| by Michael T. Childress Michal Smith-Mello Peter Schirmer |
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While we have made much progress, development of the Commonwealth continues to be frustrated by high rates of poverty, low wages and an historically poor educational status. In this report, we argue that our economic development efforts must place a far stronger emphasis on building from within. Specifically, they must bring attention to entrepreneurship and small business development equal to that being brought to industrial recruitment strategies. Rather than being the work of a state government agency, cultivating entrepreneurship and support for small business will require the contributions of governments, institutions and citizens across the Commonwealth. Through these efforts, we can increase wealth and give our young people reason to stay in—or perhaps return to—Kentucky.
This report brings new information to an expanding dialogue about entrepreneurship. It includes the results of surveys of the general population, small business owners, bankers, venture capitalists in surrounding states and businesses with a presence on the World Wide Web.
Changes in our economy and our society are redefining how we live and work, build successful enterprises, and create economic opportunity. To ensure the economic well-being of citizens, government must adapt to these changes. Successful adaptation will depend on many factors, but entrepreneurial energy is key. In this report, we argue that the entrepreneurial path is the right one for the state's development efforts to follow. The most explosive employment growth is occurring among small businesses, and more jobs are being created by industries dominated by small firms. Further, entrepreneurship offers substantial returns on investment. To garner these benefits, however, development policies must accommodate a new focus, one that places equal emphasis on entrepreneurship and small business development.
The Business of Kentucky Is Small Business
A highly diversified small business community has long been the backbone of the Kentucky economy. While the contributions of large firms are undeniable, these firms may be reaching the limit of their ability to spawn significant employment growth. Small enterprises, on the other hand, afford a virtual wellspring of potential growth. In Kentucky, firms with fewer than 500 employees created all of the net new jobs from 1992 to 1996 while businesses with fewer than 20 employees created 52.6 percent of the small business job growth or 67,744 jobs. Genuinely small businesses, those with fewer than 20 employees, represent 85.7 percent of all firms and employ 26 percent of Kentucky's workforce.
New Labor Market Realities
While the United States will continue to make increasingly sophisticated products and retain a commanding share of world production for the foreseeable future, technology and organizational change are expected to enable productivity leaps that will eliminate many manufacturing jobs. Between 1994 and 2005, the Bureau of Labor Statistics predicts that an estimated 1.3 million manufacturing jobs will be lost while the national share of output remains virtually unchanged. As a consequence, the very foundation of the development strategies on which we have historically relied is being systematically undermined. Employment growth is expected to remain concentrated in the service and retail industries, from high-end jobs for general managers and top executives to street-level sales clerks. In response to the decentralization of jobs, many are creating their own opportunities in the marketplace.
New Directions for Development Policy
In spite of changing employment patterns, a growing population of working poor, the poor quality jobs that incentive packages have netted, and mounting criticism of the cost of incentives, the lure of the big fish remains irresistible. Moreover, the long-term efforts needed to build a more entrepreneurial economy will not produce immediate, politically gratifying results. Over time, however, they will likely produce far more diversified and more resilient economies, a particularly important goal for an essentially rural state. An economy fueled by people with strong attachments to the Commonwealth will generate more enduring prosperity than one that relies too heavily upon locating industries that too often exploit our weaknesses.
While industrial recruitment can play a role in the development of Kentucky's economy, it should not be mistaken for the only one. Indeed, facilitating the growth and development of small businesses and enabling the emergence of entrepreneurs must assume equal importance in our economic policy framework. By relying too heavily on industrial recruitment today, we may place the very public goods small firms need--education, job training, infrastructure, and support services--at risk over the long term. In short, our "bird in the hand," the small firms that are already the backbone of Kentucky's economy and the unrealized entrepreneurial potential of our state, deserve a commitment of resources and energy equal to that now being extended to outside firms.
From our base of information about Kentuckians who have launched enterprises, we can learn more about the entrepreneurial process, how it can be better supported, and how our approach to development can be modified to garner more positive outcomes. Our survey findings show that the "typical" Kentucky entrepreneur is a white male, around 45 years old, of above average education and income, has started more than one business, lives in the state's urban triangle, and comes from an entrepreneurial family. While this profile reflects the state's relative lack of diversity, it nevertheless points to the need for corrective policies that will enable more women and more minorities to participate in business ownership.
If entrepreneurship is to become an engine of growth for the Commonwealth, we must first identify our strengths and weaknesses, then build and minimize accordingly. A number of useful metrics taken in combination indicate entrepreneurial health, the latent potential of a people and a place for enterprise development. Here we look at two "report cards" on entrepreneurial capacity and examine recognized inputs or raw materials of entrepreneurship and the resultant outcomes or entrepreneurial products.
Report Cards
For the past 10 years, the Corporation for Enterprise Development (CFED) has provided an annual assessment of each state's economy and its potential for future growth based on more than 50 socioeconomic indicators. Importantly, CFED's assessment of Kentucky's business vitality moved from a "D" in 1995 to a first-ever "A" in 1996, largely on the strength of the diversity of the state's economy and the improved competitiveness of its firms. According to CFED, Kentucky is home to the fourth most diversified economy in the nation, an important foundation for future small business development and expansion. Entrepreneurial energy, however, was rated as average. Its 1996 report card ranks Kentucky 43rd in new companies formed, 23rd in the percentage of change in new companies, and 24th in new business job growth.
The Center's Survey of Small Business Owners asked respondents to evaluate 32 factors that influence small business success in Kentucky. Only four factors garnered more than 50 percent in the "good" category: general quality of life (66.2); highway system (55.6); telecommunications system (54.7); and quality of universities (51.3). On the other hand, the factors which received the highest percentage of negative or "poor" scores are: availability of tax incentives (73.2); workers compensation rates (69.6); state tax rates (53.2); local tax rates (48.2); responsiveness of government agencies (41.8); and small business assistance services (41.7).
Inputs--The Raw Materials of Entrepreneurship
While we find evidence of considerable latent entrepreneurial energy in Kentucky, it is circumscribed by undereducation, poverty, and income inequality, and by the rural nature of our state. Because Kentucky is far more rural than most states, vital resources, including the capital, talent and support needed to sustain entrepreneurship, are significantly diluted in many rural communities. Importantly, however, improvements to the underlying weaknesses in Kentucky's human infrastructure are underway. Added focus and resources could transform entrepreneurial potential into real economic strength.
We examine the following inputs:
By many aggregate measures, the products of Kentucky entrepreneurship are neither of the quantity nor the quality we would hope for. Instead, the state's performance by a number of traditional measures is anemic at best. The rural character of our state dilutes resources and thus blurs the portrait of made-in-Kentucky entrepreneurship. Because, among other things, urban populations are more educated, enjoy significantly higher earnings, and form far more businesses, the Commonwealth's poor overall performance by a number of measures is a reflection of the historic weaknesses of rural economies. Nevertheless, the products of Kentucky's comparatively weak inputs suggest real promise. We examine the following outcomes:
To prosper in the years ahead, we must view change as the opportunity to transform our economy, to repair its inequities and to create enduring prosperity. To do so, we must listen carefully, ask questions, watch for opportunities and act nimbly and quickly when they appear. In short, we must become more entrepreneurial in all that we do. Here we consider some of the trends that will influence our ability to cultivate an entrepreneurial economy in Kentucky.
"The Future That Has Already Happened"
About what lies ahead, some things are virtually assured. Global trade will continue to exert profound influence on our lives, as it continues to force the organizational change that fuels the decentralization of employment patterns now underway. Technology also will continue to produce dramatic, revolutionary change, as the Internet gradually becomes the marketplace of the world, just as the tools driving it have become the engines of our economy. A state-of-the art electronic infrastructure opens windows to new markets, ideas and innovations, competitive sources of goods and services, cost-saving electronic exchanges, and more. Further, it allows rural enterprises to become real players in the larger economy.
Doing Business on the World Wide Web
Perhaps the most important innovation for business in the 1990s is the World Wide Web. While it did not exist a decade ago, furious competition among information technology companies has led to rapid improvements in the capabilities of the Web. Today, users can view live video, listen to live audio, exchange information and ideas in "real time," and make purchases online in a relatively safe environment. Moreover, customers can make purchases from a company without ever knowing where it is located.
But few Kentucky firms are using the Web. At best, we find that less than 1 percent of Kentucky businesses had a Web site at the time we collected data. Further, an analysis of 1990-1996 data on registered web sites found that while the number of Kentucky sites has expanded dramatically, it is one of the lowest among surrounding states. Kentucky businesses are moving more slowly than those in surrounding states to seize the opportunities that a presence on the World Wide Web provides.
A Rising Commitment to Microenterprises
While the high-growth firms of the larger U.S. economy continue to dazzle the marketplace, they are rare, particularly in a largely rural state like Kentucky. Far more common but virtually invisible by comparison are what are now commonly referred to as "microenterprises," tiny, often home-based businesses that usually employ no more than five people. Tiny though they are, the economic impact of microenterprises is dramatic. In 1995, the SBA estimates that microfirms employing between one and four people created 35 percent of the net new U.S. jobs. Moreover, the Information Age economy has yielded example after example of exponential growth among what began as tiny businesses.
A growing number of states have launched initiatives aimed at expanding access to credit and business development assistance among the poor. According to the Corporation for Enterprise Development, 19 states now dedicate funds to microenterprise development. But in spite of compelling findings about the early successes of U.S. initiatives as well as long-standing international ventures, state efforts, according to the Corporation for Enterprise Development, focus mainly on the capitalization of loan funds, rather than on the development and maintenance of support programs, without which many believe these initiatives will not achieve their full potential.
Neither legislation nor alterations of public policy alone will infuse the state with much-needed entrepreneurial energy. Instead, the pursuit of entrepreneurship will be a long-range process, one that aims, first and foremost, to engender a new culture, new perspectives on our communities as places of possibility rather than insoluble economic dilemmas, and new images of ourselves as a people who possess the power to transform their communities and, ultimately, the entire Commonwealth. In short, what is needed is a comprehensive effort, one that is strongly supported at the highest levels of government by all its institutions and broadly advanced at the local level. Fortunately, a remarkable convergence of thinking on how to advance entrepreneurship and grow Kentucky's wealth of small enterprises has emerged. Our findings here support many of these conclusions, and recommendations, including:
To obtain a copy of this report upon its completion, contact the center.
