Let’s Nurture Rochester’s Gazelles

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerWhen it comes to economic forecasts, I tend to be a “glass-half-full” kind of guy. Yes, there is some probability that gas will rise to $20 per gallon and we’ll start riding horses again. I think it more likely that gas prices will fall back to $3 per gallon and there will again (sadly) be a market for the Hummer.

My natural optimism was dealt a blow by a new assessment of fast-growing firms from the Small Business Adminstration (SBA). The study is an adaptation of the work of David Birch of Cognetics from the 1980s and 1990s. Firms with rapid revenue growth were dubbed “gazelles” by Birch. He found that these firms were responsible for most of the nation’s employment growth.

The current study expands Birch’s definition, using both revenue and employment growth to identify “high impact” firms. These are companies whose sales and employment doubled over the four-year period ending in 2002.

High impact firms are mostly new, small, high tech companies, right? Wrong! The high impact firms have been in business for about 25 years, on average. Less than three percent of the high impact firms were less than 4 years old.

The large high impact firms were very high impact indeed: The 1,200 firms larger than 500 employees created 5.2 million jobs between 1998 and 2002. The 280,000 firms smaller than 20 employees created 3.6 million jobs during the same period.

High impact firms are found in every industry. Of the 73 industries reported, Heavy Construction had the greatest share. More expected, Electric & Electronic Products came in second with Instruments and Related Products in third. Yet Social Services was tenth, Food and Kindred Products came in at #14, and legal services (heavens!) was #16. In Jim Collins’ book, Good to Great, he debunks the idea that great companies are only found in sexy, technology-heavy products. Collins found many great firms dealing in pretty boring stuff.

So what dented my optimism? The SBA study also reports the share of high impact firms by geography. And New York State scored—dead last. Adding insult to injury, the District of Columbia is included, placing NYS #51. (Wouldn’t #50 be bad enough?) In fairness, the range isn’t that wide. The leader is Alaska, of all places, at just under 3%. New York is just under 2%. But we’re still last.

Nor did Rochester score ahead of the pack. Of the 52 largest metros in the nation, we ranked #46, just behind Buffalo at 45. If misery does love company, we should be happy to find New York City just behind us at 47. We are consistent, if that’s a virtue in this context: Monroe County ranks #46, exactly the same as the metro, among the nation’s 51 mid-sized counties.

Our disappointment aside, there are lessons here. First, the authors note that the fortunes of industries ebb and flow. This is reflected in their analysis of high impact firms. A diversified “portfolio” of industries will “even out” this variation and protect the economy from boom and bust cycles. That’s always good advice—and Rochester’s industrial base has become dramatically more diverse in recent decades. Even if we could have an economy that was wholly populated with “high tech” companies, we probably wouldn’t want it. As an example, Silicon Valley’s economy went into a deep slump following the dotcom bust of 2001.

Second, the idea that new firms are providing most of the growth is simply false, at least in the 1998-2006 period studied here. Economic development has long been described as resting on a three-legged stool—business retention, business recruitment and entrepreneurship. As established firms are driving economic expansion, business retention is still the most important “leg.” That has been Rochester’s experience. Our high impact firms did not relocate to Rochester, and most were in business long before they became “stars.”

So I remain an optimist. We’ve weathered a historic transition at Eastman Kodak and can boast of a vibrant and diversified economy with many successful firms—many poised to join the ranks of the SBA’s “high impact”group.

Kent Gardner, Ph.D. President & Chief Economist
Published in the Rochester (NY) Business Journal July 11, 2008