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The Role of Small and Large Businesses in Economic Development

Nevertheless, a cursory look at these self-reported barriers provides interesting information. Distance from a bank is a much greater barrier in rural areas, as expected. Technological and other innovations that help overcome this barrier of physical distance could pay off—potentially increasing the share of adults us- ing a formal account by up to 23 percentage points in Sub-Saharan Africa and 14 percentage points in South Asia. Relaxing documentation requirements could also potentially increase the share of adults with an account by up to 23 percentage points in Sub-Saharan Africa. Perhaps even more important than barriers of physical access and eligibility are. | The Role of Small and Large Businesses in Economic Development By Kelly Edmiston Increasingly economic development experts are abandoning traditional approaches to economic development that rely on recruiting large enterprises with tax breaks financial incentives and other inducements. Instead they are relying on building businesses from the ground up and supporting the growth of existing enterprises. This approach has two complementary features. The first is to develop and support entrepreneurs and small businesses. The second is to expand and improve infrastructure and to develop or recruit a highly skilled and educated workforce. Both efforts depend in large part on improving the quality of life in the community and creating an attractive business climate. The reason for the shift in approaches is clear. Experience suggests that economic development strategies aimed at attracting large firms are unlikely to be successful or successful only at great cost. Smokestack chasing can be especially costly if it generates competition for firms among jurisdictions. Further because of the purported job creation role and innovative prowess of entrepreneurs and small businesses creating an environment conducive to many small businesses may produce more jobs than trying to lure one or two large enterprises. The hope is not Kelly Edmiston is a senior economist in Community Affairs at the Federal Reserve Bank of Kansas City. This article is on the bank s website at www.KansasCityFed.org. 73 74 FEDERAL RESERVE BANK OF KANSAS CITY only that new businesses will create jobs in the local community but through innovation some new businesses may grow into rapid-growth gazelle firms which may spawn perhaps hundreds of jobs and become industry leaders of tomorrow. This article evaluates this shift in economic development strategies. The first section describes traditional economic development strategies. The second section explores the role that small businesses play in creating jobs. .