Neighbourhood Effects on Firm Success and Strategy

Abstract

The main objective of this dissertation is to provide new insights on the relationship between local firms and their neighbourhoods. As a result of economic transitions and several societal developments over the past 50 years, residential neighbourhoods have developed from being places where people predominantly live into places where people also work. A growing number of small- and medium-sized firms are located in residential neighbourhoods, many of which are home-based. Triggered by relatively high levels of turbulence in residential neighbourhoods and inter-locality differences in firm survival, employment growth and firm relocation, this thesis concerned how neighbourhood characteristics, through composition effects or genuine neighbourhood effects, contribute to the success and strategies of local firms. Quantitative and qualitative analyses were performed, using a combination of primary and secondary data on firm success and strategy, firm support networks and economic, physical and social neighbourhood characteristics. The findings demonstrate that, after controlling for firm and entrepreneur characteristics, robust neighbourhood effects on the success and strategies of local firms remain. Clearly, the most significant results were found with regard to the social dimension of the neighbourhood. In general, high quality contacts and trust between neighbourhood residents (neighbourhood cohesiveness) create a business climate that is beneficial to local entrepreneurs and their firms, in which entrepreneurs are both more successful and more likely to invest. Similarly, channelling firm support at the neighbourhood level positively influences employment growth prospects and, for the dominant group of solo entrepreneurs, also results in more sales and profit growth.When making firm relocation decisions, the firm’s premises are usually more important than aspects of the neighbourhood itself. The size and cost of the business space are the most important aspects affecting both actual relocation decisions and future relocation propensity. The attractiveness of a neighbourhood for entrepreneurs is therefore largely determined by the stock of business property available. It cannot be overemphasised that firm and entrepreneur characteristics are the main determinants of firm success and strategy, and the contribution of neighbourhood aspects is small. Nonetheless, the mere existence of neighbourhood effects on firm success and strategy indicates that there are processes at the neighbourhood level (particularly social ones) that influence the likelihoods of survival and success for local firms. Fundamentally, the accumulation of problems in disadvantaged neighbourhoods creates an unfavourable business climate. Specifically, a local policy target should be the stimulation of network opportunities for local entrepreneurs, both inside and outside their own neighbourhoods, with special attention given to local solo entrepreneurs. Furthermore, investing public money to improve a neighbourhood’s social and physical order, e.g., through public safety and combating physical deterioration, may stimulate entrepreneurs to invest more in their businesses. These investments can trigger further investments, leading to improved firm performance rates and, in turn, a more thriving neighbourhood economy. In addition, spatial targeting should not exclusively focus on local neighbourhoods but should also consider the circumstances in the surrounding districts. Spillover effects from adjacent neighbourhoods may be equally important to the success of local firms as the characteristics of the local neighbourhood.