*2.1. Theoretical Structure*

Modern portfolio theory, espoused by [5], is used in identifying the unique investment portfolio(s) that yield the highest return for the level of risk tolerance of the investor. The portfolio(s) that meet the risk–return trade-off lie on the border, which is commonly referred as the efficient frontier. Since it was first applied by [20] to find the efficient trade-off between incentives to offer and the desired industrial mix in the region, regional economists have increasingly used portfolio theory to capture the risk–return trade-off with relevant variables of interest. Ref. [3] applied portfolio theory and found that luring businesses by offering economic incentives led to increased volatility in growth rates in metropolitan areas. Ref. [1] found an efficient frontier when mapping economic growth and instability for states in the United States. The paper suggests that economic diversity and instability appear to be negatively correlated.

Ref. [4] pioneered the application of portfolio theory to investigate the impacts of local employment portfolios on the entrepreneurship levels. Focusing on commuting zones and counties, they found that entrepreneurship may be an attractive avenue in areas having high employment risks and low returns. They suggest that self-employment can be an attractive alternative income mechanism to wage and salary jobs in such regional units.

The closure of a business establishment results not only in the loss of jobs or potential losses of tax revenue for the local authorities, but also in a unique externality. Business births and deaths represent business dynamism in the region, which potential entrepreneurs closely watch. Low survival rates of new businesses may have a snowball effect in discouraging potential entrepreneurs from investing in the region. The information spillover from local business birth and death rates is found to have a significant impact on subsequent entrepreneurship and job creation [21].

The number of jobs available, the growth in new jobs, and the risks associated with job growth are some of the factors that define the dynamic character of the local labor market. The interaction of these factors in the light of macroeconomic conditions and the unique economic–cultural milieu of the regional unit create opportunities (expected returns) and threats (risks) for the workforce in the region. The impact of exogenous shocks in the local labor market influences the risk–return trade-off of the worker, which affects their economic behavior.

We attempt to capture these dynamics in the local labor market through the representative labor market portfolio. The portfolio approach helps one to analyze the interplay of

numerous idiosyncratic but significant labor market undercurrents, in the context of the prevalent macroeconomic environment, when evaluating the likely impact on the survival of new businesses in the regional unit.

We begin by selecting the county as the regional unit of analysis. The resource base and socio-economic environment unique to the county affect a business's growth; hence, the regional unit or location is vital in new business survival.
