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Theory to Practice: An integrated policy approach to community economic development

April 1, 2019 / Jamie McCall / Community Development, Economic Development, Public Policy, Small Business, Theory to Practice

Theory into Practice is an occasional CSBDF blog series which explores the intersection of economic development research and current issues of debate within the practitioner community. In this post, CSBDF’s CEO Lenwood Long and VP of Research Jamie McCall respond to a recent editorial in Governing Magazine: How Cities Can Help Entrepreneurs of Color Scale Up. For more information about CSBDF’s research and policy analysis program, click here

Local governments have a wide variety of options available to them as they consider how to promote economic growth across under-served communities.[1] While policies that specifically seek to promote minority entrepreneurship are few in number and often lack adequate resources, those that do exist tend to focus on small business ownership. In a recent Governing Magazine editorial, Competitive Inner City’s Kim Zeuli and Kathleen O’Shea suggest policies in this area should shift away from general small business support and instead focus on minority-owned gazelle firms and startups in high growth industry sectors.

The Economic Development-Community Development Spectrum

Ultimately, the process of fostering local economic growth is a policy decision which is a spectrum between community development and economic development. We believe research shows long-term growth requires that local and state policy actors place themselves in the middle of this spectrum to ensure development is both sustainable and effective:

This middle ground, which is frequently contextualized by the scholarship as simply “community economic development [2]” requires that policies in the area of minority entrepreneurship retain a wide scope that encompasses all types of small businesses. Main Street firms – retailers and service industries which are the lifeblood of both inner-city neighborhoods and rural communities – need ongoing support to thrive and succeed. Importantly, this doesn’t mean minority-owned firms in high-growth sectors should not be supported. These are vital enterprises and an important part of a region’s economic growth.[3] But in an environment of limited resources, the evidence suggests public policy should remain industry-agnostic and retain a broad emphasis on small and medium-sized businesses.

Smaller minority businesses face an array of challenges, and there is overwhelming evidence that many of these smaller firms would not succeed if not for the intervention of programs designed to assist them.[4] One of the main barriers to success is capital access, a challenge common to all small firms that is particularly acute for minority-owned enterprises. Extant public policies, including the Community Reinvestment Act, have made some progress helping create better financing outcomes for minority enterprises. But the data still show substantial challenges exist, including enduring problems related to equal credit opportunity access.[5]

Using an Integrated, Placed-Based Social Network Approach to Promote Small Businesses

While we disagree that limited policy resources should be redirected to target high growth minority firms, we agree with Zeuli and O’Shea on the importance of social networks.  As they note, the promotion of social and professional networks is key for creating and sustaining robust minority-owned business communities. Across both Main Street firms and high tech startups, the leverage of social networks, shared norms, and trust among minority business owners is critical for long-term firm growth and sustainability. CSBDF’s research has demonstrated that social capital is a key variable for small business community development,[6] which concurs with other scholarship showing this is particularly true for minority-owned small businesses.[7] Overall, there is strong support for social capital networks as an important pathway for minority-owned firm success, whatever their size and industry.

To conclude, we recommend local policymakers consider a development approach that incorporates aspects of both community and economic development. Best practices in this area include an integrated policy strategy which emphasizes a strong, trust-based network ecosystem, which facilitates both affordable access to credit and comprehensive small firm technical assistance.[8] Such strategies are able to provide holistic small business assistance, and should include programs targeting under-served individuals across all industries. By approaching development in this manner, governments will be engaging in a proven method to create stronger local economies.[9] In the end, thriving small and medium-sized firm ecosystems create an entrepreneurial environment that is sought after by bigger businesses, enabling local governments to promote long-term growth.

References

[1] Morgan, J., Hoyman, M., & McCall, J. (2019). Everything but the kitchen sink? Factors associated with local economic development strategy use. Economic Development Quarterly, forthcoming.

[2] Crowe, J. (2007). In search of a happy medium: How the structure of interorganizational networks influence community economic development strategies. Social Networks, 29(4), 469-488.

[3] Mason, C., & Brown, R. (2013). Creating good public policy to support high-growth firms. Small Business Economics, 40(2), 211-225.

[4] Bates, T., & Robb, A. (2016). Impacts of owner race and geographic context on access to small-business financing. Economic Development Quarterly, 30(2), 159-170.

[5] Bates, T. & Robb, A. Has the Community Reinvestment Act increased loan availability among small businesses operating in minority neighborhoods? Urban Studies, 52(9), 1702-1721.

[6] McCall, J. (2019). Research spotlight: Understanding the importance of social capital [White paper]. Carolina Small Business Development Fund.

[7] Barr, M. (2015). Minority and women entrepreneurs: Building capital, networks, and skills [White paper]. The Hamilton Project, Discussion Paper 2015-03.

[8] Hayter, C. (2013). Conceptualizing knowledge-based entrepreneurship networks: Perspectives from the literature. Small Business Economics, 41(4): 899-911.

[9] Huggins, R. & Thompson, P. (2015). Entrepreneurship, innovation and regional growth: A network theory. Small Business Economies, 45(1), 103-128.