New evidence finds that supporting “home-grown” startups and young, fast-growing in-state companies is likely to be a more effective strategy for states to create jobs and build a strong economy than attempts to lure businesses from elsewhere.

In “State Job Creation Strategies Often Off Base,” a new report from the Center on Budget and Policy Priorities, Senior Fellow Michael Mazerov and Director of State Fiscal Research Michael Leachman conduct new research showing that the vast majority of jobs are created by businesses that start up or are already present in a state. They conclude that “many state policymakers pursue economic development strategies that are bound to fail because they ignore these fundamental realities about job creation.” When states pursue tax breaks, they divert resources needed to help home-grown startups and young, fast-growing companies deliver maximum job growth and to build a climate that supports their growth.

In the past, a lack of useful data severely limited research about which kinds of firms create jobs. Now, though, the federal government has developed databases that track over time the job-creation record of specific businesses of various sizes and ages while accounting for ownership changes. The U.S. Census Bureau has developed two such “longitudinal” databases. The U.S. Labor Department has developed one as well, and a private company using the Dun & Bradstreet business registry has created yet another.

Research using the improved data has revolutionized our understanding of which businesses create jobs, and where they create them – calling into serious question the value of the various tax breaks states offer businesses to move. Among the facts that counter tax-cut strategies:

• About 87 percent of 1995-2013 private-sector job creation in the median state was home grown. It came from startups, the expansion of employment at existing establishments, and the creation of new in-state locations by businesses already headquartered in the state.
• Jobs that move into one state from another typically represent only 1 to 4 percent of total job creation each year.
• To promote and assist job-generating entrepreneurship, state policymakers would be wise to invest in schools and colleges, improving workers’ skills, and maintaining communities that are attractive to residents who want to start a business. Successful entrepreneurs report these factors were key to where they founded their companies. 
• The most commonly cited reason among entrepreneurs for starting their companies where they did was that it was where they lived at the time; 80 percent of them had lived for at least two years in the city where they started their companies.