Executive Summary

The Small Business Economy is a review of how small businesses fared in the  economy in 2005, in the financial markets, and in the federal procurement  marketplace, as well as new information about women in business. Chapters  6 and 7 offer guest contributors’ studies of, respectively, links between education  and entrepreneurship, and an approach to economic development that has  been called “economic gardening.” In its 25th year of overseeing the implementation  of the Regulatory Flexibility Act of 1980, the Office of Advocacy  takes a look back and ahead at ways to improve the regulatory environment  for small firms. Appendices provide additional data on small businesses and  background information on the Regulatory Flexibility Act.    

  The Small Business Economy in 2005    

  Three economic indicators key to an analysis of the economy’s performance  are output, productivity and unemployment. From 2004 to 2005, all three  were up, and 2005 was generally a good year for the economy, although a  deceleration occurred in the aftershocks of the late summer hurricanes. The  estimated number of small business starts in 2005, at 671,800, was higher than  the estimated number of closures, at 544,800, contributing to an estimated  total of 5.99 million employer firms—a new high. The estimated number of  nonemployer firms also reached a new high, at 19.86 million. The number of  self-employed individuals continued to increase. Over the 1995–2004 decade,  about 0.3 percent of adults per month became primarily self-employed.  Nonfarm sole proprietorship income was up 7.5 percent in 2005, and corporate  income, representing a mixture of large and small firm business returns,  was also up, by 16.4 percent.    

  Small Business Financing    

  Favorable financial conditions supported U.S. economic growth in 2005, in  spite of the effects of hurricanes and increases in energy prices. Real gross  domestic product grew at a rate of 3.1 percent in 2005 compared with 3.75  percent in 2004. Growth was supported by a relatively stimulative fiscal policy  combined with a tightening monetary policy. Long-term interest rates remained  fairly stable, and by the end of the year, both short- and long-term rates were  at about the same level. Net domestic borrowing by all sectors increased by  19 percent—a pace comparable to the 17 percent growth from 2003 to 2004.  Business borrowing was at an all-time high, primarily as a result of borrowing  by the nonfinancial corporate sector, but also reflecting high levels of borrowing  by nonfarm, noncorporate businesses. Commercial banks expanded  lending in 2005 and eased lending standards and terms on commercial and  industrial loans in response to competition from nonbank lenders. The relative  importance of banks of different sizes continued to evolve. Very large banks  accounted for 71 percent of total domestic bank assets and 39 percent of small  business loans under $1 million. Finance companies increased their lending by  6.8 percent in 2005. Public equity and initial public offering (IPO) markets  were active, although down somewhat from 2004. Total IPO offerings were  valued at $39.7 billion in 2005.    

  Federal Procurement from Small Firms    

  A number of efforts were under way in 2005 to improve the market for small  businesses contracting with the federal government. For example, regulations  promulgated with small business support in 2004 provided guidance to “other  than small” contractors about subcontracting with small businesses. Changes  in the subcontracting rule set the stage for the new Electronic Subcontracting  Reporting System, which became operational in October 2005. Efforts continued  to provide greater transparency in federal contracting. Changes to  the Central Contractor Registration process implemented in April 2005 are  expected to improve accuracy and reduce previously required data input. The  Office of Advocacy was also asked to participate in a supporting role with the  U.S. Small Business Administration (SBA) in the Service Acquisition Advisory  Panel, which will review laws and regulations regarding the use of commercial  practices, performance-based contracting, the performance of acquisition  functions across agency lines of responsibility, and the use of government-wide  contracts. As efforts to improve the small business contracting marketplace  continued, small businesses were awarded $79.6 billion in contracts in fiscal  year (FY) 2005, according to the SBA Office of Government Contracting  report based on the second year of data from the Federal Procurement Data  System-Next Generation (FPDS–NG). This represented 25.36 percent of  the $314 billion in federal prime contract dollars available for small business  competition.    

  Women in Business    

  Recently released statistics offer new information about women in the work  force and in the business community. Data from sources that include the  Current Population Survey, the American Community Survey, the Economic  Census, and the Survey of Business Owners are the basis for a review of the  characteristics of women-owned business and women’s participation in the  labor force. More than 51 percent of the population and nearly 47 percent of  the labor force are women. Between 1997 and 2002, the number of womenowned  firms overall increased by 19.8 percent, and the number of womenowned  employer firms rose by 8.3 percent. In 2002, women owned 6.5 million  or 28.2 percent of nonfarm U.S. firms. More than 14 percent of these firms  were employers, with 7.1 million workers and $173.7 billion in annual payroll.  Minority groups in the United States had larger shares of women business  owners than did the non-Hispanic White population: 31 percent of Asian  American and 46 percent of African American business owners were women.  Almost 80 percent of women-owned businesses in both 1997 and 2002 had  receipts under $50,000; most of women-owned business receipts were in the  wholesale and retail trade and manufacturing industries. In 2002 significant  proportions of women-owned businesses were in the professional, scientific,  and technical services.    

  Entrepreneurship and Education    

  A review of recent research on the impact of general education on entrepreneurship  suggests three generalizations, according to guest contributors Mark  Weaver, Paul Dickson, and George Solomon. First, the evidence suggests a  positive link between education and entrepreneurial performance. Second,  when the forms of entrepreneurship examined are divided into “necessity entrepreneurship”  and “opportunity entrepreneurship,” the relationship between  entrepreneurship and education becomes clearer. Third, the education-entrepreneurship  link is not linear—the highest levels of entrepreneurship are linked  to individuals with at least a bachelor’s degree, but higher levels of education  are not generally found to be positively linked to entrepreneurship. A review  of research specific to entrepreneurship education suggests a link, although no  definitive evidence, between such education and venture creation. The precursors  of entrepreneurial activity can be important and measurable outcomes for  entrepreneurship education, the researchers find.    

  Economic Gardening    

  “Economic gardening” is an entrepreneur-centered growth strategy that  balances the more traditional economic development approach of business  recruitment. The approach examined here by researchers Steve Quello of CCS  Logic and Graham Toft of Growth Economics, was developed by the city of  Littleton, Colorado, in 1989 in conjunction with the Center for the New West.  It began as a demonstration program to deal with the sudden erosion of economic  conditions following the relocation of the city’s largest employer. The  economic best practices that evolved in Littleton were associated with one of  three critical themes: infrastructure—building and supporting the community  assets essential to commerce and overall quality of life; connectivity—improving  the interaction and exchange among business owners and critical resource  providers; and market information—accessing competitive intelligence on  markets, customers, and competitors comparable to the resources historically  available to larger firms. Economic gardening is finding application in a number  of community settings, especially in the Western states.    

  The Regulatory Flexibility Act in Fiscal Year 2005    

  Enacted in 1980, the Regulatory Flexibility Act (RFA) reached a 25-year anniversary  in 2005. The SBA’s Office of Advocacy oversees implementation of the  law, which requires federal agencies to determine the impact of their rules on  small entities, consider alternatives that minimize small entity impacts, and  make their analyses available for public comment. President Bush’s Executive  Order 13272, signed in August 2002, gave agencies new incentives to improve  their compliance with the RFA. Advocacy efforts to implement the law resulted  in FY 2005 regulatory cost savings to small entities of $6.62 billion in firstyear  and $966 million in recurring annual savings. Pursuant to E.O. 13272,  Advocacy trained federal agencies in implementation of the law in FY 2005.    

  In response to Advocacy’s model state legislation initiative, 18 states introduced  regulatory flexibility legislation in 2005. The importance of state regulatory  flexibility for small businesses is demonstrated in a real life example from  Colorado. The Colorado Department of Revenue proposed an amendment to  a rule that would require hotels and restaurants offering resealing of opened  bottles to purchase commercially manufactured stoppers and sealable containers  such as bags or boxes. The overall cost of compliance for this regulatory  proposal was estimated at approximately $1.8 to $3.3 million. After discussions  with small business representatives and before going further with the rulemaking  process, the Department of Revenue agreed to revise its initial proposal.  The revised rule was a success for small businesses as it provided a more economical  way for them to comply with the rule while meeting Colorado’s policy  objective. The example demonstrates how agencies, as well as small businesses  in other states, would benefit greatly by implementing a comprehensive regulatory  flexibility system. 

The SMALL BUSINESS ECONOMY

Synopsis

The year 2005 saw a sustained economic expansion, which in many ways was a continuation of the previous few years. Output rose and equity markets inched upward while unemployment was down over the course of the year. The estimated number of firms and self-employed climbed. Growth was decelerating in the fourth quarter, most likely related to the devastating effects of Hurricanes Katrina and Rita.     Introduction    The small business universe is often hidden from view. Businesses in retail trade, an industry that is among the most visible of those inhabited by small firms, constituted just 12.9 percent of employer firms in 2003. Often small firms are difficult to view statistically as well: much of current federal data are in aggregate business statistics that do not separate out small and large firm sectors.  

 Both small and large businesses are important in the provision of goods and services. Most large businesses were once small, and many small business owners once worked in large businesses. The constant movement across size classes makes it difficult to determine the status of the small business sector from any one piece of data. Key indicators in taking the pulse of small business include the number of business starts and stops, and the availability of small business “fuel”—bank financing.  

 For research purposes, the Office of Advocacy often defines a small business as one with fewer than 500 employees. This definition results in about an even split between large and small businesses of private sector employment U.S. Department of Commerce, Bureau of the Census. For government program purposes, the U.S. Small Business Administration’s Office of Size Standards, www.sba.gov/size, lists criteria for small business size designation by industry. and output, with small businesses employing 50.7 percent of the private sector work force and generating about half of nonfarm private gross domestic product. This 500-employee threshold also means about 99.9 percent of businesses are small. The size difference between the average (mean) small and large businesses was stark in 2003, according to the latest U.S. Census Bureau data. The average small employer had one location and 10 employees, while the average large employer had 61 locations and 3,300 employees.  

 Although small and large firms differ by definition in size, they are affected by economic conditions in similar ways. A series of devastating hurricanes, increasing fuel costs, and an ongoing war had important effects on both groups in 2005.  

 The information presented here opens a window on the status and role of small business in 2005 and on government statistics available for further exploration. Additional numerical and historic data in Appendix A provide a further look at the small business marketplace.  

 Small Business in 2005

 It is often said that a rising tide lifts all boats. In the business community, the tide overwhelms about 10 percent of firms annually; these businesses are replaced by a slightly larger number. The smaller businesses come and go, and it is this turnover that is a great virtue of the small business sector, where struggling ventures are replaced by new ideas. Good economic news and strong economic indicators from small businesses do go hand in hand.  

 In analyzing the economy’s annual performance, three statistics—output, productivity, and unemployment—are key. From 2004 to 2005, output and productivity were up—as was unemployment (Table 1.1). So 2005 was a good year for the economy, although a deceleration was occurring; trends in these indicators were better in the 2003–2004 period than in 2004–2005. This is not surprising considering the economic aftershocks of Hurricanes Katrina and Rita in 2005. Real GDP in the fourth quarter of 2005 was half the increase of the third quarter. Unemployment did not decline from the third to the fourth quarter.  

 Small businesses, representing half of private sector employment, were at the center of output, productivity, and unemployment changes; but as these figures are not broken out by firm size on a timely basis, other indicators offer more insight into the small business sector. In 2005 the estimated number of employer firm births, at 671,800, was higher than the number of closures, at 544,800 (Table 1.2). The net gain contributed to an estimated total of 5.99 million employer firms—a new high. The number of smaller ventures also reached a new high: the estimated number of nonemployers was 19.86 million in 2005. The number of self-employed individuals also increased.  

 Even with the prime rate climbing throughout 2005, financing was sought after to start and grow small firms. Bank commercial and industrial loan dollars were up 12.6 percent from 2004 to 2005. Bank loan officers reported stronger loan demand throughout 2005 and the loosening of credit standards.  

 Wages are important to small businesses because payroll represents a very large share of their costs; moreover, high wages may entice owners away from business ownership and into wage work. Wage statistics for the year are mixed, with aggregate figures showing solid gains while average figures showed declines. Aggregate wages and salaries were up 6.0 percent from 2004 to 2005, while inflation-adjusted average hourly earnings were down 0.7 percent. Benefits, which continue to be difficult for many small businesses to offer, saw gains that continued to outpace wage gains, and were up 4.1 percent for 2004–2005.  

 Even against a backdrop of rising energy prices, real estate costs, wages, and interest rates, nonfarm sole proprietorship income was up 7.5 percent. Corporate income, a mix of small and large business returns, was also up substantially during the year, by 16.4 percent.  

 Although the equity markets are dominated by large firms, they are home to an important group of small firms, often referred to as gazelles: these nascent entrepreneurs and companies are often the recipients of seed investments in the equity markets. In line with the increases in sole proprietorship income and corporate profits, the S&P 500 Index was up 6.8 percent and the NASDAQ was up 5.7 percent over the course of the year—solid increases, although still below their 2000 levels.  

 Demographics

 Overall, self-employment (as a primary occupation and including incorporated ventures) rose 12.2 percent from 1995 to 2004, with 10.2 percent of the 2004 work force choosing self-employment. The number of self-employed overall declined somewhat from 1995 to 2000, and then increased considerably from 2000 to 2004 (Table A.10). Over the 1995–2004 decade, about 0.3 percent of adults per month became primarily self-employed.  

 Women’s self-employment rate was below the overall rate but increased more than men’s self-employment over this period. Men represented two-thirds of the self-employed in 2004.  

 Large self-employment gains occurred in all nonwhite race and ethnic origin categories; however, self-employment rates remained low for Black and Hispanic populations. By 2004, White Americans still constituted most of the self-employed—88.3 percent.  

 Trends in business ownership by veterans moved in the opposite direction, with large declines in self-employment—22 percent over the 1995–2004 decade— but a high self-employment rate of 14.8 percent in 2004. Most of the declines in veterans’ self-employment were over the 1995 to 2000 period.  

 Individuals with disabilities that restrict or prevent some types of work sought self-employment opportunities at rates higher than the national average. These business owners had a 14.3 percent self-employment rate. The number that were self-employed changed little over the 1995 to 2004 period, gaining 3.8 percent.  

 Patterns in the age of the self-employed population matched findings from years past. Few younger workers are self-employed; self-employment rates increase with age; most of the self-employed are middle-aged; and in line with population shifts, self-employment is climbing substantially in the older age categories.  

 With respect to education as a component of human capital: like the general population, most of the self-employed—38.5 percent—have high school diplomas or less schooling. Self-employment rates increase with educational attainment, reaching 13.9 percent for individuals with master’s degrees or above. The increase in the self-employed from 1995 to 2004 was also in the higher education categories.  

 The Amazing Maze of Federal Data

 The federal government provides scores of statistical resources that can be accessed by small business owners, even from home.10 Many datasets are based on surveys such as BLS’s price indices; others are based on administrative data, such as the Internal Revenue Service’s Statistics of Income tax return counts; still others are based on a combination, such as Census’s Economic Census.  

 Finding the right source is often the challenge, with data dissemination scattered among the various federal agencies. The tried and true method of starting with the Census Bureau’s Statistical Abstract of the United States, which contains basic information from many federal and nonfederal sources, still works today.11 Researchers who need more detail can conduct follow-up work on the sources listed in tables with similar data. Umbrella government websites, in addition to general Internet searches, are other good methods to find data.  

 Multiple “quick glance” products from the government combine various data sources and provide state-level data. See Census’s state profiles (http://quickfacts. census.gov/qfd/), BLS’s state profiles (http://www.bls.gov/eag/home. htm), the Bureau of Economic Analysis’s state profiles (http://www.bea.gov/ bea/regional/bearfacts/statebf.cfm) and the SBA Office of Advocacy’s state and territory profiles (www.sba.gov/advo/research/profiles). Many government agencies also have electronic push technologies to inform users of newly released data.  

 The hunt is not necessarily over if the information is not published. For the truly adventurous, Census makes basic data from CPS available so individuals can create their own cross-tabulations.14 But the adventurous are advised to view the number of responses used to create tables to make sure that the results are representative.15 Census also will produce special aggregate data requests at cost, as in the Statistics of U.S. Business program, but users should recognize that they will not release figures that violate companies’ privacy concerns.  

 Users may be looking for one simple number or for large electronic datasets: both are available, but often the historic data are not in the desired format. Because data producers strive to provide statistics that are comparable over time, new data sources are rare and changes occur infrequently. With respect to business statistics, manufacturing and agriculture grabbed the lion’s share of resources years ago and have not been good at sharing. Data on small businesses or by size of firm have had an uphill battle ever since and many of the data programs are relatively new, making acquiring historical data from a few decades ago challenging.  

 Fortunately, the Kauffman Foundation and the National Academy of Sciences are collaborating in an examination of currently produced small business statistics: a committee report is expected to be released in the fall of 2007 with recommendations. Efforts to close some of the data gaps are currently under way with the expansion of the Bureau of Labor Statistics’ Business Employment Dynamics to include geographic data and of the Census Bureau’s Nonemployer Statistics to include dynamic (business entry and exit) data.  

 Continued Growth?  

 The Office of Advocacy does not attempt to read the tea leaves, but provides current small business statistics in Small Business Quarterly Indicators.18 Past quarterly indicators and information about firm size show that the small business sector has grown steadily if sometimes slowly over time, so deviations from this pattern would be unusual.  

 Somewhat surprisingly, a National Federation of Independent Business (NFIB) poll found that only 51 percent of small employers wanted to grow their firms; fewer than 10 percent aspired to become “growth firms.”19 This 10 percent is a small percentage of all firms, but certainly the group of firms largely responsible for changing the competitive nature of markets and developing new markets.  

 NFIB’s monthly survey found a 1.7 percent decline between 2004 and 2005 in the number of firm owners who thought it was a good time to expand. The lower level continued into the first few months of 2005. The surveys have also found that health care issues top small business concerns in recent years.20  

Economic Gardening:
Next Generation Applications for a Balanced Portfolio Approach to Economic Growth

Economic gardening is an innovative entrepreneur-centered economic growth strategy that offers balance to the traditional economic development practice of business recruitment. It was developed in 1 989 by the city of Littleton, Colorado, in conjunction with the Center for the New West. While it was introduced as a demonstration program to deal with the sudden erosion of economic conditions following the relocation of the largest employer in the city at that time, it has emerged as a prototype for a rapidly expanding movement of like-minded economic developers looking for additional methods to generate truly sustainable economic growth for their community, region, or state. The purpose of this article is to examine the history, context, and application of economic gardening principles and practices, as well as the evolving application of specific programs in cities, regions, and states beyond Littleton, Colorado. A basic tenet of the article is that smart civic leaders and decisionmakers of the future will adopt a portfolio approach to economic development that balances “outside-in” with “inside-out” strategies, tailored to local conditions, assets, and leadership.

Economic gardening is finding application in a number of community settings, especially in the Western states. Next frontiers lie at the state level, where several states have adopted statewide economic gardening principles and practices. More than simply a metaphor for explaining evolving priorities and practices in the field of economic development, economic gardening is emerging as a cohesive framework of proven techniques that both challenge and complement conventional wisdom in the field.

Background and Context

“Entrepreneurial innovation is the essence of capitalism.” —Joseph Schumpeter, 1934

The contemporary expression of economic gardening principles and practices has, at its core, elements common to longstanding tenets of free market economic theory. However, economic development as an art of public policy has evolved with changing economic conditions. Beginning in the 1 930s, economic development focused on business recruitment (“outside-in”) strategies. After the early 1 980s, entrepreneurship and small business policies and practices gained momentum. Now the focus is shifting to designing public policies to support various stages of business growth and growth companies, and fostering technology-based economic development (TBED). This evolution in economic development policy has its roots in the simple reality that state policymakers have a better understanding of the opportunity costs involved in incentivebased programs, and they recognize that the commitment of large businesses to a particular state, region, or community is more fluid than ever before.

This chapter is about the evolution of an experiment outside the mainstream of economic development that now offers insight and lessons learned, as economic development policy and practice adapts to what most agree is some form of “post-industrial economy.” This rapidly transforming U.S. economy is not about the demise of manufacturing but the emergence of advanced manufacturing methods, advanced business and financial services, exploding leisure and recreation industries, biomedical technologies and services, the information technology industry, etc. It is also about the dramatically changing proportions of firms in different size categories. The National Commission on Entrepreneurship noted in 1999: “In the late 1960s, one in four persons worked in a Fortune 500 firm; now 1 in 14 do.” In this context, constant innovation with commercialization becomes the hallmark of success, enabled by an entrepreneurial culture.

The economic gardening model developed in Littleton, Colorado, is instructive and timely, deserving wider consideration. What has evolved in Littleton, somewhat underreported in national and state economic development policy and practice, now deserves centerpiece consideration as state, regional, and local leaders play an increasingly competitive game in global economic redistribution. It is a game where reliance upon conventional recruitment and retention strategies is not as productive as in the past, and future success will require increasing innovation and adaptation from businesses and community leaders.

State/Local Economic Development Policy in Historical Context

The history of modern economic development policy and practice in the United States has its roots in Mississippi in the 1 930s. At that time, the prospects for relocating manufacturing from the North to the South were becoming apparent. To make known its low-cost operating environment, Mississippi introduced direct marketing and incentives through the BAWI program (Balance Agriculture with Industry). Mississippi’s approach soon took root in the rest of the South, with land giveaways, financial incentives, and tax breaks offered in various forms. The southern states continue with this traditional “outsidein” approach, but the practice (with incentives) has become quite similar across most states. Some now believe that an “inside-out” approach adds needed differentiation to an overall growth strategy.

With the back-to-back harsh recessions of 1 980 and 1 982, much of the Northeast and Midwest were particularly hard hit. At this same time the first “tech fever” emerged in economic development. Virtually all states wanted to model their future growth after the success of Silicon Valley in California and Route 128 in Massachusetts. This period was energized by the work of David Birch on the centrality of small companies and “gazelles” in job creation. Quite fresh and innovative, Birch’s insights influenced the development of new initiatives at the state level, including state-supported product development corporations, science and technology corporations, incubators, and early venture fund creation. By the end of the 1 980s, some state and local policymakers were becoming concerned with the generous handouts for both business recruitment and new business creation. In particular, some realized they did not have the resources or organization to compete successfully in business recruitment. The Littleton experiment grew out of such modifications to conventional economic development practices.

As a result of the dot-com and technology boom of the 1 990s, a second “tech fever” took hold. Its focus was even more technology- and venture capitalintense. Seeding university spin-offs and venture capital and angel networks, the trend especially targeted sectors believed to offer “winning technologies,” such as the biosciences. Cluster theory, as conceived and advocated by Michael E. Porter, has influenced this second tech fever, leading to de facto industrial policy in some states and regions.

While this second technology fever will inevitably play out in larger metropolitan areas and some college towns, it has eluded many small to mid-sized communities and rural regions. Some more fundamental rethinking is now under way: what are the essential engines of economic growth in a rapidly changing global economy? A small but growing community of advocates, representing cities and regions in every state of the country, has focused interest on the economic gardening approach of Littleton, Colorado, because it (1) is soundly based on economic growth principles, (2) requires fewer public resources than traditional recruitment initiatives, (3) is more focused on where rapid growth occurs—in second- and third-stage companies—and (4) does not require “picking winner industries,” but rather recognizes the critical role played by growth companies of all sizes across diverse sectors.

It is important to point out that business recruitment efforts remain very important to U.S. localities, regions, and states. In fact, with U.S. dollars accumulating in the hands of foreign investors because of large and continuing trade deficits, opportunities for foreign direct investment in the United States abound. In particular, it makes sense for states and large metro regions to be in the hunt for global capital on the move. Nevertheless, many localities and small regions, even small states, cannot afford to play this high-stakes game. What should they do? Reevaluate the dominance of their business recruitment efforts by adding a heavy dose of “growth from within.”

Today’s Economic Growth Focus: Second and Third Stage Growth, Growth Companies and Related Definitions

Stages of Growth

What counts for the future will be the number of growth companies or facilities located in a state, region, or locality. They can be locally owned, part of national chains, or foreign-owned. For example, the Denver Regional Council of Governments (DRCOG) reports for 2 002–2005 that 81 percent of net new jobs in the Denver region were attributable to 21 percent of all firms. These firms can be of any size, but “second-stage” companies are particularly strategic. The Edward Lowe Foundation describes the second stage of business development as a point in the business life cycle when the casual ad hoc methods of entrepreneurial ventures begin to fail. It is a stage when the complexity of employing an increasing number of workers and the related regulatory compliance issues begin to exceed the span of control of one owner or CEO. At this stage of business development, more formal systems and processes may be required to effectively manage the business if it is to sustain or accelerate its current rate of growth to the next stage of business. These companies have moved from where the founder is owner, operator, manager, innovator—all in one—to an operation organized around specialization and more formal organizational structure.10 While descriptive terms used to characterize this inherently fluid stage of business development can be helpful in providing a deeper understanding of second-stage businesses, a more precise definition that permits quantification is ultimately required to both identify and track this business segment. This report adopts a method advocated by the Edward Lowe Foundation in which employee count (10 to 99 employees) serves as a proxy for quickly and easily identifying this business segment (Chart 6.1). In 2 003, 1 9.7 percent of all U.S. companies were second-stage, growing numerically at 1 .23 percent per year (1993–2003), compared with all companies growing at 1 .05 percent per year.11 The only federal data of use at the subnational level to break business growth out by size of firm is County Business Patterns of the Statistics of U.S. Businesses, U.S. Bureau of the Census. A next data challenge is to identify the number and characteristics of growth companies within classes of firms by size. This is now possible with the National Establishment Time Series (NETS) database or similar datasets derived from Dun and Bradstreet sources.

A simple depiction of firm size by stage of development appears in Chart 6.1. Contemporary economic development policy and programs generally begin with the vertical cluster approach, shown as three vertical ellipses in Chart 6.2, and a related business creation or incubation strategy depicted as the small horizontal ellipse at the bottom of the chart. A balanced portfolio approach to economic development emphasizing economic gardening adds another element to that mix by elevating the importance of serving second-stage growth firms, represented by the large ellipse in the center of the pyramid. This “horizontal” entrepreneurship cluster, based on stage of development rather than vertical industry sector, highlights the stage-based threshold all growth firms pass through as they progress from being small enterprises to becoming large businesses. It is this orientation to understanding and serving local entrepreneurs, based on stage of development issues, that economic gardening programs seek to support and promote.

Growth Companies

 Growth companies can be found in all firm size categories. They are important because evidence is mounting that they are strong job generators, offer better paying jobs than the average firm, provide more opportunities for advancement, do more research and development (R&D), and export more. Most important, because they are more agile, they are ideally suited to the fast-paced business environment of the 21st century.12 Furthermore, since the late 1990s, research has revealed that growth companies frequently partner with other firms in creative ways—generating new ventures and deeper local supply-buy linkages with other firms.13 The more growth companies there are, the more the likelihood of local and regional interfirm collaboration. Most important, their CEOs and senior executives network extensively. Peer networks connecting business owners, vendors, civic leaders and entrepreneur support organizations have been identified as a key accelerator of economic growth.14 The network effect generated by a densely connected business community represents an intangible asset common to dynamic regions from Fairfax, Virginia, to Seattle, Washington.

Growth Strategy Portfolio

 The growth strategy portfolio is that mix of new business formation, retention, expansion, and recruitment strategies that best capitalizes on assets and opportunities for economic growth (defined as wealth and job creation). Like any smart investor in a fast-paced and largely unpredictable marketplace, civic, business, and government leaders must pay attention to achieving balance in their economic development investment portfolio, then fine-tuning it regularly through an ongoing strategic planning process.

The Littleton, Colorado, Story

Conventional wisdom suggests that “necessity is the mother of invention.” A public sector corollary to this notion would likely read “community crisis is the mother of innovative political policy.”

In 1 987 the state of Colorado was in the midst of a broad-based economic recession (see box).15 The city of Littleton, a suburb of Denver, faced additional economic complications as it tried to recover from the layoffs of several thousand employees by the community’s major employer. The magnitude of these challenging business conditions strained the resources of local residents and businesses and threatened to undermine the community’s overall tax base. Unfortunately, near-term prospects for recovery were not favorable.

During this state of relative economic crisis, community leaders in Littleton chose a strategic path that diverged from conventional economic development wisdom. Rather than seek a quick fix to replace lost jobs by offering relocation incentives and tax breaks to firms outside the region—an approach city leaders came to refer to as “economic hunting”—they embraced an alternate, longterm entrepreneurial strategy designed to generate new jobs from the existing base of businesses in the community. This approach, which they termed “economic gardening,” sought to cultivate an “inside-out” expansion strategy in contrast to conventional business recruitment efforts. This decision and the resulting policy implications proved to be significant for the city of Littleton and eventually for communities throughout the nation that have elected to follow a similar path.
 

The philosophical framework supporting Littleton’s economic gardening program offers a compelling argument for elevating the importance of entrepreneurship in contemporary economic development policy. The framework is both innovative and intuitively simple, suggesting that sustainable economic development policy must strike a better balance of applying “outside-in” and “inside-out” growth strategies, subject to the unique attributes and resources of a given community. The economic gardening policy the city of Littleton crafted in 1989 was based on a simple belief: small local entrepreneurial firms would be the engine for the creation of sustainable wealth and new jobs, and the role of the city was to provide a nurturing environment within which these small firms could flourish.

This shift in economic development policy away from the pursuit of and reliance upon large firms was fueled in part by the painful lessons learned, as city leaders saw how quickly out-of-market businesses could undermine the fabric of their local economy. Equally influential over time was the evolving research of David Birch, which confirmed that small businesses do, in fact, generate a majority of the net new jobs throughout most communities, particularly a select few high-growth firms he referred to as “gazelles.” Today, experts in the field of economic development take the general insights and supporting data generated by David Birch as axiomatic. However, during the formative years of the economic gardening experiment in Littleton, the practical application of those themes by economic developers outside of Littleton remained the exception rather than the rule.

As with any truly entrepreneurial venture, the process of development is adaptive by nature. Over time, the original model of economic gardening in Littleton was refined and evolved to meet the needs of the intended market—small business owners, particularly growth-oriented entrepreneurs located in the city of Littleton. What has emerged is a powerful and effective set of tools ideally suited for a new brand of home-grown economic development practices.

Practices

The economic gardening best practices that evolved in Littleton, Colorado, were ultimately associated with one of three critical themes:

1. Infrastructure: building and supporting the development of community assets essential to commerce and overall quality of life (e.g. roads, education, and cultural amenities);
2. Connectivity: improving the interaction and exchange among business owners and critical resource providers (e.g. industry trade groups, public sector supporters, and academic institutions); and
3. Market information: access to competitive intelligence on markets, customers, and competitors comparable to the resources historically available only to large firms.

Of these three critical themes forged over time through an adaptive process tied to customer input and feedback, improved access to market information proved to be of greatest value to the owners and operators of small businesses in Littleton, Colorado.

Affordable access to sophisticated market research tools, tools typically available only to large businesses, proved to be the centerpiece of Littleton’s economic gardening program. The original suite of market research tools offered by the city expanded over time and eventually included database and data mining resources, supplemented by the enhanced display capabilities of geographic information systems (GIS). These business development services, partially underwritten by the city to provide both free and discounted fee-for-service solutions, offered a degree of competitive intelligence that local business owners came to see as both relevant and beneficial.

Widespread support for Littleton’s economic gardening program among targeted business owners is understandable, given the degree to which the market research services offered by the city addressed stage-related issues faced by growth companies. Practically speaking, expansion-related challenges common to second-stage companies by definition involve the sales function and its relative impact on a company’s capacity to fuel job growth and wealth creation for the firm. The targeted delivery of applied research and sales-support materials to these targeted firms resulted in an unusually productive alignment of public sector capabilities with private sector needs. The subsequent success of Littleton’s economic gardening programs over time reflects the degree to which the city was able to deliver services to the growth companies most able to convert those services to the greatest number of net new jobs and related wealth creation.

Results

Since inception of the economic gardening program in 1 989, the number of jobs in Littleton, Colorado, doubled from approximately 1 5,000 to over 35,000 during a period in which the city’s general population grew at a more modest rate of only 30 percent.18 Sales tax revenue during this same period tripled from $6.8 million to $19.6 million, in spite of two major recessions and the adoption of a policy that eliminated the use of all incentives and tax breaks in the business recruitment process. While tracking the growth paths of firms in Littleton is beyond the scope of this paper, the creative use of the NETS database now makes such analysis possible.

Lessons Learned

Development of the economic gardening program in Littleton, Colorado, according to those involved, has been a journey in the strictest sense of the word.19 No roadmap or signpost existed to guide them through the process of designing and implementing their gardening programs. The journey has been anything but a straight and smooth path. While the Littleton, Colorado, development team acknowledges that the program remains a work in progress, they are also quick to point out that the lessons they have learned along the way can help others reduce the frustration associated with the inevitable wrong turns, potholes and dead-end paths associated with any journey into new and uncharted territory. The following “lessons learned” are presented as guidelines critical to designing effective and sustainable economic gardening programs. They are offered with the caveat that, ultimately, economic development is a “bottom up” phenomenon requiring the application of local knowledge and appropriate adaptation over time.

1. Growth companies matter: clearly define and understand the needs of the target market. Economic gardening programs cannot succeed without a clear understanding and commitment to meeting the needs of entrepreneurs— specifically, identifying and meeting the needs of growth-oriented entrepreneurs that generate a majority of the net new jobs and associated wealth at the core of any effective growth strategy. Commitment to this principle can be a politically sensitive issue, but it gets to the heart of what economic gardening is all about. Generally speaking, only a fraction of all entrepreneurs in a given community have the intent and capacity to build growth-oriented businesses. The goal is to identify them and serve them well.
2. Long-term commitment: seek to reconcile political and economic lead times. Economic gardening is a long-term strategy. It represents a lifelong economic development “lifestyle” change rather than the short-term economic development “crash diet” so often associated with recruitment and incentive programs. Unfortunately, the development cycle of gardening programs is longer than typical political election cycles. As a result, few supporters of a balanced “portfolio approach” to economic development will be in a position to reap the political benefits generated by economic gardening programs. All stakeholders in economic gardening programs must appreciate the cyclical disconnect associated with a long-term economic development strategy and be prepared for the inevitable pressures that will emerge. Consequently, economic gardening programs depend on advocacy beyond city hall and mainstream economic development organizations. Successful and sustainable programs require a long-term commitment by private sector leaders in the community, including a commitment to measurement of results, now possible with real-time retention and expansion web surveys and secondary data sources such as NETS.
3. Entrepreneurial climate: pay attention to the culture surrounding economic gardening programs. Economic gardening programs do not exist in a vacuum. As with other economic development programs, a threshold level of resources must exist. Unlike other economic development initiatives, however, economic gardening is most effective in regions having sufficient entrepreneurial spirit or “entrepreneurial DNA” already in place. The entrepreneurial capacity of a region includes both resident entrepreneurs and the degree to which the prevailing business culture is inclined to support those entrepreneurs. Unfortunately, while it is generally recognized that entrepreneurs are spread widely across all regions throughout the nation,20 the entrepreneurial culture required to effectively support growth-oriented entrepreneurs has been bred out of many communities through years of risk-avoidance or a misplaced confidence in the commitment large businesses hold toward assuring the long-term economic well-being of a given local community.
4. Leadership: identify a “champion” for the long term. Littleton has enjoyed the long tenure of key staff. As with anything new or unproven, the involvement and commitment of a recognized and respected local “champion” is critical to initial success. Often overlooked and unspoken in the process is the corresponding value of having management stability over time. Continuity of leadership at both levels both provides institutional memory and engenders the confidence of all stakeholders required to navigate the inevitable challenges that occur over time.

Does Littleton Owe Its Economic Progress to the Gardening Approach?

No definitive analysis has linked the economic gardening strategy of Littleton with its overall economic progress. Multiple factors contribute to a community’s economic change, so only the most rigorous econometric methodology could single out primary causes. But overall evidence indicates that economic gardening has most likely been a positive force in Littleton, serving as an affirmative catalyst for economic growth and encouraging a culture that supports entrepreneurship.

While Colorado and the Denver region have underperformed the United States since the 2 001 national recession, Littleton has performed remarkably well (Table 6.1).21 And since its introduction of economic gardening principles in 1 989, the number of net new jobs in Littleton has grown from 1 4,907 to 35,163, or 1 36 percent. (These numbers include wage-and-salary jobs plus self-employment.)22 This growth is approximately twice the rate of the Denver region, three times that of Colorado, and six times that of the United States.23 The growth can be partly explained by such factors as the general growth of suburban communities, Littleton’s strong concentration in certain growth industries such as business services, and a vibrant Colorado economy in the 1990s. Nevertheless, communities with healthy growth conditions can still fail to flourish because of poor local economic development policies. Clearly this has not been the case in Littleton: economic gardening, consistently applied over more than a decade, appears to have had very favorable consequences.

Littleton’s 35 percent job growth between 2 000 and 2 005 well exceeds that of comparable inner suburban Denver communities of similar size: Englewood (7.3 percent), Northglenn (6.2 percent), and Thornton (21.4 percent).

Insight

 These figures confirm a strong employment track record in Littleton, now over one full business cycle from the 1 991 to 2 001 recessions and beyond into the current U.S. and global economic expansion. Littleton appears to perform well in both good and bad times, partly because of its diversified economy nurtured by the economic gardening approach. But probably the most compelling evidence that Littleton must have been doing something right is reflected in the ongoing support the Littleton business community has given to this initiative. Several times when the city has faced budget constraints, the economic gardening program has contronted possible cutback or elimination. In each instance, the testimony and support of the business community has sustained the program. Clearly, businesses see the benefit, even while the program is supported by an optional tax on business activity, the local sales tax.

Littleton’s Broader Context—“Entrepreneurial Dynamism” in Colorado

 The economic growth of localities and regions is notably enhanced or enabled by a conducive, multi-region, or statewide economic climate. Littleton’s experiment has been aided by virtue of its location in a state that has been “on the move” over the past 1 5 years, notwithstanding a slowdown since 2 001. Colorado, in economic development terms, can aptly be described as a “break-away state.” Out of a troubling economic downturn in the mid-1980s, caused by a depressed energy and resources market, Colorado has found new vitality in technology-related and growth industries. The labor force has expanded with an influx of younger, well-educated workers, attracted, in part, by the state’s natural amenities, beauty, and quality of life.

From 1 990 to 2 004, Colorado’s per capita income increased 84.5 percent compared with 69.7 percent for the United States.24 Per capita income is a preferred measure of overall wealth creation. Further, employment growth has been strong. Between 1 990 and the third quarter of 2 005, employment covered by unemployment insurance grew 47.2 percent, compared with 21 .4 percent for the United States.25 Since the 2 001 national recession, Colorado’s growth has been somewhat muted but is still quite healthy, with average annual growth rates in jobs and output a bit less then one-half percent below the U.S. average.

Most notably, Colorado presents conditions conducive for growth, especially entrepreneurial growth. One measure of the entrepreneurial environment of states is the Kauffman Index of Entrepreneurial Activity.26 Using the Current Population Survey of the U.S. Bureau of the Census, the index measures the rate at which respondents in the sample shift from salaried or wage employment to starting a new business from one month to the next. The index is particularly good at sensing new business and sole proprietorship starts each month. Colorado presents very strong rates of such entrepreneurial activity, ranking second of all 50 states in 2 005. It showed particularly strong improvement from a score of 0.35 percent (U.S. average 0.30 percent) in 2 004 to 0.53 percent (U.S. average 0.29 percent) in 2005.

A second way of measuring a state’s entrepreneurial environment is Entrepreneurial Dynamism as reported in the Entrepreneurship Score Card published by the Edward Lowe Foundation, with analysis and research from GrowthEconomics, Inc.27 According to the Entrepreneurship Score Card, states are showing marked differences in small business and entrepreneurial performance. (See the appendix for a brief description of the Score Card.) The top 1 0 states in Entrepreneurial Dynamism for 2 005 were Massachusetts, California, New Mexico, Virginia, Maryland, Washington, Colorado, Utah, New York, and Rhode Island. Colorado scores in the top 1 0 on two of the three drivers that make up Entrepreneurial Dynamism: Entrepreneurial Vitality and Entrepreneurial Climate. In a third driver, Entrepreneurial Change, which measures recent growth in small business activity, Colorado rates in mid-range with a ranking of 26 out of 50.

Multiple factors can contribute to the changing entrepreneurial dynamics of a state or region, including many outside the direct control of the public sector or public-private partnerships. Rapidly changing local industry competitiveness, especially with respect to a changing global marketplace, can energize or enervate entrepreneurial response. Culture too, plays a big part. States with changing demographics experience different cultural dynamics regarding innovation, commercialization, and business creation. Notwithstanding these factors, it appears that those states experiencing high scores in Entrepreneurial Dynamism are well suited to local innovations that support small business and entrepreneurial development. In effect, the ambient state “entrepreneurial climate” sets the stage for creative local entrepreneurial development.

Colorado also performs well in the “Nexus” report.28 In early 2 005, the U.S. Small Business Administration’s Office of Advocacy and the Edward Lowe Foundation cosponsored a significant study of The Innovation-Entrepreneurship Nexus: A National Assessment of Entrepreneurship and Regional Economic Growth and Development. Authored by Advanced Research Technologies of Ohio, the research is based on an analysis of the U.S. Census database, the Longitudinal Establishment and Enterprise Microdata (LEEM) file, which makes possible tracking firm performance by size over time. In the study, 394 regions in the United States were compared using three indexes: the Entrepreneurial Index, Innovation Index, and Economic Growth Index.

Of the top 30 ranked regions, six were located in Colorado. This distinction positioned Colorado as the state having the largest number of top-ranked regions. Key findings from the study are that:

• Regions with innovation capabilities may not necessarily exhibit high growth;
• High growth is related to the connection between innovation and entrepreneurship; and
• Entrepreneurial vitality is a critical component of economic prosperity.

While considerable attention has been given to building development capacity through both research and development and entrepreneurship, the Nexus study findings draw attention to linking the two themes. Such a linkage would result in more “deals” for venture investors, rapid transfer from discovery to application leading to higher productivity, and higher levels of worker knowledge and skills, resulting in higher pay and higher profits. Winning states and regions appear to be those where innovation and entrepreneurial activity synchronize in self-reinforcing ways.

Of particular note is Colorado’s strong long-term showing in the growth of second-stage companies. Colorado’s second-stage companies outperformed the United States throughout the 1 990s in growth in number of firms, employment, and payroll (Charts 6.3–6.5).

Since the recession of 2 001, Colorado has underperformed the United States, likely because of the impact that recession had on Colorado’s burgeoning technology companies.

The Evolving Application of Economic Gardening in Other Regions

The economic gardening practices forged in Littleton, Colorado, continue to evolve. Evidence of this evolution can be seen in how the sophisticated competitive intelligence services originally conceived in Littleton have been further refined by communities throughout the country as each community seeks to customize its program to reflect local assets and needs. In each case, however, the guiding philosophy and principles of “inside-out” economic development remain central to all economic gardening initiatives. To demonstrate this evolution, the economic gardening programs of four communities other than Littleton have been selected as examples of emerging “best practices.” The four programs and their host communities include search engine optimization (Oakland, California), cluster development (Santa Fe, New Mexico), connectivity (Madison, Wisconsin), and regional delivery (Cheyenne, Wyoming).

Search Engine Optimization: Oakland, California

In 2 004 the Oakland, California, Economic Development office launched an economic gardening pilot program.30 The intent of the program was to encourage the use of business development principles that embraced the entrepreneurial themes common to the venture capital firms that proliferated in the region, rather than relying solely on conventional incentive-based practices. 31 The Oakland pilot program emphasized the use of information-related marketing resources similar to those found in Littleton, Colorado. The pilot program differed from the Littleton model, however, in offering consulting services related to search engine optimization, an expertise associated with that city’s specialized technology talent pool. This particular web marketing expertise, a natural complement to other sales and market information services valued by second-stage companies, represents an important adaptation to the economic gardening program originated in Littleton. The search engine optimization program adds value to participating businesses by increasing the effectiveness of their Internet marketing efforts through more efficient use of website structure, file naming conventions, page titles, keyword meta tags, description meta tags, image tags and text links.

Cluster Development: Santa Fe, New Mexico

Santa Fe Economic Development, Inc. (SFEDI), a New Mexico nonprofit corporation, is charged with the responsibility of leading economic development efforts in the region without compromising the community’s distinctive character. Striking a balance between cultural preservation and the relentless forces of progress presents a true economic development challenge. To bridge these related but often opposing views, SFEDI chose economic gardening as the long-term strategy for diversifying Santa Fe’s economy. It did so by crafting a plan that fused conventional industry cluster development techniques involving highly specialized economic inputs with economic gardening principles and practices.32 The resulting plan, involving a four-step cluster cultivation process, emphasized the importance of entrepreneurship and its “inside-out” approach to development. At the same time, the SFEDI plan required the rigorous application of cluster development techniques by recognizing the importance of supporting those clusters that had developed naturally in the region rather than seeking to create or compete for clusters based on their relative potential or current popularity among other economic developers. The four-step process, designed for long-term effectiveness, included cluster identification, cluster activation, cluster support, and cluster expansion. The ultimate objective of the program is to create a competitive advantage for the region based on the existing local business environment.

Connectivity: Madison, Wisconsin

Connectivity among business owners and the broader business culture supporting entrepreneurs is an important but intangible component of all economic gardening programs. In 2 004, the state of Wisconsin, at the direction of a newly elected governor, addressed this issue by establishing the Wisconsin Entrepreneurs’ Network (WEN) and a related program called the Wisconsin PeerSpectives Network.33 Both programs were designed to increase the density of connections and interaction among entrepreneurs and the broader community of organizations supporting entrepreneurship. The Wisconsin Entrepreneurs Network was designed to cast a wide net and improve referral links to information and service providers. The PeerSpectives program, a CEO peer-to-peer problem-solving resource, offered access to a narrow and highly targeted community of CEO peers. Taken together, the programs offered enhanced connectivity and exchange among a traditionally fragmented and isolated community of business owners and leaders.

Regional Delivery of Services: Cheyenne, Wyoming

The economic gardening program in Wyoming, a true statewide initiative, posed a set of challenges not faced in the entire history of the Littleton, Colorado, program.

The Littleton economic gardening program, for all its success in testing and delivering a suite of market information services, never dealt with the sheer scale of engaging and delivering that same service to such a large and geographically dispersed customer base. While the philosophy, principles, and proposed services of the Wyoming economic gardening initiative parallel that of Littleton, the greater challenge for the state had to do with logistics and customer service.

Responsibility for managing the 2 003 implementation of the program was assigned to the Wyoming Market Research Center (WMRC).34 WMRC, a co-venture involving the Wyoming Business Council and the University of Wyoming, modified program processes derived from Littleton by building a strategic distribution alliance with the Wyoming Small Business Development Center (SBDC) and its network of regional representatives. This distribution alliance effectively allowed WMRC to focus on its core competency of research and analysis and to outsource the sales and customer service aspects of the program.

The Georgia Story

The relatively rapid emergence, adaptation, and dissemination of economic gardening principles and related best practices throughout the country suggest a growing recognition among economic development leaders that entrepreneurcentered initiatives offer an important complement to conventional “outsidein” recruitment programs. Unfortunately, the adoption and implementation of those programs has been so recent that very little data exist regarding overall program effectiveness.

Many communities, especially in rural regions and small urban markets, have become more receptive to economic gardening programs, given the degree of difficulty they have experienced in pursuing conventional business recruitment programs. In many cases, the price competition among communities involved in business recruitment has become so fierce that some practitioners argue that the eventual winners, in fact, become the real losers over the long term. In this context, recent changes in the economic policy for the state of Georgia offer a refreshing counterpoint to conventional wisdom.

The state of Georgia, like most states, has a long history of pursuing industrial recruitment as its primary strategy for economic development. In 2 002, following the election of a new governor, a series of entrepreneur-centered programs was initiated to support the small businesses that constitute a majority of businesses in the state.35 Those programs, administered by the Georgia Department of Economic Development’s Entrepreneur and Small Business Office, eventually evolved to become a statewide demonstration of the economic gardening principles and practices created in Littleton, Colorado. In fact, the principles and practices conceived and tested in Littleton served as a model for the related programs proposed for Georgia. The key difference between the Littleton model and the programs designed for Georgia is the scale and operational complexity of administering a comparable program to a significantly larger set of stakeholders across a significantly larger geographical area.

In an effort to minimize the complications presented by these two substantial programmatic differences, the design and development of Georgia’s economic gardening program draws upon the “lessons learned” in Littleton following more than a decade of experimentation and refinement, and specifically addresses the three critical themes that comprise Littleton’s core principles.

Addressing the four lessons learned from the Littleton experience, the Georgia program:

1. Specifically defines its primary target audience as business owners having no more than 19 employees and a demonstrated desire to grow their business;
2. Acknowledges the long-term strategic nature of the initiative;
3. Communicates an intended outcome of “changing the culture of entrepreneurship in the state;” and
4. Demonstrates political support at the highest level by virtue of the endorsement it has received from the governor.

The Georgia program also has embraced each of the three core principles or themes identified by Littleton as essential for success by offering specific programs or resources; for example:

1. Infrastructure: Entrepreneur and Small Business Coordinating Network (ESBCN) and the “Entrepreneur Friendly” (EF) communities initiative;
2. Connectivity: Mentor-Protégé program; and
3. Access to market information: market research project.

Viewed together, the positioning and programmatic responses outlined in Georgia’s economic gardening program clearly address the “lessons learned” and related critical themes advocated by Littleton. The comprehensive and integrated structure of these programs and related resources suggest that Georgia’s economic gardening program is well positioned for success. Specific examples of each are outlined below.

Infrastructure

Infrastructure, from an economic gardening point of view, involves both conventional assets and services such as transportation and education, and related intangible assets and services such as financial resources and a business culture that supports entrepreneurship. While the state of Georgia is generally competitive in its delivery of conventional infrastructure, the intangible infrastructure it has developed to support entrepreneurship as a part of its economic gardening program shows great promise. Two specific examples include the Entrepreneur and Small Business Coordinating Network (ESBCN) and the Entrepreneur Friendly communities initiative.

The ESBCN is a multi-agency group involving state and federal agencies. The ESBCN is responsible, as its name suggests, for coordinating the state’s entrepreneur and small business initiatives, including the Entrepreneur Friendly communities initiative. The ESBCN offers value to entrepreneurs by acting as an advocate for their interests and streamlining access to the vast and often complicated process of navigating bureaucratic channels.

The EF communities initiative is a community-based program designed to enhance the business environment for entrepreneurs and encourage the inclusion of entrepreneurial and small business strategies into a region’s overall economic development strategy. 37 This program, early in its development, offers promise to the economic gardening effort for the state because it establishes a programmatic and staffing framework upon which to convey a variety of useful services and solutions geared to the target market.

The EF initiative includes a seven-step process which, when completed, allows a qualified community to access specific state resources and services useful to resident entrepreneurs (Chart 6.6).

Connectivity

While the ESBCN and the EF communities initiative both provide a degree of connectivity in the conventional sense, from an economic gardening point of view, connectivity relates to improving the density and frequency of direct links among target entrepreneurs, their peers, and related support organizations. The Georgia Mentor/Protégé program is an excellent example of this model. The program connects qualified entrepreneurs with their counterparts in larger firms with the intent of solving specific issues identified during an extensive interview process.38 Participants commit to an 1 8-month engagement cycle designed to identify strategies for accelerating growth, securing necessary resources, and defining new target markets.

Access to Market Information

The challenge of delivering relevant and timely market information, the cornerstone of the Littleton, Colorado, economic gardening model, becomes a daunting task when projected on a statewide basis. This is particularly true for a state as vast as Georgia. The lessons learned in Littleton, and subsequently refined when that methodology was applied to the state of Wyoming, demonstrated that the local model required adaptation for statewide delivery. In Georgia, this adaptive process will be mitigated to a degree by a phased distribution of the service in select EF communities.39 The EF community system and the 1 0 regional project managers assigned to serving local entrepreneurs will work to manage the overall volume of customers to match the capacity of the market research team.

Georgia’s Changing Growth Portfolio

Given the Littleton, Colorado, state experience, does Georgia possess the ambient statewide climate conducive for nurturing economic gardening at the regional and local levels? According to the Kauffman Index of Entrepreneurial Activity, Georgia does not score as well as Colorado, but is above the national average. In 2 005, Georgia’s index was 0.37 percent compared with the U.S. average at 0.30 percent, ranking it 1 9th of 50 states. In the latest Edward Lowe Foundation Entrepreneurship Score Card, Georgia is a runner-up to the top 10 states in entrepreneurial dynamism, scoring 3 of 5 stars and ranking 1 3th of 50. The Entrepreneurship Score Card indicates notable improvement in Georgia’s small business growth over the 2 001–2005 period. Georgia is quite diversified in the size distribution of its companies and has always had an aggressive approach to attracting investment from the outside in. Over the years, with considerable support from state government and utilities, Georgia has offered attractive incentives for direct investment. Nevertheless, Georgia presents healthy scores in entrepreneurial dynamism and appears to be moving towards a balanced growth portfolio where growth from within is gaining increasing support. Georgia’s scores in the Entrepreneurship Score Card are summarized in the appendix.

Most important for this chapter is how Georgia’s second-stage companies have been faring in recent years. The growth in the number of firms with 1 0–99 employees, as well as in the jobs they created, surpassed the U.S. average in the 1990s and since the 2 001 recession (Charts 6.7–6.9). Payroll growth in recent years has tracked the U.S. average closely, although it performed well above the national average in the late 1 990s. On average, Georgia has not attained the growth levels of Colorado. However, Georgia’s second-stage companies are presenting more robust growth in this decade compared with Colorado.

Georgia also scores reasonably well in the Nexus report mentioned earlier. In linking innovation with entrepreneurship, of the top 30 regions of 394, three were from Georgia.

It appears Georgia has strong entrepreneurial momentum and would do well to consider strategies to accelerate entrepreneurial growth as a complement to its ongoing recruitment efforts. Economic gardening offers considerable promise in Georgia.

Conclusion and Observations

The key conclusion of this report is that economic gardening, as formulated and implemented in Littleton, Colorado, has clearly passed the “beta stage” with flying colors. It is not only ready for application elsewhere; its principles and practices are being adopted rapidly based on its inherent logic and on a mounting body of supporting evidence. Most likely, gardening programs are best suited to regions and states already exhibiting healthy signs of entrepreneurial dynamism, like Georgia. Unfortunately, long-term definitive data are still scarce, but initial prospects and anecdotal evidence associated with economic gardening have been very promising. Ultimately, the prospects and future success of economic gardening practices are best expressed by the degree to which they can influence and complement existing economic development activity. Economic gardening has enough potential for spurring regional growth that industry professionals should be familiar with its principles so they can recognize situations where its best practices could be applied. Specifically, economic gardening can influence the dialogue within communities regarding the appropriate mix and allocation of economic development resources—encouraging the adoption of a balanced portfolio approach that generates long-term wealth and well-being for all citizens.

Limitations and Future Research

This report examined the origin, context and application of economic gardening principles and practices in selected U.S. locations. By design, this report was exploratory in nature and sought to identify the key themes and relative progress of this emerging practice rather than offer definitive answers to critical questions or proof of basic assumptions associated with the topic. Clearly, the next generation of research on this topic needs to quantify the assumptions and opportunity costs associated with economic gardening practices. To the degree possible, practitioners in the field currently attempt to measure the impact of economic gardening practices whenever those practices involve public sector resources or public policy review. Unfortunately, fundamental assumptions associated with economic gardening remain untested in academic circles because of the relatively recent emergence of the practice and the general absence of mainstream financial support for the topic among organizations historically associated with the funding of economic development initiatives. A short list of possible actions warranting further review includes the need to:

1. Quantify key assumptions associated with economic gardening principles, including:

• The role and relative economic contribution of high-growth, second- stage firms
• Any variation by region or by industry sector

2. Improve skills in measuring and assessing the receptivity and sustainability of a locale, region, or state, for economic gardening, including assessing:

• Extant growth by firm size using a microdata file such as the National Establishment Time Series.
• The long-term political and operational challenges confronted by “gardening” programs vs. conventional economic development initiatives.

3. Measure the comparative impact of economic gardening programs, including:

• The long-term return on investment and “total cost of ownership” of gardening programs versus conventional recruitment, expansion, and business creation strategies.