Our real objective is not just jobs but productive jobs–jobs that will mean more goods and services to consume.
— Milton Friedman (Free to Choose: A Personal Statement)

In the previous post, I cited the results of a survey of 1982 to 2006 graduates of Iowa State University.  The 15.8 percent of Iowa State University graduates between 1982 and 2006 who had created at least one for-profit business, resulted in the creation of 222,569 jobs.  These companies had 2007 revenues of approximately $64 billion.  For an indication of magnitude, note that Iowa gross domestic product was $135.7 billion in 2008.

An interesting result of the survey was that 84 percent of these over 200,000 jobs were created outside the state of Iowa.  Only 35,242 of the jobs created at firms started by ISU alumni entrepreneurs were created in the state of Iowa, 15.8 percent of the total.  A higher proportion of total companies founded by alumni were located in Iowa (35 percent), but those businesses located outside Iowa had more jobs created per enterprise.  Large metropolitan areas both in the Midwest (Minneapolis, Chicago, and St. Louis, Kansas City) and outside the Midwest (Phoenix, Los Angeles, Dallas, Seattle, San Francisco) recorded multiple alumni starting businesses.

If ISU alumni entrepreneurs had started their firms in Iowa and all the jobs created at those firms were also in the state, then theoretically Iowa’s economy would be about 40 percent bigger than it is today.  Can you imagine an Iowa with that many more firms, jobs, and people?

So what’s going on?  Undergraduate enrollment at Iowa State is comprised historically of greater than 70 percent Iowa residents.  It seems reasonable to expect some propensity for an entrepreneur to locate their business in their state of residency and undergraduate attendance.  However, that expectation isn’t met by the data from the survey.

It’s not that I believe that ISU alumni have a particular requirement to start their firms in Iowa, even if they grew up in the state.  We just need to trade some of our native entrepreneurs for those from other states.  I immigrated all the way from Nebraska and have started two companies in Iowa, but apparently this is rare behavior.

Part of the story is the overall environment for entrepreneurs in Iowa.  Iowa’s report card for entrepreneurship is not stellar, with the state consistently ranking between fortieth and fiftieth in most measures of entrepreneurial activity such as venture capital investment, manufacturing investment, employment growth, and new business creation.  This fact makes the entrepreneurial activity of Iowa State University alumni appear all the more impressive.  It may also explain the disproportionate amount of entrepreneurial activity of alumni outside the state of Iowa.

There were some important indicators from the survey on firm location.  The top response for business location in the survey was ‘where I lived’ (82 percent ranking it as very important) indicating that alumni had already moved away from Iowa to pursue their careers when they started their entrepreneurial ventures.  Rather than move back to their native state of Iowa, they located their business where they lived currently and had built their post-undergraduate career and lives.  The first business start for alumni was on average ten years after graduation.

The founding of entrepreneurial ventures by ISU alumni, over 70 percent of whom are Iowa natives, outside the state of Iowa likely signifies problems in the business climate in the state.  A more dynamic business climate would lead to a higher proportion of undergraduates pursuing careers in their native state because of more numerous and better quality job opportunities.  This, in and of itself, would increase the likelihood of alumni ventures being started in Iowa.

The consequences of what is commonly referred to as ‘brain drain’ are profound from an entrepreneurial as well as an economic perspective.  Policies that have focused on keeping students in state to attend college miss the point that if they do not find a commensurate way to make a living in the state upon graduating they will leave (Artz, Georgeanne M. and Li Yu, 2009).

A more dynamic entrepreneurial ecosystem in the state would encourage more alumni to either start their ventures in Iowa sooner after graduation or to move back from another state after having pursued employment with another company for a time.  It would also attract more entrepreneurs who are non-Iowa natives.

The ISU alumni survey reveals the economic impact of alumni entrepreneurs and the positive role that higher education plays in spurring entrepreneurship.  Entrepreneurs tend to have higher incomes, their ventures create jobs for others, and they are more active in their local communities.   This activity does not occur in a vacuum, however, and the business and entrepreneurial climate in the state plays an important role in the form and location of alumni’s entrepreneurial ventures.

Research- and technology-intensive universities like Iowa State can have a dramatic impact on the economy via the entrepreneurial activities of its alumni.  The economic activity this entrepreneurship can spur is part of a larger entrepreneurial ecosystem, however, that necessarily requires a vibrant economic environment to fully extend its potential impact.

In the next post, I’ll dive deeper into issues regarding Iowa’s business climate, as well as that of other states.

Artz, Georgeanne M. and Li Yu.  How ya gonna keep ‘em down on the farm: Which Land Grant graduates live in rural areas? Working Paper No. 09016. Iowa State University Economics Department. July 2009.