Small Businesses and Economic Development of Low-Income Communities

Small businesses generate income and create new jobs. In 2005, firms with fewer than five employees accounted for 36.7% of total net job creation in the previous year, and those with fewer than 20 employees accounted for 45.3% of net job creation.[i]

Even micro-enterprises have been shown to alleviate poverty. An Aspen institute report that tracked low-income micro-entrepreneurs for 6 years found that 72% had seen their income increase, and more than half had experienced great enough gains in income to move out of poverty. Their reliance on public assistance fell by 61% over the surveyed time period.[ii]

Small businesses also are more likely to support their local communities through donations and community service. Several surveys of local business owners show that small businesses recirculate more of their revenues back into the local economy through wages paid to local workers, profits paid to local owners, procurement of locally produced goods and services for internal use and for resale, and charitable giving.[iii] Supporting local small businesses can have a multiplier effect on the surrounding community. They give back because their success is more closely tied to the welfare of the broader community. Furthermore, small businesses are driven to become more efficient because they must compete with one another to influence local decision makers. This diffuses power, in contrast to the leverage that a few large corporations, who can relocate, would hold over local government.[iv] An empirical study of small businesses in rural Iowa confirmed that small businesses make significant contributions to their local economy and that businesses that contribute more money and in-kind professional services in their community are more successful in business.[v]

In predominantly black and minority communities, small business development for black-entrepreneurs can combat underemployment, since black-owned businesses are more likely to hire black employees than white-owned businesses, and local businesses are more accessible to local employees than employers located in the suburbs.[vi] This is a vital aspect of economic development, since the black unemployment rate is consistently double the white unemployment rate,[vii] and for young black men, the unemployment rate is even higher: 37%.[viii]

All of these factors suggest that small business development is key to achieve broader community economic development. In fact, in their book, Planning Local Economic Development: Theory and Practice, Blakely and Leigh suggest that business development is “the best way to build or maintain a healthy local economy.”[ix]

[i] See US. Census Bureau, Dynamic Business Statistics, BDS Dataset List, Initial Firm Size, available at http://www.ces.census.gov/index.php/bds/bds_database_list. [ii] Jones, supra note 8 at 390, referencing: Peggy Clark and Amy Kays, Microenterprise and the Poor: Findings from the Self-Employment Learning Project Five-Year Survey of Microentrepreneurs vii (1999). [iii] See e.g.: David A. Fleming and Stephen J. Goetz, Does Local Firm Ownership Matter, 25(3) Econ. Dev. Quarterly 277 (2011), which found a positive relationship between the density of locally owned firms with fewer than 100 employees and per capita income growth in the surrounding county. See also: Indie Impact Study Series 2013: A National Comparative Survey, Albuquerque, NM, Civic Economics (2013); and Matt Cunningham and Dan Houston, The Civic Economics of Retail: Ten Years of Studies, Civic Economics (2012) <civiceconomics.com>, which find positive associations between local firm ownership and growth in the local economy. See also: Troy C. Blanchard, Charles Tolbert and Carson Mencken, The health and wealth of US counties: how the small business environment impacts alternative measures of development, 7 Cambridge j. Regions Econ Soc 1 (2011), which found that, despite creating jobs that are less likely to include health insurance benefits, small businesses improved aggregate population health outcomes in their community, due to improved social relations. On small business contributions to charity, see Patricia Frishkoff, Small Business Contributions to Community Service, Small Business Administration, (1999), which found that, in terms of cash donations combined with in-kind contributions, small businesses were significantly more generous to charities (firms with 100 or fewer employees gave on average $789 per employee, compared with larger firms’ $334 per employee.) [iv] C.W. Mills and M. Ulmer, Small Business and Civic Welfare: Report of the Smaller War Plants Corporation to the Special Committee to Study Problems of American Small Business, Document 135. U.S. Senate, 79th Congress, 2nd Session, February 13. Washington, DC: U.S. Government Printing Office (1946). [v]Maureen Kilkenny, Laua Nalbarte, and Terry Besser, Reciprocated community support and small town-small business success, 11.3 Entrepreneurship & Regional Development 231 (Jul-Sept. 1999). [vi] Timothy Bates, The urban development potential of black-owned businesses, 72(2) Journal of the American Planning Association 227 (2006). [vii] Drew DeSilver, Black Unemployment Rate is Consistently Twice That of Whites. Pew Research Center (August 2013). Available online at <http://www.pewresearch.org/fact-tank/2013/08/21/through-good-times-and-bad-black-unemployment-is-consistently-double-that-of-whites>. [viii] Orlando Patterson, Black Americans, Chapter 13 Understanding America, (Peter Schuck ed. 2008), 398. [ix] Edward J. Blakely and Nancey Green Leigh, Planning Local Economic Development: Theory and Practice, 217 (4th ed. 2010).