Introduction

This chapter extends research reported in the previous chapter, which focused on firm formation in six sectors: distributive, manufacturing, business services, extractive, retail trade, and local market. The current chapter focuses on the rapidly growing service sector and subsectors of service industries, which are defined by their founders' educational requirements and their primary markets.

Since the mid eighties, the role of education and human capital externalities has been recognized as a key variable in theories of economic growth. Lucas (1988) emphasizes that the economies of metropolitan areas are a natural context in which to understand the mechanics of economic growth, and an important factor contributing to this growth is the catalytic role of human capital externalities within the cities. While the benefits of human capital to individuals have been extensively studied, economists are now realizing that individuals do not capture all of the benefits from their own human capital. Some benefits spill over to their colleagues and observers – through discussion, example, publications, and positive attitudes toward change, risk, and new knowledge.

Several interesting findings provide some groundwork for this chapter. First, Rauch (1993) finds that cities with higher average levels of human capital also have higher wages and land rents. Second, Glaeser, Scheinkman, and A. Shleifer (1995) find that for a cross section of cities, a key economic determinant of growth is level of schooling, just as has previously been found for countries.