Coffee and Innovation
To improve entrepreneurship and innovation…we need more coffee shops? Seems so.
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Entrepreneurship, small business formation and innovation are often considered to be important for economic growth. Countries often implement policies that focus on boosting entrepreneurship in various ways such as enacting tax credits for research and development, funding education, encouraging high skill immigration and many other policies.
New research has shown that there may be a simpler solution – more Starbucks cafes!
Third Places
“Third Places” are informal locations that allow people to talk to others outside of their home (first place) or work (second place). Typically, third places are neighborhood cafes, restaurants and pubs – casual places where individuals can interact.
Sociologists have looked at the impacts of third places on neighborhood cohesion and social networks. Choi, Guzman, Small (2024) (“CGS”), however, decided to look at the impact of these third-places on entrepreneurship. CGS undertook three separate research designs to test how the opening of third-places, specifically Starbucks coffee shops, impacts entrepreneurship.
Starbucks
The typical Starbucks coffee shop in the US, besides selling coffee, allows patrons to linger and socialize. It is common to find people working on their laptops, reading and writing, as well as interacting with others at a Starbucks. Thus, the opening of a new Starbucks cafe could increase entrepreneurship. However, it is important to ensure we are not capturing reverse causality. That is, what if Starbucks cafes open in areas that already have high entrepreneurship, because these areas might have high demand for a place like Starbucks.
To tackle this potential issue CGS came up with a nifty idea – CGS looked at areas where Starbucks applied to open a cafe.This means that Starbucks saw business potential in all of these areas, suggesting that each of the areas shared many similarities.
In some of the areas Starbucks did move forward with opening the cafe, while in others Starbucks failed to open a cafe due to administrative regulations such as zoning laws or permits. This approach is similar to what we would expect in a randomized trial, as we see in medicine (some people get the medication, others do not). In this case, the ‘treatment’ is having a Starbucks open. The ‘control’ group are the regions in which Starbucks wanted to open a cafe but failed. The assumption is that which Starbucks cafe applications got rejected was random, which allows to compare the places that got a Starbucks cafe to places that ‘nearly’ got a Starbucks cafe.
CGS found that on average the areas that did get a Starbucks, the number of new firms being registered on average went up by 9% to 18%, implying around 3 to 6 additional firms are being created in an area per year.
Targeted Third Places
To further study the impact of third-places, CGS also looked at a particular Starbucks cafe campaign. Starbucks partnered with retired basketball star and businessman Earvin ‘Magic’ Johnson in 1998 to open cafes at under-resourced areas such as Harlem in New York City. This partnership created an interesting research opportunity, because the areas in which these cafes opened were typically not considered by Starbucks.
By comparing areas in which these Magic Johnson Starbucks were opened to demographically and economically similar areas, where a Starbucks wasn’t opened, CGS found an even larger effect. The number of newly created and registered firms in an area jumps up by nearly 30%, implying over 4 additional registered firms per year.
First “Third Places”
Using the above findings and to ensure there are no other causal mechanisms, CGS looked at places that had opened a Starbucks and compared them to areas that had no prior cafes as potential ‘third-places’. CGS found that the results remained – areas that got a Starbucks compared to areas with no cafe third-places, saw business formation go up between 5% to 14%, resulting in about 1 to 3 new businesses being formed.
CGS found that other cafes, like Dunkin Donuts, which are not conducive to prolonged seating, did not result in an increase in business formation. Other cafes that had a similar business model to Starbucks, like Caribou Coffee, however, did increase business formation.
All of this evidence suggests that the presence of such third-places really does have a significant impact on entrepreneurship in the form of business formation.
Growth
After establishing that third-places do increase business formation, CGS looked at what other factors may influence entrepreneurship. Turns out that the size of the third place impacts business formation. Larger Starbucks cages resulted in more business formation.
Moreover, new Starbucks cafes were also found to impact nearby regions – areas within 10 miles (a 15 minute drive) of the Starbucks cafe saw more business openings. Areas further out did not.
Lastly, an important question might also be what types of businesses were formed and whether the businesses are more likely to be ‘innovative’/high growth. CGS found that, in the sample for which they had business type data, the formation of corporations (which are more likely to be growth oriented businesses) went up by 8%, greater than the 5.5% increase for all types of businesses. Firms with names typically found in the high-tech sector saw increases, albeit slightly smaller, at 3.5% more.
Third Places and the Work From Home Revolution
Findings by CGS suggest that entrepreneurship could be relatively ‘cheaply’ boosted by the creation of viable third places. The ability for people to meet and spend time together in a space clearly results in innovation. These third places, naturally do not have to be Starbucks cafes, but places where there is an inviting space for people to linger.
The CGS findings complement some of the research on the positive impacts of the work from home revolution. We noted that the work from home revolution has resulted in more businesses, such as restaurants, being successful in residential areas. Anecdotally, there has been a rise in neighborhood cafes. These neighborhood third-places can therefore result in increased entrepreneurship and innovation. Moreover, third-place cafes can even benefit firms that already exist, as knowledge spill-overs between workers of different companies can also occur.
Given that running third-places comes with a set of costs, especially rent, that can be burdensome for cafe owners, there appears to be scope for government policy that either assists with this cost to foster the creation of third-places or actively creates third-places. The benefits to such a policy will materialize with more business creation and dynamism, as well as increased tax revenues.
Interesting Reads from the Week
Interest Rate Update: The Federal Reserve cut interest rate by 0.25% to 4.5%-4.75%, which was expected by markets and many economists.
Article: In light of the interest rate decision,
(a Substack that focuses on academic finance research) discusses a study which shows that “investors do not simply react to the literal meaning of a Fed Chair's words, but also consider their nonverbal cues”. This is a fascinating finding. For more such insights – follow and subscribe to Alpha in Academia.Note:
points out that ‘free’ parking spots are actually baked into nearby rents. A free parking spot near an apartment increases rents by 17%!
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Living in NYC, sometimes those second places are third places. I do enjoy an iced coffee, my iPad and an online shopping list.