Back to Strategies for ChangeBy Michael T. Childress and Michal Smith-Mello; Peter Schirmer
From Entrepreneurs and Small Business—Kentucky’s Neglected Natural Resource
pp. 107-110, published 1998
The larger economic context in which businesses must compete and workers must strive to gain an economic foothold has changed dramatically. Competition is fierce and global in its reach. The more successful, more competitive firms have fundamentally altered the way they work to achieve greater efficiency, productivity and quality. The effects of these changes have been profound. In millions of workplaces around the nation, fewer people do more work of a higher quality. Patterns of employment have become far less centralized, as the nation’s firms and governments have become purposefully smaller. While traditional employment is less certain today, the economy is exploding with entrepreneurial opportunities for those with ideas, innovations, and the drive to find a place for them in the world marketplace that hums around us. Small, sometimes tiny, one-person, enterprises are seizing the business opportunities being scattered into the marketplace. A select few are growing at a rapid pace, reminding us that every business, even the world’s monolithic corporations, were once small firms struggling to succeed.
The future happening all around us compels attention to the development of timely, responsive public policy. The challenge of expanding opportunity has grown far more complicated, even as the resources and information available to us have expanded. Development is no longer simply a matter of creating jobs, of recruiting "value-added" industries that will employ citizens of the Commonwealth. Indeed, what the larger economy now values is no longer easily defined. Information and the tools that enable its production, manipulation and dissemination now dominate our economy, hardly the "goods" of the recent past. While it remains a cornerstone in our economy, manufacturing is no longer a certain path to high-value jobs and enduring economic strength; productivity leaps and global competition for cheap labor virtually assure declining employment in this sector. In short, the circumstances that enable development have changed. In turn, public policy must respond and be prepared to continue responding thoughtfully and nimbly if it is to answer the challenge of creating opportunity for citizens of the Commonwealth.
Today’s development challenge demands that we shift our focus from the mobile industries we have assumed will be the salvation of local economies to the cultivation of entrepreneurial capacity and business development within the Commonwealth. As Peter K. Eisinger and others have argued, "demand-side" policies that focus on local resources as a basis for growth can help diminish counterproductive interstate competition and facilitate capital formation and the creation of wealth. An entrepreneurial development approach represents a significant reversal of past policies, movement away from the widely held notion that opportunity and prosperity lie in the hands of someone somewhere else. It demands that we focus more, much more of our energies and our resources on the considerable strengths that lie within our state, as we have with education reform. In doing so, we can build on an already remarkably diverse economy that is dominated and driven by small firms.
A more entrepreneurial approach to economic development offers many potential benefits to the Commonwealth. Small firms, research shows, are not only creating the majority of jobs in today’s dynamic economy, they are also creating the best jobs, jobs of value that contribute to the well-being of families and the wealth of communities. Further, by focusing on our capacity for development within the state, we can invest our economic development strategies with far greater equity, creating opportunity in places where it is most needed rather than in places where mobile industries are most likely to locate. Further, an entrepreneurial approach to development that is echoed in the language of public policy and in the approaches to development that we adopt is likely to become an important catalyst for innovation in many other arenas.
Unlike mobile firms, small businesses are an integral part of the life of communities, linked to people and places they are far less likely to leave than firms whose fates are orchestrated from distant locations. Moreover, they generally possess sufficient flexibility to weather larger economic storms and to adapt to changing market conditions more readily than large firms. Some researchers conclude that small businesses are an indispensable element of vibrant, growing communities. Indeed, many of the enormous difficulties posed by the challenge of rural development can be overcome through the deliberate cultivation of entrepreneurial capacity and the development of small businesses at the local level. By strengthening our infrastructure of support for entrepreneurship and small business development, we can help more small firms succeed and more small communities thrive.
Many have argued that the entrepreneurial energy emanating from Kentucky is, at best, anemic. Indeed, our resource-rich state suffers from a shortage of the very raw materials that are believed to foster entrepreneurship. The enduring legacy of undereducation, a lack of diversity in our population, and an inadequate store of management talent adversely affect our ability to generate and sustain new enterprises. Moreover, we find that Kentucky entrepreneurs have little familiarity with a variety of state and federal programs designed to assist them. Those who are familiar with these services usually find them less than satisfactory, suggesting that our infrastructure of public support for entrepreneurial development is, at best, weak and, at worst, ineffective. Among small business owners, government is viewed as more of a hindrance than a help in development. Therefore, public response to the mix of raw materials we bring to entrepreneurship may not be sufficient to counter circumstances that inhibit business development.
In spite of the inadequacy of the raw materials Kentucky brings to the entrepreneurial process, we find outcomes indicative of far more strength than many are willing to attribute to our state. Indeed, Kentucky may have significant latent entrepreneurial energy. The traditional aggregate measures used to assess Kentucky’s capacity for business development belie the very different circumstances in which many Kentucky entrepreneurs live and work. Because our state is far more rural than virtually every state with which it is routinely compared, the Commonwealth does not fare well in analyses that focus exclusively on aggregate data. Many indicators of entrepreneurship, we find, are biased in favor of more urbanized states. When we control for our state’s "ruralness," we find that data typically used to depict Kentucky’s anemic entrepreneurial capacity reveal a different picture. While not an altogether rosy one, it is one of surprising strength given the limitations of our entrepreneurial raw materials and the dilution of resources that result from the rural nature of our state. To tap and increase our store of entrepreneurial capacity, further investment in programs that cultivate, train and guide entrepreneurs and business owners are needed.
What we may not need is more capital. Indeed, we find that, contrary to widely expressed concerns, sufficient traditional and venture capital may be readily available to qualified Kentucky entrepreneurs. For the very small percentage of entrepreneurs who seek venture capital, we find that readily accessible venture capital firms located in surrounding states are willing and eager to invest in Kentucky firms, so long as they possess the requisite strengths that virtually every lender expects—a good idea backed by some collateral, a solid business plan and a competent management team. Indeed, as our depleted entrepreneurial resource base suggests, our problem, if we have one, is not one of too little capital to finance entrepreneurial ideas. Instead, venture capitalists and bankers concur, we have too few entrepreneurs who are genuinely ready to launch businesses.
In order to grow established small firms in our state as well as enable emerging ones, we also must cultivate vision beyond our borders. Externally oriented export firms that see and tap more of the potential of the marketplace that lies beyond their immediate environs are not only more likely to grow and succeed, they are more likely to pay higher wages. Consequently, the low utilization of the Internet that we find among small business owners may be constraining business growth and development. The public good to be realized from increased use of the Internet for market research, advertising, sales, purchases, recruitment and training, we believe, is clear.
As we look to the future, a range of trends will influence business formation and development in the Commonwealth. Here, the aging of our population and the movement of more retirees to rural destinations in Kentucky will create distinct new markets and new business opportunities. Moreover, we can expect more older citizens to venture into business ownership as they remain vigorous and active for a longer time and seek income to supplement retirement provisions. Everywhere, globalization and information technology will continue to influence the economy, stimulating competition while creating opportunity. How quickly and effectively appropriate members of our business community utilize the Internet may exert a strong influence on the future of our economy.
On the capital front, bank consolidation will continue to change the character of banking and perhaps the role that these institutions play in financing small firms. While many see a future of diminished capital from these traditional institutions as once well-established relationships are lost in corporate acquisitions, others predict an era of increased professionalization and innovation in banking practices, spurred by competition. Our findings suggest that the latter is the more likely scenario. Certainly, Kentucky’s largest banks manage most of the volume of small business loans. And the once-conservative market for small business lending has changed. Already, some banks are aggressively competing for small business loans. Moreover, a recent national survey finds that more small firm owners report borrowing from banks than in past years, though many are unhappy with changes in their banking community.
In years to come, as we contend with the fallout from welfare reform, the smallest of small firms—microenterprises—are likely to garner increased attention and public investment, as new labor force entrants seek opportunities at the edge of our economy. Lessons in microenterprise development from the poorest nations of the world are already informing our approaches to cultivating and capitalizing would-be entrepreneurs who historically have been excluded from the economic mainstream. By broadening access to credit and to programs that nurture entrepreneurial skills and by enabling the accumulation of assets, we can adopt a far more empowering response to poverty than in the past.
Because small firms, some of which began as sole proprietorships or microenterprises, are creating high-quality jobs and, in many cases, experiencing exponential growth, we need no longer look to the outside world for the possibility of generating wealth in Kentucky. Instead, we need to capture more of the spirit of enterprise within the people of this state and their communities and to examine the effectiveness of our response to small businesses and would-be entrepreneurs. Our research suggests that we are doing too little to cultivate entrepreneurial talent and enable business development. As some of the most dynamic economies in the world have demonstrated, we can build a far more innovative and entrepreneurial culture, one that responds to the needs of people and firms and that creates wealth and opportunity.
In doing so, we will discover and make possible new opportunities in unexpected places across the Commonwealth. Perhaps more important, we will begin changing the mindset that has imprinted upon generations of Kentuckians the belief that they must leave their home state in order to prosper. Through the development of a far more entrepreneurial economy, we can transform the Commonwealth from a place that citizens return to in their retirement years after they have accumulated wealth in another place to a place where people can build wealth, whether they are young or old. And we can begin to counter the misguided notion that the best hope for rural Kentucky is the migration of its unemployed and underemployed to urban areas with temporary labor shortages. While our highly mobile labor force will continue to adapt to economic circumstances as needed, the public suggestion that abandonment is a solution to rural economic shortcomings runs counter to the larger, widely shared goal of retaining more young people and more of the state’s best and brightest. Beyond our already strong urban triangle, rural as well as urban areas across the Commonwealth hold enormous potential for small business development by people who consciously choose the quality of life small towns offer. Through policies and practices that enable entrepreneurship and small business development, we can help more of these individuals create and spread wealth. We can capture more of the enterprise within us.
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