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Theory to Practice: Social capital as a policy solution to raise the economic mobility of North Carolina’s entrepreneurs

May 16, 2019 / Jamie McCall / Community Development, Economic Development, Public Policy, Small Business, Theory to Practice

Theory to 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 Vice President of Research Jamie McCall and Development Associate Emily Stallings explore an evidence-based policy solution for improving economic mobility, a main theme of the 2019 Federal Reserve Community Development Conference. For more information about CSBDF’s research and policy analysis program, click here

Every two years the Federal Reserve System holds a conference on a preeminent policy issue in community development. As the United States central bank, the Federal Reserve is charged by Congress to regulate financial institutions, manage the country’s money supply, and conduct policy analysis on related issues. The System’s 2019 conference invited research proposals on different strategies to improve economic mobility and support the growth of the middle class. In framing the theme of this year’s conference, Federal Reserve staff outlined several areas where there is a need for further research.

In particular, a review of currently scholarly work showed little comprehensive evidence on what types of community-level investments can consistently promote place-based economic mobility. Carolina Small Business, in collaboration with faculty from the UNC Chapel Hill’s School of Government, published a paper which speaks directly to this issue: Building Bonds and Bridges (and Leveraging Links): A Place-Based Mobility Strategy Based on Social Capital Creation.

Social Capital as a Place-Based Solution for Community Development Policy

When researchers talk about something being “place-based,” they refer to development theories which suggest the geographic location of a community is a key policy consideration.[1]  In other words, the institutional and economic history of a community is inexorably linked with its development outcomes. More than ever before, research suggests that policy solutions which foster economic mobility must be place-based and be adaptable to a wide variety of communities.[2] Our analyses provides evidence that community development organizations are more effective in place-based programmatic outcomes when they leverage their communities’ social capital. In this context, social capital refers to networks and norms of trust between and among both individuals and organizations.[3]

The concept of “social capital” is difficult to define and measure – especially in the field of community economic development.[4] There is a great deal of theoretical literature which highlights why use of social capital is an effective method to engender better economic outcomes at the neighborhood level.[5] But to date, there is sparse data on how to quantitatively measure the use of social capital in a way that reproducible and traceable across time and place.[6] Our paper offers some answers via qualitative analyses of dozens of semi-structure interviews with North Carolina’s community development leader-practitioners. We believe this kind of research is invaluable because of the insights it can offer to practitioner-researchers and policymakers.

In entrepreneurship and small business promotion, social capital can lower the transaction costs of economic activity.[7] Put simply, when small firm owners trust each other, they interact in ways that create lasting and meaningful economic impact. For instance, restaurant owners might be more likely to use local suppliers when they engage in localized entrepreneurial social networks around the food service industry. Social capital can also work within a neighborhood to increase local support of small businesses. When members of a community know and trust the owners of local retail enterprises, they are more likely to patronize these establishments. A common example that we see in neighborhoods across America is the proliferation of local farmer’s markets.

A Proposed Model of Interaction Pathways to Promote Economic Mobility

In our paper, we propose that social capital interactions within the community economic development sphere tend to follow a 3-step pathway:

The paper goes into detail on what each of these terms mean, but we’ll briefly describe them here. Level refers to the context in which a social capital interaction occurs – between individuals or between organizations. Type describes the character of the networking. Bonding capital is formed when parties with a shared homogeneous identity interact, while bridging capital is created when groups containing heterogeneous characteristics work together.[8] Linking capital is a key sub-type of bridging capital that involves the networking of individuals or groups that have disparate levels of power.[9] Finally, structure simply refers to whether the social capital interaction occurs in a way that is intentionally arranged (formal) or happens spontaneously (informal).

CSBDF’s Programs Serve as Innovation Laboratories for Social Capital

Even the most thorough research has limited utility unless it can provide a pathway to think about more innovative or more efficient policy solutions. One of the goals of CSBDF’s research agenda is to assess the effectiveness of our work through the lens of best practices for community economic development organizations. The programs and operations of CSBDF seek to put research theory into practice in ways that can be modeled by other organizations. For years, we’ve been engaged in a variety of initiatives that we think are emblematic of the best available social capital research on how to promote better economic outcomes:

For example, one of CSBDF’s initiatives is a statewide university partnership that focuses on North Carolina’s Historically Black Colleges & Universities (HBCUs). The partnership exists to bring customized programming on small business and entrepreneurship both to university students and to the communities that surround the institution. The content and format of these programs are designed to be place-based because they are customized and tailored to the unique needs of each partner. The social capital curated by this initiative is organizational in that it fosters trust between different universities. Our preliminary assessment also suggests the partnership creates large amounts of formalized bridging and linking networks between partner organizations. To our knowledge, this type of collaboration represents a first-of-its-kind social capital network. In the future, CSBDF hopes to work with partners to better outline the mechanisms of action which support this initiative and propose methods to evaluate its use of social capital.

As the Federal Reserve System has recognized in its summary of the 2019 community development conference, there is a dearth of research on how communities can engage in place-based pathways to promote economic mobility. Carolina Small Business’s research, in partnership with our collaborators at the University of North Carolina’s School of Government, is helping to provide more data in this area. As we develop this line of inquiry, CSBDF will continue to put into practice what the research suggests is one of the most effective ways to promote local economic development. While more research is needed to fully explore the implications and impact of social capital interactions, we’re proud to represent a laboratory of innovation for these kinds of initiatives.

References

[1] Drier, P., Mollenkopf, J., & Swanstrom, T. (2014). Place Matters: Metropolitics for the 21st Century. 3rd Ed. Lawrence, KS: University of Kansas Press.

[2] Chetty, R., & Hendren, N. (2018). The impacts of neighborhoods on intergenerational mobility I: Childhood exposure effects. The Quarterly Journal of Economics, 133(3), 1107-1162.

[3] Lin, N. (1999). Building a network theory of social capital. Connections, 22(1), 28-51.

[4]  Van Deth, J. (2003). Measuring Social Capital: Orthodoxies and Continuing Controversies. International Journal of Social Research Methodology, 1, 79-92.

[5] Temkin, K., & Rohe, W. (1999). Social Capital and Neighborhood Stability: An Empirical Investigation. Housing Policy Debate, 1, 61-88.

[6] Quantitative measures of social capital activity tend to be restrictive because they only measure a narrow category of network activity. While index measures of social capital do exist, the most validated measures currently only extend to the county level. CSBDF assessed some of this data in a previous research spotlight.

[7] Cooke, P., & Wills, D. (1999). Small Firms, Social Capital and the Enhancement of Business Performance through Innovation Programs. Small Business Economics, 13(3), 219-234.

[8] Coffe, H., & Geys, B. (2007). Toward an Empirical Characterization of Bridging and Bonding Social Capital. Nonprofit and Voluntary Sector Quarterly, 36(1), 121-139.

[9] Lang, R. & Novy, A. (2014). Cooperative Housing and Social Cohesion: The Role of Linking Social Capital. European Planning Studies, 22(8), 1744-1764.