Back on October 14, I wrote a piece on whether or not economic development can help solve our current financial crisis.  In short, I answered “no”.  But I also argued that a comprehensive local economic development strategy could contribute to long-term, stable local economic growth.  I also wrote that any comprehensive local economic development strategy should and must consist of six general strategies, including:  1) technology led economic development, 2) small business and entrepreneur led development, 3) workforce development, 4) business retention and expansion, 5) real estate development and reuse, and 6) neighborhood level economic development.  I thought that it would be useful for those of you interested in local economic development to explore each of these six general strategies in greater detail over the next month or so.

I though I would start out by exploring entrepreneurship and small business-led economic development.  First, it’s kind of an obvious topic to start with for someone who writes a blog sponsored by the Nevada Small Business Development Center.  Second, I was also inspired to start with entrepreneurship and small business-led economic development after reading a wonderful op-ed piece published by Reno Gazette Journal back on October 19 and written by Mr. Dave Archer, CEO of the Nevada Center for Entrepreneurship and Technology (NCET).  The NCET was first formed in 2003 and, in a relatively short period of time, has helped small businesses and entrepreneurs start and grow their businesses across the state.  To anyone who is interested, I highly recommend that you check out their website at http://www.ncet.org/ to see what they are all about!

Small businesses and entrepreneurs can be, but are not always, the same person or the same businesses.   Mr. Archer, and others in the field of economic development, have argued that entrepreneurs differ from “traditional” small businesses in that the markets for the goods and services entrepreneurs develop and provide typically haven’t even been created yet!  They are risk takers!

Many owners of “traditional” small businesses decide to start their small business after a market has already been created for their goods and/or services.  The owner of a neighborhood coffee shop is reacting to a demand for coffee that many of us already have (myself included!).  The owner of a local neighborhood retailer is reacting to a demand for goods that already exists.  The owner of a local hair salon is reacting to the existing demand for hair cuts, perms and manicures.

Entrepreneurs are, as Mr. Archer points out, “typically risk-taking, forward-thinking people who have an ability to see far beyond the boundaries of ‘the box’ in assessing business-building opportunities”.  Because of their unique propensity to take risks, even in the best of economic climates, entrepreneurship-led local economic development strategies typically consist of three very specific and unique parts.  According to the International Economic Development Council (IEDC), these unique parts consist of:  1) technology assistance, 2) provision of business space (usually in the form of a business incubator), and 3) financial assistance.

Technical assistance generally consists of assistance in business plan development, aid with preparing grant applications (usually for those entrepreneurs who are involved in the research and development of new technologies), training and managing staff, applying for loans, financing, marketing and product development, improving the design of a product or the manufacturing process, and accounting and other record-keeping functions.  Depending upon the experience of the entrepreneur and the complexity of the good or service they hope to develop, it can take up to several months or several years just to provide the entrepreneur with “technical assistance”.

Small business incubators, or the provision of business space, for entrepreneurs can take years to develop.  The advantage of these incubators is that they provide the new entrepreneur with low rent, shared support services and even networking opportunities.  The downside is that it can take years for a local economic development authority to find the appropriate and required land to house the incubator, to secure the needed financing to build the incubator and it can take even more additional years to actually finish building the incubator.  There are short-cuts such as converting an old warehouse or rehabbing an existing factory, but even if you can get the incubator off the ground and open within a year or two, it still takes a lot of time for the entrepreneurs to move in, get settled, get to work and develop a new good or service to a point where it is ready for “mass production”.

Access to capital and financial assistance is the third way a local economic development authority can help in assisting entrepreneurs grow and develop their business.  A local economic development authority can provide low-interest loans, grants or even provide “seed capital” by putting entrepreneurs in contact with venture capitalists and “angel investors”.  In addition to these avenues of financial assistance, a local economic development authority can directly help an entrepreneur by helping the new business to generate funds from within the operations by reducing overhead costs (this usually requires the existence of an incubator), managing cash flows and assets, disposing of non-productive inventory and machinery equipment, collecting deposits or progress payments from clients, ensuring capital assets are being efficiently used, negotiating low prices from suppliers, leasing equipment and/or locations instead of purchasing them, and establishing “trade credit” with suppliers through consignment, installment contracts or longer credit terms.

Small business development and entrepreneurship-led development is a vital part of any local economic development strategy.  Small businesses and entrepreneurs, as Mr. Archer and the IEDC correctly point out, can positively impact local competitiveness, diversify a local economic base and stimulate local economic development.   Small businesses and entrepreneurs also serve as employers, creating new jobs and playing a very important role in hiring part-time workers and people just entering the labor market.  They serve as local tax revenue generators, helping to broaden the local tax base.  They are economic supporters in that they typically buy and sell locally, helping to generate income and opportunities for other local small businesses and entrepreneurs.  They are property owners and renters, helping to lease vacant space and even fill vacant downtown storefronts.  They are also providers of long-term economic stability in that, by definition, they are “homegrown” and have a “personal stake” in their community.

But is entrepreneurship and small business development “key” to an economic recovery, especially in the current economic downturn?  The short answer is “no”.  As I’ve tried to point out, both in this post and my post back on October 14, any local economic development strategy requires YEARS to be effective.  Small businesses and entrepreneurs in particular require years of investment to grow and develop in order to have a net positive impact on the local economy.  According to the IEDC, the majority of business start-ups (including traditional small businesses and even entrepreneurs) fail within the first 18 months of operation.  On average, only 40% of business start-ups survive the first five years of operation and only 10% will survive a decade!  Even as employers, the majority of small businesses and entrepreneurs offer their employees lower wages and fewer benefits than their “corporate counterparts” in the first couple of years because these small businesses and entrepreneurs need additional time to develop their goods and services and “break into” more lucrative markets.  Entrepreneurs in particular, because of their “cutting-edge” nature, may need additional time in order for the necessary markets to become available for their unique brands of goods and services.

The time needed to make small business and entrepreneurship development a success makes it a poor substitute for a short-term economic recovery plan and strategy.  That said, an economic downturn does NOT mean that we should abandon these small businesses and entrepreneurs.  In fact, they probably require even more support to just survive the current financial and economic crisis we are experiencing, both here in Nevada and across the nation.

The long-term pay-off of small business and entrepreneurship development is too large to ignore.  The long-term pay-off of this strategy has too much to offer to long-term, stable local economic growth to be shelved.  Our small businesses and entrepreneurs have historically served as the “back bone” of our local, and national, economy.  After all, where would we be if entrepreneurs such as Hewlett and Packard didn’t start their business in their own garage?  Where would be if it wasn’t for Steve Jobs and Bill Gates?  Can anyone really say that the world isn’t a better place because of the iPhone?  These start-up small businesses and entrepreneurs are now the employers of millions of people and have helped create a global network of economic linkages.  They are employers, tax revenue generators, economic supporters, property owners and renters and even providers of economic stability.  That said, we should not overly estimate their immediate short-term impact.  They may not be “key” to immediate economic recovery, but they are absolutely key to the long-term, stable economic growth of our local economy and our local community.

This entry was posted on Thursday, October 23rd, 2008 at 7:13 pm and is filed under Economic Development, Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a comment, or trackback from your own site.