Foreign direct investment (FDI) promotion has traditionally been a game for the big boys with large multinational corporations as the primary business recruitment target and large cities, states/provinces, and countries as the prime recruiters. A series of articles in the April/May 2014 issue of FDI magazine examines a growing trend where inward investment agencies are turning their attention to supporting and attracting small and medium-sized enterprises.
The issue includes a series of articles that offers a general update along with more background on efforts in Finland and the U.K. (Note: Article access requires registration). Small firms entering global markets have many unique needs. Of course, capital access programs matter. In fact, some industry experts find that these programs matter more in FDI than in domestic markets as available capital may persuade a firm to enter a previously neglected foreign market. When combined with other consulting services, such as the programs now underway in Leipzig, Germany, these efforts can prove quite attractive to SMEs. They help encourage managers to consider locating in cities and regions outside of the usual suspects.
These efforts also need to be much more customized and hands-on than traditional FDI programs. In Finland, the Helsinki Business Hub team focuses heavily on contact facilitation, linking overseas entrepreneurs into the local ecosystem. Lastly, successful initiatives provide hands-on guidance about local rules, regulations, and business customs, so that SMEs can achieve a ”soft landing” in new markets.
Since this is national Small Business Week (how could you forget?), I thought I might highlight a few recent articles on issues related to small business and entrepreneurship.
1) A recent Brookings Institution report has received a lot of attention by noting that business deaths in the U.S. have been exceeding business births for a long time—since 2008 to be exact. This lagging business dynamism is a big worry, and something that warrants much further analysis. A useful review of this data recently occurred on The Atlantic Cities blog. My take is that the Brookings study focuses on firms with employees, and thus doesn’t address the fact that many people are pursuing different business strategies as free-lancers or solo entrepreneurs. So, the numbers don’t tell the whole story. But, that point is more of a quibble than counter-argument. U.S. business dynamism is slowing and that is not a good thing.
2) A new CFED study takes a deep and sympathetic look at the many financial challenges facing America’s micro-entrepreneurs, i.e. firms with less than 10 employees. CFED researchers surveyed a sample of microbusiness owners about their use of financial services. Most of the findings won’t be a surprise to those who work in the field, but they are still instructive. For most microbusiness owners, the split between household and business expenses is pretty murky. Moreover, few have access to much financial cushion in the event of crisis or emergency. In these cases, they typically rely on savings, credit cards, or family/friends to weather the storm, and lack access to more sophisticated banking services. The result is continued instability and uncertainty—not the best financial state for building sustainable businesses over the long-term.
3) Another new study from the Partnership for a New American Economy examines the growing importance of Latino entrepreneurs. Since 1990, the number of U.S. Latino entrepreneurs has tripled and now involves more than 2 million business owners. And, this rate of business start-up keeps climbing, even as overall business start-up rates stagnate. All is not rosy. For example, self-employed Latinos make less than other self-employed Americans. But, the trends are moving in a positive direction and it’s clear that the future of entrepreneurship in the U.S. will depend heavily on Latino entrepreneurs.
Most public policies go through fad cycles. They start as fledgling proposals and, if successful, morph into “an idea who’s time has come.” In many cases, backlash is the next stage as critics point to flaws in the idea and new evidence raises questions about policy or program effectiveness.
The field of microfinance offers a great case in point. Pioneered in Bangladesh by Grameen Bank, the practice of using microloans to aid the poor soon went global and microfinance programs can now be found around the world. But, the past years have been tough for microfinance advocates. Grameen Bank founder Mohammed Yunus has been under political attack at home, and numerous research studies questioned whether microfinance worked. (Here and here are some examples of recent critiques.)
Recently, researchers at the World Bank reported data from the longest and most rigorous evaluation of microfinance programs developed to date. Their report, Dynamic Effects of Microcredit in Bangladesh, tracks program development and outcomes over the course of 20 years, and finds that these effort do indeed help lift people out of poverty. Families participating in microcredit schemes benefit from higher household assets, higher expenditures, and improved education outcomes. Moreover, the programs offer even greater benefits for women than for men. These impacts are large and persistent over time. While this rigorous report should not be viewed as the last word, it is further compelling evidence that investments in microcredit work.
The history of clean and alternative energy in the U.S. is a story of boom and bust cycles. Unlike many other boom and bust industries where cycles are driven by market forces alone, the clean energy market’s gyrations often result from inconsistent or poorly conceived policy decisions. Clean energy investments spike when new funding is available (such as the 2009 federal stimulus bill) or when critical tax incentives, such as Renewable Energy Production Tax Credit, are in place. When these subsidies are removed or reduced, investments falter. The result is a roller coaster ride for investors, entrepreneurs and alternative energy advocates.
Creating a more consistent, predictable, and steady investment climate is essential to a more stable alternative energy market in the U.S. And, finding these new funding tools is not rocket science. As a new study from the Brookings Institution and the Council of Development Finance Agencies shows, the bond market is a promising and underutilized tool for clean energy finance. State and local development agencies have long experience in financing major infrastructure projects with bonds; using these tools for clean energy investments makes sense too.
The study highlights the emergence of numerous state clean energy funds and green banks that are already having big impacts. For example, New York’s State Energy Research and Development Authority has recently raised nearly $25 million to invest in energy efficiency projects. Overall, state clean energy funds have invested $3.4 billion in state dollars, leveraging much more federal and private investment, since 1998.
The report includes a number of guidelines and policy recommendations for how to further expand on these promising beginnings. If we are truly serious about developing new sources and markets for clean energy, we will need to develop a more robust and stable source of financing for these projects. Clean energy bonds can and should be part of the solution to this challenge.
For years, tax incentives, credits, and abatements have been the policy tools of choice for economic developers. In fact, for many people, tax incentives are what economic development policy is all about. Even with the economic development profession, incentives are a controversial topic. We don’t really know whether they work—firms like them of course, but it’s tough to determine whether various tax credits are an effective use of taxpayer dollars and whether they produce a solid return on investment. For every convincing study by incentive critics like Good Jobs First, there are lots of cases where tax incentives seem to have been the reason why a deal got done.
One reason for the current debates is that we have trouble making real “apples to apples” comparisons between various incentive programs. At the same time, we also have limited data and poor transparency around incentive deals and their impacts. A new project led by the Pew Center for the States and the Center for Regional Economic Competitiveness seeks to address these data and transparency challenges. (EntreWorks Consulting is providing additional consulting support to this project). The Business Incentives Initiative will be working with seven U.S. states (Indiana, Louisiana, Maryland, Michigan, Oklahoma, Tennessee, and Virginia) on three important tasks:
- Identify new tools to manage and track incentive programs,
- Improve data collection and reporting, and
- Develop new national standards for managing, tracking, and reporting on the outcomes of various state economic development incentive programs.
This project was officially announced today and will formally kick off this Spring. It has great promise for introducing new tools and new models to help all of us get a better handle on what works in the field of economic development incentives. Watch this space for more details as the project progresses.
If you think franchising is just about creating another Subway, Curves, or Jiffy Lube, think again. As an article (“It Takes a Village”) in the April 2014 issue of Entrepreneur magazine notes, the international development community is also embracing franchising in a big way. A model of microfranchising or social franchising is gaining traction as an effective means to use “the power of the market” to advance important missions such as providing medical care, drugs, and other needed services to impoverished communities. (Recent books on microfranchising can be accessed here and here.)
This model makes sense–it provides a standard format and processes, low cost, and systems to manage distribution, work flow and the like. Successful programs, such as Vision Spring (which sells eyeglasses) and the Health-Store Foundation (providing nurses and clinics) are growing rapidly and expanding to new countries. Business schools, such as BYU’s Ballard School and Northwestern’s Kellogg School, are also providing research and support for these efforts. And, now the franchisers themselves are engaged. The International Franchising Association has its own Social Sector Franchising Task Force designed to help support the expansion of the microfranchise model. The Task Force will be releasing its own research this year, and we will be sure to keep you updated on these findings.
Across the industrial heartland, many communities face huge challenges with blighted and vacant properties. These challenges affect not only major industrial centers like Cleveland and Detroit, but many smaller cities (such as Springfield, MA, Reading, PA, Syracuse, NY, and many more) as well. Abandoned properties invite crime, reduce property values, raise local maintenance costs, and generally hinder local redevelopment efforts. In cities with declining populations and tight budgets, it’s a major challenge to control, rehabilitate or demolish these blighted buildings and sites.
In recent years, many states and communities are embracing land banks as a means to deal with this issue. Land Banks are independent authorities designed to manage and oversee blighted and tax delinquent properties and land parcels. Land banks acquire properties in various ways, sometimes via purchase of tax-foreclosed properties or passive acceptance of parcels from sheriff’s sales. Acquired properties are often destroyed, but are preferably rehabilitated and resold. In the process, dangerous abandoned structures are eliminated and new homes are created for responsible owners. Two of the best examples of these tools are Michigan’s Genesee County Land Bank and the Fulton County/Atlanta Land Bank Authority.
Land banks have been around for awhile (Here is a good history), but seem to be gaining traction now. Last year, Pennsylvania approved a state land banking program that is now being used in many cities. For example, Philadelphia unveiled its program in December 2013.
The growth of these new land bank models is very promising. (A recent HUD review of trends can be accessed here). The tools are flexible and help achieve multiple goals, from eliminating blight, increasing local tax revenue, and expanding local pools of affordable housing. Land banks can and should be in the tool kit for any community seeking to address major challenges related to abandoned and tax-delinquent properties.
Recently, it seems like every week brings us a new study purporting to show what public policies matter for high growth entrepreneurs. (Recent examples include studies from the Kauffman Foundation and Endeavor Insight). These studies are often helpful, but may be focused on only one country or suffer from ideological blinders. It’s likely that a conservative study will note that taxes matter, while liberal researchers point to an embrace of diversity as important pro-entrepreneur attribute.
A solid new study from the UK-based Nesta offers useful insights on the question of what policies and business climate characteristics are associated with the development of high-growth firms. The report, “What Drives the Dynamics of Business Growth?,” compares the climate for high growth firms in ten developed economies (the US, Canada, and eight advanced European economies). The environment for high growth firms in these economies share several characteristics. First, churn is good. Economies that have high levels of job destruction also have high levels of job creation. Second, new high growth firms create the bulk of new jobs in all of these economies. Third and not surprisingly, younger firms, and firms in certain sectors (such as service and manufacturing) face more volatile operating environments than more mature firms or firms operating in manufacturing sectors.
What policies seem to be correlated with more high growth firms? The paper stresses the great importance of flexible labor market rules. Nations with stringent job protection rules also tend to have less dynamic economies. Bankruptcy rules also matter. It’s no surprise that bankruptcy regulations that punish entrepreneurs for failure tend to also reduce their willingness to take risks. A more diverse and competitive banking sector also helps ensure better access to capital for new firms. Finally, the study highlights an interesting result related to R&D subsidies. Extensive R&D subsidies may have the effect of protecting incumbents and larger firms as opposed to spurring innovation by new companies. Since many of these subsidies take the form of tax credits (often of limited benefit to new and barely profitable start-ups), they generally are used more liberally by larger and more established companies.
For the past year, I’ve been involved with an Appalachian Regional Commission (ARC) project, headed by colleagues at the University of Illinois and CREC, examining the importance and influence of a community’s economic diversity. Researchers have recently become very interested in concepts of economic resilience–due in part to the impacts of recent natural disasters like Hurricanes Katrina and Sandy. (For an example, see the work of the excellent Building Resilient Regions project.) A lot of this work has examined how communities respond to and recover from disasters, with a focus on infrastructure, advance planning and the like. But recovery from disasters—natural or economic–also depends on a region’s underlying economic strengths. And, it appears that regions with more economic diversity (i.e. they are home to large mix of industries and economic activities) may be more resilient and more competitive.
Our research project sought to examine this hypothesis in Appalachia. The situation on the ground in Appalachian communities is very complex and differentiated, but the region is home to many communities, such as small coal towns, that suffer from a lack of economic diversity. Finding ways to stabilize and grow these economies is an important mission for the ARC.
Our project includes several key tools and resources (all of the materials are compiled here):
1) A web tool that maps economic diversity across the region, examining diversity by industry, occupation, and broad employment functions,
2) Case studies of community economic diversification efforts, and
3 A Guide for Action that can be used by community leaders and economic development professionals.
This project includes some very useful resources and guides. It’s hard to briefly sum up the whole package, but I would point to one important concluding thought: Effective regional diversification strategies are not about simply supporting a generically diverse mix of local economic activity. Instead, these strategies require a well-conceived approach that builds multiple competitive specializations that are effectively aligned with a region’s real economic assets and skill sets. These multiple (and diverse) specializations will help ensure that your region survives and prospers in the event of future shocks, whether they be natural or economic disasters.
I’m a pretty big cheerleader for the positive impact of small business on local economies, but I do try to ensure that my advocacy is fact-based as opposed to faith-based. It’s important to weigh all the facts, even if you don’t necessarily like the conclusions. That’s my perspective on two new reports that are worth a look:
1) America’s Self-Employment Landscape: New data from CareerBuilder and EMSI looks at the latest trends related to self-employment in the US. The 2000s saw a big jump in self-employment and rising interest in what we’ve been calling the 1099 Economy. The new data show that the number of self-employed workers is declining after a solid period of growth. Much of the decline has occurred in sectors hard hit by the economic downturn, such as construction, but the decreases are generally occurring across most sectors. The study finds an increase in the number of people taking 2nd or 3rd jobs for extra income, but fewer people seem to be quitting their day jobs to start a full-time business.
2) Rethinking the National Export Initiative: This Peterson Institute critique of the Obama Administration’s National Export Initiative (NEI) argues that the NEI was too focused on helping small and medium-sized enterprises (SMEs). Exporting is dominated by large businesses–the top 1% of US exporters account for 80% of all merchandise exports. By focusing on SME export promotion, the program targeted firms facing the highest barriers to success. According to this view, a more effective export strategy would encourage larger firms to invest in entering new markets via interventions to improve local business climates, to promote a more competitive exchange rate, and to open new markets via new trade pacts.