A Change of Scenery for Startups

The general spread of expertise, high housing costs in the most successful cities, and perhaps even a degree of intellectual complacency in Silicon Valley all may, looking forward, favor some of America’s laggard regions.

Sometimes significant news doesn’t make much of a splash, and that was the case for a major transaction last week. PetSmart Inc. announced the acquisition of Chewy.com LLC for $3.35 billion, the largest e-commerce deal ever. Also notable is that Chewy.com, which sells pet products online, is based near Fort Lauderdale, Florida, rather than San Francisco or Seattle or New York. Might we be at a point where startups and e-commerce drive economic growth and job creation in many regions of the country, not just a few of the more famous (and expensive) areas?

Between 1940 and 1980, poorer American cities gained economic ground on the wealthier cities, at an average rate of 1.4 percent a year. About 1980, however, this convergence stopped. Since then, the poorer cities haven’t gained ground in relative terms. There is a chance now that this trend will flip again.

To be sure, there are still trends toward greater regional concentration of talent and innovation, as supercompanies such as Google parent Alphabet Inc., Facebook Inc. and Amazon.com Inc. have been innovative across a wide variety of areas and have built seemingly unassailable moats. Nonetheless, an alternative vision is forming, in which lesser developed parts of America start to gain ground on Silicon Valley, and smooth out the regional distribution of income. Silicon Valley is starting to become a national benefactor, not just on the side of consumer products but also through job creation.

Consider the Chewy.com deal in more detail. The company, founded in 2011, has been a star in online pet products, most of all for its fast shipping, good selection and dedication to customer service. They took business away from Amazon, but of course building on initial innovations from Amazon and others in Silicon Valley. PetSmart, a major bricks-and-mortar seller of pet products, took notice and soon will have a much stronger online presence to complement its stores. If all goes well, the acquisition will create both store and delivery jobs across the nation. In the meantime, more entrepreneurs will be tempted to try their luck creating new businesses in unusual locations.

A recent study by Michael Mandel, an economist with the Progressive Policy Institute, found notable signs of startup activity in Detroit, Pittsburgh, Cleveland, Cincinnati, Phoenix, Miami, New Orleans and Charleston, South Carolina, in addition to the locales more closely associated with tech. So this trend does have a chance of spreading, and at a time when the startup scene in Silicon Valley seems to be slowing down.

Mandel also estimates that the e-commerce sector has added 270,000 jobs to the American economy since March 2014, across multiple regions, and, in spite of all the recent problems, retail employment remains above its 2007 peak. Some additional good news is that e-commerce distribution jobs tend to be better paying and less of a dead end than most retail jobs. The warehouse and storage sector is growing dramatically, and those jobs are typically far from the wealthiest parts of the country -- they are boosting Kentucky, Ohio and Tennessee.

In the last two years, again according to Mandel, “the regions outside the top 35 metro areas accounted for almost half of net new establishments,” compared with less than one-fifth of net new businesses during the seven preceding years.

Information technology also holds the potential for distributing job gains across the country more evenly, as it spreads through a more varied set of economic sectors. Data from the U.S. government indicate that the 10 fastest growing categories for jobs typically held by men include web developers, computer and information research scientists, biomedical and agricultural engineers, and information security analysts. The projections of such growth stem directly from the likelihood that those new jobs will come in many regions.

The single fastest-growing category for men, including those without college degrees, is ambulance drivers and attendants. Ambulances may seem low tech and “old economy,” but they are ever more in demand, not only because of population aging but also due to information technology. New tech gives ambulance attendants the capability to assess, monitor and possibly treat the patient much better than before. In other words, tech can boost the demand for jobs, such as driving, that might appear low tech on the surface. And because ambulance driving requires discretion in terms of speed or negotiating novel traffic situations, those jobs won’t be replaced by autonomous vehicles anytime soon.

The general spread of expertise, high housing costs in the most successful cities, and perhaps even a degree of intellectual complacency in Silicon Valley all may, looking forward, favor some of America’s laggard regions. There is no single answer to regional economic development, but finally some factors seem to be pointing in the right direction.