The Impact of Geographic Differences in Human Capital on Service Firm Formation Rates

Although human capital externalities are a key variable in theories of economic growth, there has been little investigation of the mechanism by which these externalities are realized. We examine the relationship between the local levels of human capital and firm formation rates and find that formation rates differ with the share of adults with college degrees, especially for industries that normally require college-educated founders. They also differ strongly with the local concentration of existing establishments in the same sector, especially for industries serving non-local markets, suggesting that an important mechanism is the spillover of relevant knowledge.