Local Business Climate
The local business climate is often cited as a reason for some communities to be economically more successful than others. That reason creates a policy imperative to improve the local business climate. But the means to improve the local business climate are not always clear nor, where clear, easily implemented. In the first place, the elements that compose a positive local business climate may not be constant over time and space. These elements may vary from community to community, if not in kind, at least in emphasis or distribution. Further, the sequence of a healthy local business climate and local business success may be a “chicken and egg” question. Does success yield a healthy climate or the reverse? Such issues show that the state and local rankings that appear so prominently in business and economic development publications are little more than publicity gimmicks, often politically inspired. However, there is a subjective something called a local business climate, and the best ones to assess it are the people who operate within it. Many communities, even some states, are beginning to examine their business climates by considering local institutions and attitudes toward enterprise. Few comparative measures exist to help them. Thus, this issue of the National Small Business Poll attempts to establish national baseline measures against which to measure a Local Business Climate.
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Local institutions appear to play a large role in the local business climate and, therefore, should greatly encourage or discourage local business formation, operation, and growth. Some of these elements are more likely to support enterprise than are others. Yet, when small-business owners evaluate their local institutions, they do not sharply differentiate among them. The assessment of individual institutions appears moderately interrelated. That implies that these elements are either mutually supportive and re-enforcing, or small-business owners ignore or are oblivious to the differences.
Limited evidence suggests that small-business owners do not sharply distinguish among local institutions. While on the whole, small-business owners assign positive ratings to the individual institutions and infrastructure elements examined, no less than one quarter (nor more than one-half) assigns negative ratings to every one. Given that owners chose to locate their businesses in these communities, many owners either miscalculated these factors at the outset or thought them unimportant, or conditions changed subsequently.
Small-business owners give their most favorable assessment to local community spirit. Sixty-seven (67) percent agree, including 17 percent who strongly agree, that “a real community spirit exists” in the area in which their business principally operates (Q#1B). In contrast, one in five (21%) disagree.
Community spirit obtains a 2.40 assessment by averaging responses on a five point scale (“1” strongly agree to “5” strongly disagree with non-respondents classified as neither agreeing nor disagreeing). Owners evaluate no other element as favorably.
“The local business community works closely together” and “the local public school system works cooperatively with local business groups” are the two elements receiving the next most positive scores. Small-business owners rank them almost identically with the former averaging 2.63 on the five point scale and 59 percent agreeing (Q#1F) and the latter 2.64 with 55 percent agreeing (Q#1D). Collaboration (working closely together) among the local business community is likely more important to the economic success of local enterprises than many, including business owners, recognize. While individual businesses may compete vigorously for customers and sales, cooperation to improve the overall climate helps individual owners collectively compete against businesses in other locations and share the spill-overs that they and their brethren create.
Small-business owners have a curious and often inconsistent view of American education. They are more educated to a considerable extent than is the general public with half holding a bachelor’s degree including nearly one in five with a graduate or professional degree. They also believe education is critically important. But, they are not always pleased with what is taught, the way it is taught or who is doing the teaching. Yet, small-business owners agree that “the local public school system works cooperatively with local business groups.” They obviously do not think the public schools are as remote from the business community as they would appear to be. Forty-five (45) percent also agree that “area colleges and universities go out of their way to work with local businesses, including people trying to start them” (Q#1H). About 5 percent volunteer that there are no local colleges or universities. The 2.74 average evaluation ranks higher education at the top of the third tier of institutions creating a more favorable local business climate.
A majority (52%) of small-business owners agrees that “bankers and investors in the community go out of their way to help local businesses, including people trying to start them” (Q#1C). However, 30 percent disagree. The average ranking owners assign the local financial community is 2.74, the same as colleges and universities. The traditional tense relationship between bankers and small-business owners appear in these figures, especially on the negative side. Still, the average score suggests considerable perceived support.
A majority of small employers (52%) agrees that “community groups and organizations go out of their way to help local businesses, including those starting” (Q#1G). Community groups receive a 2.76 average score. The term “community groups and organizations” means different things to different people. In all likelihood, the term to small-business owners means organizations like the local Chamber, Rotary, or even the local economic development authority. It typically does not mean the social activist organizations that other interests often use to define community group. But the survey contains no data to determine the distribution of these two meanings among the population.
The local media completes the group of institutions and infrastructure elements that constitutes a third tier. Publicity is important to the local business community not only because of immediate sales interests, but for long-term understanding of the problems and opportunities involved in business ownership. However, local business competes with other interests, local and not, for space and/or time in the media. While a majority (55%) agrees that the local media does a good job covering local business news, 34 percent do not (Q#1A). A relatively small 9 percent do not have an opinion. Owners provide the media a 2.78 average rating, a bit above the 3.00 absolute neutrality number.
Least helpful to the local business climate are local governments. Half (50%) of all small employers disagree with the proposition that “local governments go out of their way to create a favorable business climate for local businesses, including people who are trying to start them” (Q#1E). Thirty-five (35) percent agree with the remainder neither agreeing nor disagreeing, nor expressing a view. The average rating for local government is 3.25, the only one of the eight elements evaluated falling to the unfavorable side of the ledger.
Owners of the largest small businesses, those employing 20 or more people, typically offer the most positive assessments of every institution or element of infrastructure. However, the differences between large and small are modest on most dimensions. The most important exception involves the support of local bankers and investors. Owners of the largest on average have a 15 percentage point higher average evaluation than owners of the smallest. The disparity is understandable. Larger small firms tend to be older and more established, and usually have more favorable balance sheets. Relations with the financial community, therefore, are likely to be more established and positive. The second exception involves the helpfulness of local colleges and universities. This exception is also understandable given that owners of larger firms tend to be more highly educated and that the expertise offered in them is usually more applicable to larger than to smaller firms.
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Local Values and Attitudes
Community values and attitudes play an important role in the development of local businesses, particularly in the more innovative ones. Because these values and attitudes are difficult to identify let alone quantify, hard to change in the near-term, and often must be tangentially addressed, they are often ignored. Yet, values and attitudes are very much part of the local business climate, and a critical factor in its long-term development.
Respect for local business owners and their success is an important community value supporting development. The reason is that most people prefer to enter occupations or activities that peers hold in esteem. Many find respect is an important social reward. Where respect for successful business owners is pervasive, a series of role models and possibly mentors are available. The following three propositions, therefore, address small employer views of the regard the local community has for people who own businesses.
Most local communities have notable examples of people who have earned the respect of their community through business ownership. Seventy-four (74) percent agree that their community has many examples of well-respected people who made a success of themselves by starting a business (Q#8H). Just 16 percent disagree, yielding almost a five to one positive ratio. The average rating of this proposition on a five point scale is a very favorable 2.28. Thus, the overwhelming majority of communities have prominent citizens who put themselves in that position, at least in part, through business ownership.
Two-thirds (67%) agree that people with successful businesses get a lot of attention and admiration in the community (Q#8E). People know who they are for the positive contributions they have made. This proposition averages 2.39 on a five point scale, also very favorable. However, just 53 percent agree that most leaders in the community are people who own their own businesses (a 2.74 average) (Q#7B). The degree of urbanization is highly associated with those in rural areas much more likely to provide community leadership.
Receptivity to change is increasingly considered an important ingredient in local economic development. Change implies acceptance of new ideas and the people who bring them. New blood in the community on a periodic basis is therefore likely to stimulate change and growth. The more locals are open to new people, the more likely newcomers will integrate and contribute – other factors equal. Seventy-four (74) percent claim that their business community is open to new-comers (Q#8D). No equivalent number from the perspective of new arrivals is available. Still, the 2.34 average is the most agreed upon proposition of the 17 presented in the survey. Few think their business community is closed.
Four propositions address the social and cultural values of the community. Each proposition embodies a series of ideas and behaviors that encourage or support entrepreneurial activity. In the opinion of small-business owners, the set of the four evaluated most likely to appear in their communities is personal responsibility. Sixty-five (65) percent agree that the social values and culture of the community stress the responsibility the individual has to manage his or her own life (Q#8I). Twenty-one (21) percent disagree, creating an average 2.50 score.
Closely related is the proposition that the social values and culture of the community emphasize self-sufficiency, autonomy, and personal initiative. Like personal responsibility, self-sufficiency, autonomy, and personal initiative contrast sharply with collectivism, dependence, and shared responsibility. These community values and behaviors are therefore likely to be associated with entrepreneurial activity. Sixty (60) percent agree that their community emphasizes these values (Q#8A). Twenty-four (24) percent disagree for a 2.62 average assessment.
Creativity and innovativeness are different concepts, though ones small employers’ score almost identically to self-sufficiency. The essence of entrepreneurship is doing something new or different in the economic/ business sphere. That places a premium on creativity and innovativeness. Fifty-eight (58) percent agree that the social values and culture of the community emphasize creativity and innovativeness while 26 percent disagree (Q#8G). The proposition’s average assessment is 2.64.
While the prior three propositions offer a support structure for entrepreneurial activity, they tend to be indirect influences. However, the fourth focuses on entrepreneurial risk-taking. It also is the one least frequently thought to characterize the local community. Forty-six (46) percent of small employers say the social values and culture of the community encourage entrepreneurial risk-taking (Q#8C). Thirty-four (34) percent disagree. The result is a 2.85 average evaluation.
Finally, more small employers disagree (46%) with the idea that young people in the community are encouraged to be independent and start their own businesses than agree (30%) with it (Q#8F). The proposition’s 3.20 average rating is the lowest of the set. It also suggests that as the community values and culture move away from broad concepts that underpin entrepreneurial activity to concepts more directly supportive of such activity, the perceived prevalence of the item declines. Should this theme stand more rigorous testing, additional evidence – in this instance empirically-based rather than the more common historically-based - would be available to argue the critical importance of a broad based cultural component in entrepreneurial activity.
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The Local Business Climate
Small employers typically feel good about the communities in which they are located. Sixty-five (65) percent report that their community’s business climate is favorable (Q#9). Of that group, almost one in 10 (9%) characterizes the climate as very favorable. Twenty-one (21) percent hold the opposite opinion and 11 percent fall in the middle. That means small employers are over three times as likely to term their community’s business climate favorable as unfavorable. A strong economy likely contributes to the strength of the overall assessment and any comparisons must take it into account. Still, many communities should take heart that their small-business owners believe that they are located in a good place to do business.
In this instance, the whole appears to be greater than the sum of its parts. The average favorable rating assigned the local business climate on a five point scale is 2.39. That score is more positive than all but one of the eight institutions and structures separately evaluated, and all but two of the nine values and culture sets separately assessed. Thus, local business owners feel better about the total package the community has to offer than its individual components.
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History in the Community
Prior research has established that most businesses are born, operate, and die in the same community; there is relatively little inter-community movement. Eighty-six (86) percent in this survey report that the business was founded in the community where it is now located (Q#2). Of the 14 percent who relocated their business into the community in which they now operate, 28 percent say they have done so in the last five years, 36 percent in the last six to10 years, another 28 percent in the last 11 to 20 years, and the remainder more than 20 years ago (Q#2a). While the number of relevant cases is small, it would appear that inter-community moves are steady and have not been influenced by shocks forcing clusters of moves.
The location of businesses has remained quite stable despite the fact that the community has often changed dramatically since the business was formed. Half (50%) think change has taken place in the community since they first started operation there (27 percent, dramatic change) and half think little or none has occurred (17 percent, not changed) (Q#3). A plurality (45%) assess any change experienced as resulting in a more favorable business climate, while 28 percent assess the change as resulting in a less favorable business climate (Q#3a). The remainder (27%) think that change in the business climate has not accompanied change in the community. However, assessing the distribution of favorable and unfavorable change must consider the likelihood that those experiencing an unfavorable change have a higher closure rate. The direction of business climate change appears unrelated to the size of community change.
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Changing Business Locations
Despite public official expressions to the contrary, the primary economic development strategy throughout the country remains recruitment of businesses located elsewhere. Recruitment appears in two forms - recruiting a business to move (in whole or in part) or recruiting a business to expand outside its present location.
Twenty-four (24) percent of small-business owners are currently planning or considering a significant expansion of their businesses (Q#4). The total rises to one-third among those whose firms employ more than 20 people. Most (69%) intending expansion plan to grow in their current community (Q#4a). That is also true of the typically more attractive larger, small employers. Still, 28 percent indicate that their expansion will occur outside their current community.
There are two principal reasons to look elsewhere. The first is a business reason of some type, such as proximity to a market or a supplier, which attracts them to locate elsewhere. Of those expecting to locate their expansion outside their current community, half (50%) report business reasons are pulling them elsewhere (Q#4a1). The second reason to look elsewhere is an unfavorable local business climate that is pushing them. The push could be a deteriorating local market, callous local officials, or any number of similar factors. Twenty-six (26) percent, or 2 percent of the entire population, say that their expansion is being pushed out of the community in which they are now located. Twenty-four (24) percent either do not know or refuse to answer. The unusually high non-response suggests that the question might not have been clear or their choice was not as dichotomous as it theoretically appears. Regardless, a significant number of local expansions will not occur locally, though the amount of direct influence local development officials have to shape those decisions is not obvious.
The second type of movement is picking up the business and taking it elsewhere. Thirteen (13) percent are now considering the option (Q#5). Given that 14 percent say the business moved from somewhere else, the number who report considering a move appears reasonable. Again, the primary reason for moving could be the pull of outside factors or the push of local factors. Differing from location of expansions, relocation appears much more frequently to be associated with an unattractive local business climate. Forty-seven (47) percent report they are considering a move due to a push while 31 percent indicate that attractive conditions elsewhere are pulling them away from the community (Q#5a).
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Changing Residential Locations
The residence and the business are the two most important places (in terms of time spent) in a small-business owner’s life. Any location decision affecting one, business or residence, could strongly influence location of the other. Under most circumstances, the nearer the two are, the better.
Most small employers live close to their businesses. Forty-seven (47) percent say that it takes them five minutes or less to drive from their residence to their place of business (Q#6). Many of these walk. The 47 percent includes 24 percent who operate home-based businesses (Q#D3). Another 20 percent drive to work in six to 10 minutes, meaning that two-thirds reach work in 10 minutes or less. Just 6 percent drive more than 30 minutes (one way). Those owning larger, small businesses are somewhat more likely to live farther away.
Seventy-nine (79) percent have not moved their personal residence since first occupying their current business location (Q#7). Of those who have changed residence, 12 percentage points have moved closer to the business while 8 percentage points have moved away from it. The data offer no reasons for the choice to move the residence nearer or farther.
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The owners of small firms often transact business outside of their local communities. Still, these businessmen and women are substantially more likely to be influenced by their local business climates than are firms with global operations. A local business climate, therefore, is typically of much greater concern to small businesses than to large ones, and smaller, small business than to larger, small ones. Since the vast majority of business starts are very small and formed by local people, the same conditions apply to those starting a new venture. Local officials, therefore, exercise their greatest influence, for good or for ill, over the local small business population.
Owners of operating small businesses generally believe that their local business climate is favorable. That should not be surprising. Most are operating successfully where they are located and the overall economy is currently healthy, meaning that it is also healthy in most localities. Those planning significant near-term expansions typically expect to site them locally and those who expect to site them outside the community typically note that business reasons are pulling them there rather than local conditions pushing them out. A small number plan to move their entire operation, almost equally divided between those being pulled out and those being pushed out. While local officials have a right to regard these data as positive, a claim that they are largely responsible is tenuous. Half of small employers disagree with the idea that local government in their area goes out of the way to create a favorable business climate. Every other group assessed on this metric, from the local financial community to the local public schools, score positively and often very positively.
It is important to recognize that the assessments of the various components of the local business climate reported above are made by people currently in business. Those considering a start may have a different opinion of the same business climate. For example, while those operating usually believe the local business community is open to newcomers, those trying to get in may have a different perspective and may not agree. Further, an empirically-based, objective assessment of the local business climate may differ from the assessment made by owners of operating businesses. Any difference between the two does not matter in the short term, however, because people react to what they believe rather than to reality, and the people who primarily matter in this instance are those making business decisions. That situation can change over the longer term as prospective owners or policymakers react to a changing, possibly more objective, assessment of the climate while experience may sway current operators to change their views. Finally, while the components of a local business climate can be objectively measured, the relative importance of each component is likely to differ substantially from business to business. An enterprise developing software, for example, is likely to be very sensitive to the availability of people with a specific set of technical skills while a brick producer is likely to be highly sensitive to energy costs. Neither is likely to be sensitive to the component highly valued by the other. Thus, the value of these operating owner evaluations is that they provide an average perspective of those who operate within them, meaning those who react to the economic, social and cultural signals it sends.