New Research on Local Roles in Small Business Growth

October 17, 2011

by Christiana McFarland

The recent recessionary period has focused new attention on the role of small businesses in generating economic growth. Many local leaders are turning attention to supporting and growing their small business community in order to realize tangible economic impacts including job creation and exporting local goods and services. But what are the most effective roles for cities in small business development?

NLC conducted research, reported in Small Business Growth: U.S. Local Policy Implications, on the impacts of local policies on the growth of small businesses, including: access to capital programs (revolving loan funds), management development (small business development centers), regulatory and permitting assistance and marketing assistance. Also included in the analysis is whether the local government partners with the small business community for policy development. The analysis is based on the 2009 National League of Cities/International City/County Management Association Economic Development survey.

The most effective way local governments create opportunities for small businesses, according to the new research, is by providing an efficient regulatory environment and avenues for local businesses to engage with policy makers. Surprisingly, other local tools to support small businesses, including management development assistance, revolving loan funds and marketing assistance do not have the expected impact on small business growth.

Regulatory Assistance

Ideally, a local government's regulatory processes - permitting and zoning - exist to guard against detrimental development, preserve local assets and safeguard citizens.

However, regulatory processes can also present barriers to small businesses, imposing time-consuming bureaucratic requirements, complex rules and regulation and inefficient processes.

The speed and efficiency of regulatory processes is an indicator of local government responsiveness to small businesses that often do not have the time or resources to navigate bureaucratic steps.

Partnering with Small Business

Partnerships and open communication with the small business community and service providers help local governments understanding what businesses exist in the community, uncover their challenges, realize gaps in support and help drive policies that are most responsive to needs.

Entrepreneurs and growth companies, in particular, likely fly under the radar of traditional economic development programs meant to attract and retain larger employers. In order to begin to forge connections with small businesses and to get a handle on what services are available in the community, local leaders can seek out partners that commonly interact with the local business community, such as chambers of commerce, technology councils, universities, small business development centers and economic development organizations.

Management and Skills Development

Lack of management and business skills is a common culprit in small business failure. Local programs for small business management and skills development typically include general management training, financial advising, assistance with formulating a business plan and other technical assistance associated with business ownership.

These programs are often offered by a local government through a partnership with a small business development center (SBDC). According to preliminary research results, management and skills development assistance does not appear to contribute to the growth of small businesses. However, this may simply reflect the constant "churning" of those small businesses most likely to benefit from SBDC services.

Market Expansion Assistance

Market expansion can be the most daunting challenge for entrepreneurs and small business owners because of their lack of resources and specialized marketing knowledge. Local programs to assist small businesses in expanding the market for their goods and services typically include such things as buy-local campaigns or group marketing systems.

These programs are often focused on the local and regional consumer base. Small business marketing programs do not appear to substantially contribute to small business growth. These programs are more likely recirculate wealth, or attract new customers from the jurisdiction and region, but do not necessarily increase the penetration of small businesses into new, external markets.

Access to Capital

Even in good economic times, the relatively high failure rate of new small businesses tends to limit their financing options.

Most state and local government financing programs, such as a revolving loan fund, traditionally have better loan terms and are geared toward businesses that are above average risk and may not be able to participate in traditional lending markets.

The research finds that using a revolving loan fund does not appear to contribute to small business growth on a broad scale. Although these programs may be helpful to a handful of businesses, the limited amount of capital made available may curb their impact.

Additionally, local governments may not have the financial capacity or detailed marketing tools needed to adequately provide financing services on their own.

Although these preliminary results help shed light on traditional or most often used small business development policies, further exploration into more innovative tools and the experience of entrepreneurs and small businesses with them is critical if local governments are to remove barriers and provide support, particularly for small businesses with higher growth potential. NLC will continue to conduct research and provide resources and outreach to local leaders on these issues through its Economic Development program.

Details: To download a copy of the new report Small Business Growth: U.S. Local Policy Implications go to www.nlc.org > Find Solutions > Economic Development. For more information, contact Christiana McFarland, program director, Finance and Economic Development, at mcfarland@nlc.org.

For cities looking to better understand their business landscape, the Edward Lowe Foundation has created a free tool that allows users to access data about businesses and jobs at the state, metropolitan statistical area (MSA) and county levels. To learn more, visit www.YourEconomy.org.