Small Business Start-Ups Create Economic Impact

Economic growth is important for cities, states, and nations. Research by Donald, et. al. (2009) helps decision-makers understand that a healthy balance between large and small business development puts economies on the right track to flourish while encouraging positive budget balances. Their study shows that the activity of business start ups foster growth not only in one state but also the surrounding states. Some businesses will succeed and others will fail but the economic activity of constant start ups is a revenue generator. 

The U.S. Small Business Administration reports small business activity is one of the major engines to economic growth and creates a majority of new jobs. It is possible that smaller businesses that are entrepreneurial by nature engage in research and development that have an even larger impact on the economy (Acs and Plummer, 2005). Both jobs and innovation are needed to keep the economic engine running at ideal speeds. 

There are a number of economic indicators of small business activity. States often focus on gross state product (GSP), state personal income (SPI) and total state employment levels. Much of the information is drawn from the Census or Bureau of Economic Analysis. These hard facts often ignore the rates of new business birth and death within a state. Yet it is this birth and death process that keeps momentum.

Small business growth contributes heavily to economic growth. There is a lag in the start of business and its overall contribution to the economy (Holtz-Eakin & Kao, 2003). It takes time to move from a start-up stage to a more sustainable stage where a successful process can compete on the market. When a number of businesses move into a sustainable stage they contribute to hiring, wealth, and product development. 

The environment is often a predictor of where small businesses will start. Entrepreneurs like places where an educated workforce exists (Lee et. al. 2004). Those who are investing their money want to connect up to those with the skill and knowledge to compete. Universities often act as hubs to entrepreneurial growth under the right conditions and a loosening of bureaucracy can make ideas more possible.

The results on small business for macro economic growth are mixed depending on which metrics one uses. However, by looking at birth and death rates the authors found that small business growth has a large impact on state economic growth. That growth also helps raise other states within their proximity. It is important to have increasing growth of business start-ups to raise tax revenue and positive economic output. The author argues that states who attempt to foster small business start-ups is a factor even more important than raising tax rates or implementing rules to create growth. 

Comment: The author did move into the concept of large firm and small firm growth. It appears that large firms provide a level of stability but higher levels of economic growth can be found in the constant starting of small businesses. Even when some small businesses die off in the first few years the entrepreneurial spirit raises its head again to start another business with new knowledge. Policy makers should be focused on ensuring that there is an appropriate balance of large and small business development and the environment to help encourage this higher economic activity.  States in close proximity also receive benefit in economic activity and should encourage each other to create larger synergy.

Ace, Z. & Plummer, L. (2005). Penetrating the knowledge filter in regional economics. Annals of regional Science, 39

Bruce, Et. Al. (2009). Business activity and state economic growth: does size matter? Regional Studies, 43 (2). 

Holtz-Eakin, D. & Kao, C. (2003). Entrepreneurship and Economic Growth: the proof is in the productivity. Working Paper No. 50. Center for Policy Research, Syracuse University, Syracuse, NY.

Lee, et. al. (2004). Creativity and entrepreneurship: a regional analysis of new firm formation. Regional Studies, 38.

Economic Development through a Cultural and Financial Lens

In the Hispanic villages of northern New Mexico a quest for the development of culturally appropriate and economically sustainable hubs has created new methodologies.  It was a push to move the villages from a colonial area design to something new and more progressive. The author Kristina Fisher (2008) discusses how business development and agricultural improvement can be fostered through non-profits. 

The War on Poverty and The New Deal created much activity in the region but communities soon when back to their traditional ways of life.  Some questioned the logic of these programs and the ability to raise local Hispanic communities out of poverty. In 25 years since the non-profit Ganado del Velle was created it used the hub and spoke model to create interrelated economic development projects that led to higher levels of local development. 

The model used incubation with hub and spoke model to develop the natural and cultural resources of the valley. Some of their works included concepts such as weave making, marketing outlets, time sharing, resource sharing, entrepreneurship, better farming, and showcasing artistic and food products.  They were able to bring products and services to the local market while raising the income of residents. 

The previous and traditional practices of the local people were no long sufficient for the modern economy. The locals were left in poverty and unable to compete. Success came through four principles:

-Invest in people and empower them to do the work they love. 

-Utilizing and sustaining the natural and cultural resources of the area. 

-Change the economic structure to reduce dependency and increase opportunity. 

-Provide financial support for research, marketing, businesses, and development. 

The Ganados model was seen as a success through its balance of leaders, financing, and hub and spoke non-profits that coordinated entrepreneurial activities. Each non-profit focused on the development of skills and bringing the proper financial resources to the forefront so that individuals could develop businesses. They focused on developing off of the existing culture and methods of the area, created money making avenues, connected their products to the market, and attempted to diversify their productions. A major problem learned in the process is that success did not reach its full potential due to inter-conflict that drew resources away from group members. 

The model was seen as successful to the local people and their financial growth. They were able to take simple farmers and small artisans and find greater outlets for their work by opening a retail outlet within a metropolitan area and showcasing their work.  Each component of the hub was built to enhance the other businesses.  Even though the model used a non-profit it is not confined to that type of entity alone. Any type of business, committee, or other organization may engage in hub development for philanthropic or revenue generating purposes.  It was a process of teaching people how to maximize their profits and providing the outlets to market their products effective.  Some businesses may find value in raising local value of products by bringing them to market and earning a percentage from this increased value making both the individual artisan and the business more financially successful.

Fisher, K. (2008). Reclaiming Querencia: The quest for culturally appropriate environmentally sustainable economic development in Northern New Mexico. Natural Resources Journal, 48 (2).

Developing Economic Activity through Hub and Flagship Models

Researchers Kim and Le-Yin investigated the economic develop of the province of Qingdao, Northern China, to determine how foreign direct investment clustering set up by local government helped to create an electronic industry renaissance (2008). Using the hub-and-spoke model of geography with the flagship-and-five partner’s model of strategic management offers an additional theoretical lens to spur economic activity.  The key is to encourage the economic hub to drive and influence the global network versus being perpetually dependent on it.

Direct investment in China has superseded most countries of the world and has consistently beaten the U.S. since 2002. Chinese leaders have set up economic zones in urban areas that are the center of economic activity. As the investments in internal businesses rises so does the exports of the nation. Electronics is one field in which the Chinese have exceeded expectations.  

There is a dependent and a developmental type structure. In a dependent type structure, foreign investors seek to limit information and attempt to seek gain from local resources and labor. In a developmental structure information is passed so that local firms can develop because the goal is to enhance local resources and labor. Profits can be realized in either method through extraction of resources or enhancing of resources for sustainable profits.

Local producers should be pushing to influence the global networks by updating technology, communication, and effectiveness. This helps them avoid a dependent position and helps to drive the industry with new development and product releases. As the economic hub develops and begins to lead the market the global network, it will seek to capitalize off of local innovation to create a win-win situation.

There are primarily three major benefits in developing economic hubs and zones that arise from reduced costs (Cumber and Mackinnon, 2004):

- Growth of industries that provide input into the system.

- Development of local skilled labor.

-The creation of infrastructure and dedicated resources.

As the work processes become more embedded into new firms and labor an infrastructure is developed that encourages higher local economic growth. It is the shared aspects of gaining knowledge and economic advantages that encourages mutual growth. As this synergy rises the area begins to flower and develop on its own. An economic hub can be defined as, “socio- territorial entity which is characterized by the presence of both a community of people and a population of firms’ and he adds that ‘in the district, unlike in other environments . . . community and firms tend to merge” (Becattini, 1990, p. 38).

The hub and spoke model helps in mapping and understanding the structure of a local economic system. The model looks at regional anchors of business and industry and how suppliers and other related industries spread out like spokes on a bike (Markusen, 1996).  Regional anchors can be seen as the cash cow type large businesses that appear to influence the economic market of the area. They can be connected to the natural resources of an area (i.e. mining, fishing, etc.) or non-resource based industries (i.e. cell phones, technology, etc.).

A similar model also helps to describe the economic activity of an area. The flagship and five partner model indicates that a flagship firm (i.e. multi-national corporation) is vertically connected to and provides leadership to suppliers, customers, competitors, and other non-business infrastructure (Rugman and D’Cruze, 2000). The flagship is the dominating multinational firm (or large firm) that influences the development and direction of other firms in their economic vines.

The researchers (Kim and Le-Yin, 2008) conducted interviews with companies around Qingdao to understand how these firms work together for mutual benefit.  They delved into the various types of suppliers and products being sold. It was important for them to also look at how multinational firms and direct foreign investment can create higher growth within an area.

They found that larger firms created a structure by integrating a number of firms and suppliers to work together. These large firms stepped into fragmented industries and connected them to produce significant benefits. As firms worked in research & development and updated their technology the transference of information led to higher levels of mutual growth. The larger firms were able to draw in more foreign direct investment into the area. The key is to have firms work together in a dynamic way creating higher levels of growth, exchange, and economic development.

The report does highlight the ability to use the hub and spoke model as well as the flagship model to map an economic area. Previous research has indicated that synergy can be created among the varying firms in order to develop higher levels of growth. Furthermore, additional studies have indicated that cognitive models develop within the population based upon culture, skills, and social interaction that exists between the interlinking of these firms. It is these new cognitive models formulated among the bounded rationality of firms as well as the general population that can create perpetual growth upward.  This growth and transference of knowledge can be fostered by flagship businesses that encourage interaction among firms by ensuring that a percentage of supplier capacity is open to working with other companies.

Becattini, G. (1990) The Marshallian industrial districts as a socio-economic notion, in Pyke F., Becattini, G. and Sengenberger, W. (Eds) Industrial Districts and Inter-firm Co-operation in Italy, pp. 37–51, International Institute of Labour Studies, Geneva.

Cumber, A. & Mackinnon, D. (2004) Introduction: clusters in urban and regional development, Urban Studies 41, 959–969.

Kim, J. and Le-Yin, Z. (2008). Formation of foreign direct investment clustering-a new path to local economic development? The case of Qingdao. Regional Studies, 42 (2).

Markusen, A. (1996) Sticky places in slippery spaces: a typology of industrial districts, Economic Geography 72, 293–313.

Rugam, A. and D’Cruz, J. (2000) Multinationals as Flagship Firms: Regional Business Networks, Oxford University Press, Oxford.

A Case Study on Regenerating a Local Economy

Dr. Rosabeth Moss Kanter builds off of her previous research of five American cities of Boston, Cleveland, Miami, Seattle, and Spartanburg-Greenville to find patterns to success economic rejuvenation. It is important for struggling cities to develop concepts, competence and connections. It is also necessary to encourage those who think in the region to work with those who make products and those who sell the products. As an example of success, she focuses in on Spartanburg-Greenville and how it became a world class area of manufacturing that attracted foreign investments from 215 companies in 18 countries. Without visionary leadership, friendly business environment, commitment to training, and collaboration between business and government the success story would have never generated.

Her paper argues that success will come from matching the local needs to that of the global economy. Unfortunately, there is a level of divergence between locals who are aware of local issues and the business leaders who are more aware of global issues. Trying to get the social and business interests on the same page for improved competitiveness is difficult.

A particular problem is local political interests that desire to move into an isolationist stance. Unfortunately, this stance leads to economic withdrawal and estrangement that impacts the lives of those who local politicians profess to protect. At times local political interests will use the fears of workers to create rifts between them and the outside world that manifests itself in worker resentment, a downgraded economy, and “us vs them” mentality.

In the industrial world the location of a company was important because it means they had control over distribution and local labor. However, the global economy requires these companies to think on a new paradigm which includes the ability to harness innovation and knowledge to continually update their products. In such cases innovation can meet manufacturing to compete in the global economy.

A market is made up of three different types of people:

Thinkers: These are the intellectual innovators that create new ways of competing on the market. This may be in the form of new products and services. Such people are adept at creativity and developing new and unusual solutions to problems.  

Makers: Makers are people who are strong at execution. They can use manufacturing abilities to create high value-laden products. Such makers can be pre-existing businesses that are retooled for new products and services.

Traders: These are individuals that can make global connections to other countries and people. They are the ones who foster new business investment, distribution of products, and connect the local area to the global economy.

Spartanburg-Greenville, South Carolina, is a success story even though it is an unlikely place for such global success. They were able to renew entrepreneurship, innovation, teaming, improving awareness of world needs, and connecting local companies to global networks. Despite its textile, automotive, metalworking background it, at present, has one of the lowest unemployment rates, high per capita engineers in the area, and rising wages throughout the region while many other areas are declining.

From her research a successful “come back” requires:

• 1 -Visionary leaders who have a clear economic strategy and recruit international companies.
• 2-A hospitable business climate and positive work ethic that attracts innovative companies to make long-term investments.
• 3-Strong training and upgrading of local worker skills.
• 4-Collaborations between business and business as well as business and government.

Local regions that have suffered from the weight of change often do so because of the perspectives of those within the area and a need for a broader self-perceptive view. To change this perspective requires an expanding of understanding from local to global. The catalysts to this change often include a vision brought forward by leadership, positive business environments, business interaction and partnerships with local government, and the upgrading of employee skills/abilities.  Without putting the right factors in place that change the competitive nature of the area it is likely that such declines will continue if the tendency to be protective outlives the need to grow and develop. Those who do the thinking, are partners with those who do the making and those who sell the products. They are all on the same team.

Kanter, R. (2003). Thriving locally in the global economy. Harvard Business Review, 81 (8)