Faculty of Economics and Business Administration,
D-09596 Freiberg, Germany
Abstract. We demonstrate that the link between geographic speciﬁc factors and the propensity
for entrepreneurs to start new ﬁrms varies from industry to industry. Linking regional startup rates
in Germany during the late 1980s to geographic-speciﬁc factors for disaggregated manufacturing
industries, we ﬁnd that the impact of geographic speciﬁc factors of startup activity varies substantially
across industries. In addition, the evidence suggests that it is factors speciﬁc to each industry, such
as capital intensity, that shape the link between geographic-speciﬁc factors and new-ﬁrm startup
Key words: Start-ups, new ﬁrm formation, regional differences, industry speciﬁc effects.
JEL Classiﬁcation: L6, R12.
One of the most important questions confronting economic policy emerging in this
past decade is how to transform a region into “the next Silicon Valley”
(Audretsch, 1998). A substantial literature has responded in regional economics
trying to identify those geographic speciﬁc characteristics which induce new-ﬁrm
startups. Unfortunately, this literature has produced a number of ambiguous re-
For example, while some studies ﬁnd that greater unemployment serves as a
catalyst for startup activity, others ﬁnd exactly the opposite, that new-ﬁrm startups
tend to decline as unemployment rises (Storey, 1991; Reynolds et al., 1994b). The
purpose of this paper is to show that the ambiguous ﬁndings in the regional eco-
nomics literature is the result of ignoring the role that industrial organization plays.
Using data on new ﬁrm formation in German regions during the late 1980s, we link
We are grateful to the helpful suggestions and comments by Paul Reynolds and David Storey
on earlier versions of this paper. Any errors or omissions remain our own.
See for example the collection of country studies included in the special issue of Regional
Studies on Regional Variations in New Firm Formation, edited by Paul Reynolds et al. (1994a), as
well as Audretsch and Fritsch (1994a,b) and Fritsch (1992) for Germany, and the survey by Storey