| First National Conference on the
Future of Australia's Country Towns
Economic globalization and the decline of the family farm over the past several decades have contributed to what Davidson has called "America's Rural Ghetto" (Davidson 1996). Rural poverty has become as intense, if not moreso, than that found in the United States's inner cities, and it has stubbornly resisted a variety of attempts at mitigation through economic development policies.
The latest strategy in good currency for addressing this problem is the encouragement of emerging, "home grown" enterprises in rural communities. The expectation is that these new ventures will provide jobs, or at least self-employment; will remain loyal to the places in which they were spawned as they grow; and will export their goods and services outside the community, bringing in much-needed income. Tactics employed to carry out this strategy include the development of business incubation programs, microenterprise programs, rural enterprise zones and empowerment communities, home-based business initiatives, and regional marketing cooperatives, among others.
Despite these efforts, rural enterprise development faces major challenges. Among these are the fact that economies of scale, or critical mass, may be harder to achieve; business services and other resources may be in short supply; capital for entrepreneurial endeavors may be lacking; agriculture, or another single industry, may dominate the economy, stifling innovation; and immediate sources of information and ideas may be limited (Lichtenstein and Lyons 1996). These are not the kinds of challenges that can be overcome by a single rural enterprise development service provider working in isolation, as too many of them attempt to do. Nor can this approach yield the economic transformation of a rural community, even when it is done well (Servon 1998).
This suggests the need for building social capital for enterprise development in rural communities. Social capital has traditionally been defined in terms of internal and external linkages (Coleman 1988; Putnam 1993; Flora 1998) relative to the community. Flora and Sharp (1997), Servon (1998) and others have extended the notion of community social capital building to enterprise development; however, very little attention has been paid to precisely how such an effort should be undertaken given the unique obstacles facing new rural enterprises.
This paper examines an approach to rural social capital building for encouraging enterprise development that is based on the specific needs of the entrepreneurs to be served as defined by the context in which they operate (Lichtenstein and Lyons 1996). This approach is applied when looking at the cases of a rural business incubation system in northeastern Alabama, a business incubation program serving rural Humboldt County, California, and a community-based economic development program in the Central Appalachian region. Several implications are drawn for successful social capital building for rural enterprise development.
Rural poverty has been, and continues to be, a nagging problem in the US in recent decades. This is due to a variety of reasons, among them the rise of the global economy and a very slow response in rural regions (Reid and Frederick 1989). Another contributor has been the decline of the family farm. In the state of Iowa alone, from 1981 to 1987, 20% of all farms closed operations. From the 1940s to the 1980s, the number of family farms in the US fell from 30 million to 5 million. During the same time period, the average farm size more than doubled (Davidson 1996: p. 35).
Yet another source of rural poverty is farm debt. Between 1971 and 1986, total farm debt jumped from approximately $50 billion to a figure in excess of $200 billion (Davidson 1996). These problems brought with them a substantial decline in rural population in the mid-1980s (Reid and Frederickson 1989) and an accompanying decline in retail business activity. Of Iowa's 955 incorporated cities and towns, 479 have less than 500 inhabitants. Iowa's rural towns saw the number of variety stores drop by 37%, building materials stores by 21%, men's clothing stores by 38%, grocery stores by 27%, and gas stations by 41%, in the decade from 1976 to 1986 (Davidson 1996: p. 55).
Throughout the 1980s, rural job and earnings growth lagged well behind that found in America's urban areas. In fact, rural per capita income fell during this time period relative to urban per capita income. The rural poverty rate was also 35% higher than the urban (Reid and Frederickson 1989).
At best, things only leveled off a bit in the 1990s. Family farms continue to decline in number. While there has been some growth in the number of jobs, they are not the kinds of jobs that will reverse rural economic decline. Davidson (1996: p. 174) notes that from 1989 to 1993, median income in rural areas actually declined by 3.2%. This was despite an increase in two-income households and a growing willingness on the part of residents to commute 50 miles or more to jobs.
Over the past several decades, a number of economic development strategies have been employed in an attempt to mitigate the rural problems noted above, none of which has proven successful in turning the US's rural economies around. Many of the earlier strategies were growth oriented, emphasizing the recruitment of businesses from outside the given rural community into that community (Meyer and Burayidi 1991). Rural branch plants of major corporations have been regularly closing their doors in recent years, leaving many residents who no longer have farm incomes, or whose farm incomes are insufficient to make ends meet, to look for other lines of work (of which there are few). Still other outside businesses, such as hog and chicken processing plants, have caused safety, health and quality of life problems that tend to negate their economic benefits (Davidson 1996).
In recent years, another strategy has emerged - one that is based in the kind of economic sustainability thought to be attainable through encouraging the creation and development of small enterprises (Lin, Buss and Popovich 1990). This strategy for rural development utilizes a variety of tactics, including business incubation programs (both residential incubators and incubators-without walls), microenterprise programs, rural enterprise and empowerment zones, regional marketing cooperatives, entrepreneurship forums, entrepreneurship training using new telecommunications technologies, Small Business Development Centers (SBDCs), rural manufacturing networks, and a host of others. In most cases, these tools are employed in isolation of one another. There are some exceptions to this, such as placing SBDCs inside rural incubators, or the work of such organizations as the Appalachian Regional Council (ARC) and the Mountain Association for Community Economic Development (MACED), which attempt to coordinate enterprise development activities on a regional scale. Nevertheless, much rural enterprise development activity is highly fragmented (Reynolds and White 1997), impeding its ability to transform rural communities from poverty to prosperity.
Lichtenstein and Lyons (1996: 223-224) have noted that in order to be successful in developing new enterprises at a scale large enough to significantly impact their economy, rural communities must address the barriers to successful entrepreneurship presented by the unique characteristics that make them a community: boundaries, size, composition, internal linkages among community members; external linkages between community members and other communities; and the level of local control over resources. Of particular importance are internal and external linkage characteristics. While, on the one hand, these characteristics can present enterprise development challenges, themselves, on the other, overcoming those challenges is the key to mastering all of the obstacles facing entrepreneurs in a given rural community.
This suggests that building edifying links between and among the various players in the enterprise development arena (i.e.: entrepreneurs, business development service providers, governments, private corporations, social service agencies, and others) can help to make the likelihood of successful enterprise development, at the scale necessary to create an economic transformation in a given community, much greater. In other words, the key to successful rural enterprise development lies in the building of social capital (Tolbert, Lyson, and Irwin 1998; Flora, Sharp, and Flora 1997).
Social capital has been defined in a variety of ways, but, at its essence, it is a system of relationships between and among individuals in a social network (Coleman 1988). The term "social capital" was first coined by Jane Jacobs, who said "....underlying any float of population must be a continuity of people who have forged neighborhood networks. These networks are a city's irreplaceable social capital." (Jacobs 1961: p. 138). Since that time the concept has been greatly elaborated upon by Coleman (1988), Putnam (1993) and others. At the heart of social capital are relationships between individuals and organizations based on expectations and obligations (norms) and trust (Coleman 1988). Individuals and groups do things for one another, thereby amassing credits. The resultant network of creditors and debtors (with everyone playing both roles) constitutes social capital (Coleman 1988). Social capital may be internal to a community or between that community and others outside its boundaries.
Social capital is commonly thought of as a fourth form of capital, along with financial, human, and physical. Like these other forms, its purpose is to make productive activity possible (Coleman 1988). Much of the general literature on social capital is focused on using it to build human capital, in the sense of developing stronger families and communities. However, in recent years, a literature has grown up around social capital building for community development (Servon 1997) and for economic development (Grisham 1999; Flora 1998; Tolbert, Lyson and Irwin 1998; and Flora, Sharp and Flora 1997).
This emerging literature emphasizes networks as a vital element of social capital. It affirms the strong relationship between social capital building and successful economic development (Flora, Sharp and Flora 1997). It also points out, however, that there are two types of social capital: vertical (or what Flora, et al. call "hierarchical social capital") and horizontal. The former tends toward maintenance of the status quo, while the latter perpetuates diversity and innovation. It is, of course, horizontal capital that is sought in enterprise development.
Flora, et al. (1997) call the social capital necessary for successful economic development "entrepreneurial social infrastructure". They assert that cooperation, not competition, is more likely to foster economic activity. Servon (1997), using an in-depth analysis of two exemplary microenterprise programs, points to the trust engendered by intra-program networks and the shifting of norms produced by inter-program networks as keys to success in fostering new businesses.
None of this research, however, has examined what obstacles facing entrepreneurs in rural communities should be addressed by this social capital building and how social capital building undertaken by enterprise development service providers can be built into the practices of those providers in a strategic fashion that helps their clients to overcome those obstacles. The underlying question here is whether or not all social capital is useful to enterprise development, or are certain types more useful than others. How can communities successfully use their enterprise development resources to build social capital that will truly help their entrepreneurs?
If useful social capital for enterprise development is to be built or taken advantage of (if already existing), then a clearer understanding of what rural entrepreneurs need in order to be successful must be developed. Lichtenstein and Lyons (1996) have created a tool for making this kind of needs assessment. They define an "entrepreneurial need" as the obstacle(s) that prevents an entrepreneur from obtaining the resource(s) she requires for successfully starting, growing and sustaining her business. They then use this relationship between business resources and obstacles to obtaining them to create a matrix that permits its user, employing a set of well-considered questions, to diagnose a given entrepreneur's needs (see Figure 1).1
As can be seen in Figure 1, Lichtenstein and Lyons identify four categories of resources that are crucial to the success of any business enterprise. The first is the business concept, which is the marketable idea for a product or service that becomes the focus of that business. Second are physical resources, including supplies, equipment, space, and money/financial capital, among others. Third are core competencies or skills, some of which are managerial, technical, and marketing/sales skills. The final crucial resource category is a market and its various considerations.
Lyons and Lichtenstein (1996: 27-35) identify nine general varieties of obstacles that stand in the way of acquiring these resources. They are:
- Lack of Availability (the resource is simply not available in the context in which the entrepreneur works)
- Lack of Visibility (the resource is available, but the entrepreneur is unaware of its existence)
- Lack of Affordability (the entrepreneur cannot afford the resource)
- Transaction Barrier (a problem with the exchange in acquiring the resource)
- Lack of Self Awareness (the entrepreneur does not know what resource (s)he needs)
- Lack of Accountability (the entrepreneur either will not take responsibility or does not know how to take responsibility for her/his resource needs)
- Emotions (the entrepreneur cannot cope emotionally with a problem)
- Lack of Skill (the entrepreneur is incapable of using the resource once (s)he obtains it)
- Lack of Creativity (the entrepreneur is unable to develop innovative solutions to her/his problems)
Lichtenstein and Lyons point out that different contexts will yield different obstacles to entrepreneurial success; thus, they have made their matrix sufficiently generic to permit flexibility of diagnosis. Once the entrepreneur's needs have been clearly diagnosed, they can be addressed strategically through specific practices. Therefore, solutions are no longer "cookie cutter" or "one size fits all" in nature but highly tailored to the context. This means that rural entrepreneurs can get assistance that helps them meet their unique needs.
Applying this to social capital building, once an entrepreneur's needs are carefully diagnosed, the service provider can then link that entrepreneur to the appropriate networks, internal and/or external, for overcoming the obstacles he faces, or build new networks as required. That is, the diagnosis not only can make the assignment of the entrepreneur to an existing help network more accurate and effective but can aid in identifying gaps in social capital for enterprise development as well. In this way, a service provider is not merely employing or creating social capital for social capital's sake.
In the following sections we examine this proposed approach to the effective use of social capital for enterprise development in rural regions by using it as a lens through which to view the efforts of two business incubator programs and a regional community-based economic development program located in three different rural regions in the United States. These cases were selected based on their reputations as being exemplary in their use of networking strategies to address rural enterprise development challenges. We employed in-depth telephone interviews with program staff to derive much of this information. We also used secondary sources (census data, descriptive material prepared by the programs, and web-based information) to gain a fuller understanding of the programs and the rural contexts in which they operate.
Business Incubators and Social Capital Building: The Cases of the Northeast Alabama Entrepreneurial System and the Arcata Foodworks, Inc.
A collaborative approach to enterprise development that has been growing in popularity throughout the United States and the world is the small business incubator. It has become an especially important tool in rural communities and regions in recent years. The business incubator is particularly conducive to social capital building because it rests on the concept of resource pooling - eliminating availability and affordability obstacles by permitting multiple enterprises to share resources.
Most business incubators today operate both residential and affiliate programs. A residential incubator takes its name from the fact that most incubators are buildings that have subdivided their space to permit occupancy by multiple small companies (the residents) at one time. This space is typically flexible in that it can be expanded or contracted to meet the needs of the individual client enterprise. It is also affordable because the rents that are charged are commonly at or below market rates in the local community.
In addition to space, most residential incubators provide their client entrepreneurs with "shared services", various forms of business management assistance, and financial assistance. "Shared services" is incubator parlance for a host of business services that an incubator offers its clients on a shared basis (e.g.: reception services, clerical assistance, use of fax equipment, etc.). These are typically charged for on a per use basis and are less expensive than they would be if the entrepreneur had to purchase them on the market. Furthermore, they are highly convenient because they are offered within the incubator facility (a one-stop approach).
Business management assistance is provided in a host of forms. The incubator staff typically acts as mentors, coaches, and role models to their clients. The staff often provides formal management training seminars and workshops as well. Sometimes members of the incubator's board of directors serve as coaches and mentors to client entrepreneurs. Many incubators utilize the services of the US Small Business Administration which maintains the Service Core of Retired Executives (S.C.O.R.E.). This program offers the management expertise of retired business people at no cost to the incubator or its clients. Additionally, local private management consultants may agree to provide formal training in exchange for access to prospective markets. Finally, a number of incubator programs approach business management assistance by making referrals to other organizations that provide it in the community. This latter strategy might be viewed as a form of networking among local service providers.
Incubator financial assistance also takes a variety of forms. Incubator program managers may act as liaison between their clients and the local banking community, lending the former added credibility. Incubators may also help to prepare clients for approaching bankers by critiquing their business plans as well as their presentations in advance. Some incubators maintain their own revolving loan funds to be used by their clients exclusively. Incubators that specialize in assisting technology-oriented companies may sometimes have venture capitalists in residence. Still other incubators take equity positions in their client businesses as a way of providing capital resources.
Arguably the most important service afforded by a residential incubator is the opportunity for networking among its tenants.
(Lichtenstein 1992). The very fact that these businesses all operate under one roof makes collaboration much more likely. These relationships may involve formal or informal partnerships, joint ventures, cash buy from/sell to relationships, bartering, or basic information exchanges (Lyons 1990).
Affiliate programs are attempts by residential incubators to reach out to entrepreneurs located elsewhere in the community. These affiliated companies are given access to all the services provided residential clients on a preset fee basis. This casts the net of enterprise development more widely by extending the network of small businesses community-wide. It also enhances an incubator program's capacity to build social capital for enterprise development through external linkages.
Two business incubation programs were studied for the purposes of this research. The first, the Northeast Alabama Entrepreneurial System is both a business incubator and a network of multiple incubators in the making. The second is the Foodworks Culinary Center of Arcata, California, an industry-focused incubator that has reached out well beyond the boundaries of its local community.
The Northeast Alabama Entrepreneurial System (the System) is centered in Anniston, Alabama, a town of approximately 26,000 people, located in a rural region 60 miles northeast of Birmingham and 100 miles northwest of Atlanta, Georgia. It is operated as a nonprofit entity and was initially funded with city, county and state monies. At present, however, revenues are covering operating expenses. The system was designed to create and link three business incubators located throughout the region. At present, only one of those incubators is in operation - Greenbrier Entrepreneurial Center in Anniston. Initial construction funds for the Greenbrier Center came from US Economic Development Administration funds. A second incubator, to be located in Gadsden, is in the feasibility phase of development (Williamon 2000). When complete, the System will be only the second incubator network in existence in the US. The first, the Northeast Mississippi Business Incubation Network, was designed and built by the same man who is the architect of the System: Mr. Giles McDaniel.
The Greenbrier Center has space for 19 residential tenants. It offers the basic shared services provided by most business incubators to their clients (described above). Its tenants represent a variety of small light manufacturing and service businesses.
The rural region served by the System is made up of three counties. The largest is Calhoun County, with a population of approximately 116,000 (US Department of Commerce 2000). This region is particularly interesting in that, unlike most rural areas, agriculture is not the prominent industry. Instead, the primary economic activities are manufacturing, retail trade and services. The area also has a strong military presence, with the Anniston Army Depot (employing 3,396 people) and Fort McClellan (2,509 employees) (Williamon 2000). While northeastern Alabama suffers from many of the same problems found in all US rural regions, per capita incomes are higher than in comparable areas because of the strong manufacturing and military economic base (Though, per capita personal income is still below that of Alabama, as a whole, and that of the United States.). This situation enhances the area's ability to support enterprise development because two major barriers to successful entrepreneurship in a rural region - dominance by a single industry and limited markets for goods and/or services - are partially mitigated.
Nevertheless, other barriers to enterprise development loom large. One of these is the common problem of insufficient capital for business start-up. Approximately 75% of the region's firms need outside financing to get their operations started; however, the majority do not meet the lending requirements of local banks (McDaniel 1999). The loans required are not large - in a range from $10,000 to $75,000 (McDaniel 1999). Using Lichtenstein and Lyons's diagnostic tool, northeastern Alabama entrepreneurs face affordability obstacles and transaction barriers to obtaining the necessary capital for start-up. They cannot meet the interest and collateral requirements of traditional lenders, and they are viewed as posing undesirable financial risks. Technically, the capital is available in this region; however, it is not accessible for these other reasons.
Another barrier to enterprise development in northeastern Alabama that is commonly cited is a lack of management expertise (McDaniel 1999). However, this does not appear to be a reference to inadequate local business consultation resources (which is a common problem in many rural areas). Instead, the lack of expertise described is on the part of the entrepreneurs, themselves. This is not uncommon among entrepreneurs in any context (urban, suburban or rural). Most entrepreneurs are skilled technicians but lack business management skills. It is more useful to think about this situation as involving self-awareness, visibility, and affordability obstacles to obtaining the core competencies and skills necessary for successful entrepreneurship. Local entrepreneurs in this rural region are often unaware that they need these skills. They falsely believe that all they need for a successful business is their technical expertise. Those who do recognize their management skill deficiencies may not know where to turn for help, or they may not be able to afford the help they can get from private business consultants.
Despite the relatively robust manufacturing and government sectors in northeastern Alabama, there still exists the perception (and in some cases the reality) that local markets for goods and services are limited (McDaniel 1999). With regard to some types of goods and services that are not necessarily complementary to the local economy, there is an availability obstacle - the market is not present locally, or not sufficiently large to sustain a business. However, in many cases, the obstacles to obtaining markets are a lack of visibility or transaction barriers. Many small firms are unaware of potential markets in the region, and those markets are unaware of them. Furthermore, some local start-ups face problems that may be race or gender based with getting access to markets, or that have to do with lacking required credentials.
The Northeast Alabama Entrepreneurial System, and particularly the Greenbrier Entrepreneurial Center which is currently in place, employ several practices aimed at addressing the various obstacles described above. Relative to the obstacles to acquiring capital, the System has established ties with the Northeast Alabama Regional Planning and Development Commission, a public regional planning agency. The Planning and Development Commission operates a revolving loan fund for the purpose of assisting new and expanding businesses in the region. Because the Commission does not have to pursue a profit or answer to shareholders, it can better afford to take the risk of lending to small businesses than can private lending institutions. The Commission can also charge lower interest rates and accept less collateral for its loans, lowering the affordability obstacle. The Commission is currently in the process of launching a micro-loan fund as well. It will make loans of $5,000 to $35,000 to small companies in the region. This will be yet another source of affordable debt capital in appropriate amounts for local entrepreneurs. The System also attempts to link its clients to US Small Business Administration lending programs, county and city loan programs, and private investors (McDaniel 1999).
In addition, the System helps by making its client companies more visible to lenders and investors. As Giles McDaniel, the System's Executive Director, points out, the foundation of the local economy is small growth companies. Yet, most people know nothing about these firms until they grow to the size of Microsoft. Ironically, despite the importance of these businesses, traditional lenders do not want to take the risk involved in financing them. The incubator program acts as a champion for their clients in this regard (McDaniel 1999). In a sense, the System is linking its clients to the local financial community. All of this represents an effort on the part of the System to build linkages within the community in order to help its clients overcome their capital acquisition obstacles.
The obstacles to obtaining business core competencies and skills are addressed by the System through training courses. Some of these are offered in-house at the Greenbrier Entrepreneurial Center. They included courses in bookkeeping, finance, and other basic management skills. Instructors are drawn from the community - consultants, attorneys, employees of local corporations, faculty at Jacksonville State University (a higher education institution located in the region), and so forth. Other training courses are offered out in the larger community. A prime example of this is the System's efforts in linking their clients to the Next Level program (McDaniel 1999). Next Level is a national management training course of study for entrepreneurs developed by US West (a major telephone service provider) and the University of Colorado. The program was brought to the area by a grant to the State of Alabama by the federal Appalachian Regional Commission. The System makes it accessible to its client entrepreneurs for $75 (the normal cost is about $300). Both of these practices build valuable social capital (both internal and external) for enterprise development and help clients overcome visibility and affordability obstacles to acquiring needed skills.
To assist its clients in overcoming obstacles to acquiring markets, the System acts "as an extra set of eyes and ears for the companies." (McDaniel 1999). This helps these entrepreneurs overcome the market visibility obstacle. Transaction barriers to markets are addressed by bringing incubator clients together with potential purchasers over lunch or in some other face-to-face encounter. The System also tries to open markets up to their clients by introducing them to business people in the same industry with whom a strategic alliance or joint venture might be formed. This gives the client's company the ability to pursue larger, or more complex, contracts than they might normally have the capacity to pursue. Again, the practices used involve networking. Contracts are identified and made by the System, and then it's left up to the client to carry them through (McDaniel 1999).
All of the practices of the Northeast Alabama Entrepreneurial System involve social capital building of some kind. In some cases, it involves linking clients with service providers in the region. In others, clients are linked to other local businesses for partnership purposes or as a way to open markets. The residential incubator, the Greenbriar Entrepreneurial Center, itself, connects client firms in productive ways.
These networks may be either formal or informal. Most of the System's networks appear to be informal. However, occasionally contractual relationships are entered into. To date, the System has made no attempt to create networks outside of its region, citing budgetary constraints (McDaniel 1999). This has precluded social capital building of the type that is external to the economic region. However, Giles McDaniel reports that they do keep in constant contact with service providers and others within their networks in the region (McDaniel 1999).
By its very nature, an incubator program builds social capital. However, the Northeast Alabama Entrepreneurial System seems to have the potential to do more than the average incubator. As it builds its multiple incubator system, linkages will be made between these programs located in different towns within the region that should further enhance the System's ability to assist its clients.
The fact that the Northeast Alabama Entrepreneurial System is not yet a complete system currently limits its impact on enterprise development in its region. This appears to be a function of limited resources. This problem probably serves to limit the System's ability to connect its clients to enterprise development service providers outside its own region as well.
The Foodworks Culinary Center (commonly referred to as the Foodworks) is located in northern California in rural Humboldt County. It is a residential incubator with an affiliates program. The residential program is situated in the small town of Arcata (pop. 15,000). The Arcata Economic Development Corporation (AEDC), which is a nonprofit planning and economic development organization that now serves all of northern California, created the Foodworks in 1991. AEDC's principal focus is serving small businesses in the region (foodworks.bizconnect.org/about.html). The Foodworks continues to maintain close ties to AEDC.
The Foodworks is an industry-focused business incubation program that serves food-processing companies. This is a variety of incubation that aims to bring businesses in the same industry together to share resources, ideas and information. It is a more efficient approach to incubation because its client entrepreneurs have similar business needs. This allows the incubator to be strategically focused in the enterprise development services that it provides.
The Foodworks's purpose is to diversify the region's economy by developing a food-processing micro-industry. This is very much in keeping with the predominant industry in the area, which is crop-based agriculture. It is also a recognition of the fact that there was already a considerable amount of food preparation activity taking place in the region (Palmquist 2000).
The Foodworks currently has 10 tenants and 20 other clients that use its facilities on a shared basis. Businesses located in the incubator include baking companies, a caterer, health food makers, a manufacturer of barbecue sauce, and a maker of cream cheese spreads, among others (foodworks.bizconnect.org/about.html). The incubator facility, itself, has 20,000 sq. ft. and cost about $1 million to build. A $100,000 grant from the City of Arcata, a $465,000 Community Development Block Grant from the City and a $450,000 loan from a nonprofit lending organization funded construction of the facility. The Foodworks also receives some state and federal funding. The program is not yet self-supporting (Palmquist 2000).
The region served by the Foodworks is situated along California's northern coast, about 300 miles north of San Francisco, the closest major city (Palmquist 2000). Historically, the principal industries in the area have been timber harvesting and commercial fishing. These have declined severely in recent years, however. Tourism is an emerging industry, and agriculture continues to be a staple of the economy. This region is very rural and quite isolated.
Perhaps the biggest barrier to successful entrepreneurship in this rural region is a limited local market and difficult access to external markets due to distance. Thus, a market of adequate size is not available and the exportation of goods/services is unaffordable to most of the region's small companies. This is mitigated only slightly by the fact that in the case of the Foodwork's clients, the product is specialty foods, which can command higher prices.
An obstacle for entrepreneurs in the food processing industry is the high cost of entry. Commercial kitchens are very expensive and must be properly maintained and regularly inspected. Most small operators cannot afford one of their own. According to Lichtenstein and Lyons's diagnosis this would be an affordability obstacle to a physical resource need. There are very few commercial kitchens in existence in northern California. Very few restaurants in the region are willing to rent space to food processing entrepreneurs after hours (Palmquist 2000). To make matters more difficult, it is illegal in California to sell food that is manufactured in the home (Palmquist 2000).
Another entrepreneurial obstacle in this region is a lack of adequate management skills on the part of entrepreneurs and a lack of management experts to advise them (Palmquist 2000). Thus, core management competencies may be unavailable or may not be visible to the entrepreneur in need of assistance.
Finally, lack of capital is a commonly cited barrier to successful entrepreneurship. However, as John Palmquist, the General Manager of the Foodworks, notes, the capital is available. The real problem is that business plans are often poorly done and management skills are lacking. When these latter deficiencies are addressed, local lenders, traditional and nontraditional, are willing to lend (Palmquist 2000).
With regard to the market access obstacle in the region, the Foodworks has tried several approaches. At one time, the incubator's manager set aside a percentage of his time to travel to major cities on the West Coast to open up markets to Foodworks clients. As an incentive, he received a percentage of the sales he was able to broker (Lichtenstein and Lyons 1996). This practice was abandoned when the manager at that time, who had marketing background, left the employ of the incubation program.
Most recently, the Foodworks has linked itself to a regional marketing cooperative, created in 1996 with a grant from AEDC, known as Humboldt Harvest Food and Beverage Association. Foodworks tenants could become members for a fee of $100. The idea behind Humboldt Harvest was that it would jointly promote the specialty food products of the region both within and outside the region. It was also a vehicle for providing its members with access to distributors and brokers who could help get their products to wider markets. However, this latter advantage turned out not to be as beneficial as originally anticipated. Despite the fact that Humboldt Harvest members were all in food processing, they had certain distinct needs. As John Palmquist (2000) puts it, "...there are those who specialize in wet products, those who specialize in dry products, and those who specialize in organic products, and they do not use the same distributors and wholesalers in each case." For this reason, membership in Humboldt Harvest has slipped badly. However, the cooperative still has a good image and has provided some valuable assistance to its membership, such as helping them to create web sites. Efforts are being made to revitalize it. The Foodworks does work extensively with UPS to try to mitigate the problem of market access.
The Foodwork's response to the obstacles created by the high cost of entry into the food processing business lies in its facility. The incubator boasts 15 commercial kitchen spaces. One is a shared use kitchen that includes public equipment, and can be rented on an as needed basis. The other fourteen are permanent spaces that are available for the exclusive use of individual client companies during long-term stays. The incubator offers electricity, gas and water; however, the tenants must acquire their own equipment (refrigerators, sinks, etc.). The Foodworks has a revolving loan fund available to clients that provides capital for equipment purchases.
In order to address the obstacles associated with a general lack of skilled management in the region, the Foodworks has created linkages with Humboldt State University and the College of the Redwoods to provide management skill building expertise. The Foodworks also has non-contractual relationships with local Small Business Development Centers. In addition, the incubator program is establishing an informal organization called the Consultants Network, which is designed to identify business management experts in the region and link them to client companies. The Peer Consultancy Networks developed by the Foodworks provide marketing and financing expertise and idea sharing as well (Palmquist 2000).
Similarly, the Foodworks tackles the capital obstacles faced by its clients through networking. While it operates its own revolving loan fund, it also helps clients acquire capital by improving their business plans and honing their management skills via the networks described above, which, in turn, opens up lending opportunities.
Through its alliance with AEDC, the Foodworks actively works to create and maintain linkages within the incubator program, within the food processing industry, and across city, county and federal agencies. John Palmquist (2000) emphasizes that the social capital building process is difficult and comes about only over long periods of time. He notes that it has taken the Foodworks seven years to build its various linkages. These connections extend well beyond Arcata to a six-county area.
Regional Community-Based Economic Development Programs and Social Capital Building: The Case of ACEnet
The third case to be explored is that of The Appalachian Center for Economic Networks (ACEnet). Members of its community who were concerned about the regional economy formed ACEnet in 1985. It operates as a nonprofit organization. It represents an approach to enterprise development that recognizes the strong connection between economic development and community development. As its name suggests, the entire mission of ACEnet is built around the concept of networking and the advantages that it offers when trying to help rural, often low income, entrepreneurs. ACEnet's web site sums this up as follows ( www.acenetworks.org):
Networking works most effectively, as Robert Putnam has powerfully illustrated in Making Democracy Work, in communities
that develop a history and norm of working together. It is increasingly clear that there is a direct connection between building healthy regional economies and increasing opportunities for collaboration and participation. We believe that building dense networks of diverse participants is a powerful strategy for asset building in low-income communities.
ACEnet operates in that portion of the massive Appalachian region (extending from Alabama in the south to New England in the north) known as Central Appalachia. Central Appalachia includes portions of the US states of Kentucky, Ohio, Virginia, and West Virginia. Most especially, however, the organization serves an eight-county sub-region in rural southeastern Ohio. This is a rural region characterized by extensive poverty. Because of its mountainous terrain, farming is small scale and not particularly profitable. Most farmers need a second source of income to make ends meet. Education levels are relatively low. Transportation systems are very limited, isolating the region and making it unattractive to large industrial employers.
Given these characteristics, much emphasis has been placed on entrepreneurship and enterprise development as the strategy of choice for bringing vitality to the economy. Yet, entrepreneurs face considerable barriers to their success. June Holley (1999) of ACEnet cites the culture of the region as chief among these. She says that the people of Central Applachia tend not to think like successful entrepreneurs. They are generally risk averse and not accustomed to thinking in an innovative fashion about solutions to their problems. Using Lichtenstein and Lyons's (1996) diagnostic matrix, described above, these entrepreneurs face accountability, emotional, and creativity obstacles to obtaining the core competencies/skills necessary to successful entrepreneurship. These tend to be obstacles that are internal to the entrepreneur himself, and can best be overcome via enterprise development practices that focus on providing support via interaction with others in a way that is empowering. This might include role modeling, information sharing, risk pooling, and so forth.
Another barrier to entrepreneurship in Central Applachia is the physical isolation created by the topography. There are very few large cities in the region. Most human settlement takes the form of isolated farms and very small towns. The mountains act as dividers between a series of small valleys (so small that they are accurately referred to by locals as "gaps"). These small pockets of human activity are sometimes so separated from one another that there is little or no interaction between them, let alone with the outside world. As an example of this isolation, researchers have encountered areas within this region that have their own dialects, some that sound very similar to Elizabethan English. This kind of isolation engenders self-awareness obstacles, as people in the region often have no idea what they need or what is possible in the realm of entrepreneurship. Furthermore, it makes the availability and affordability of certain crucial resources a major problem. Successfully overcoming these obstacles to entrepreneurship requires linking Central Appalachian entrepreneurs to resources outside of the region. It necessitates the pooling of resources to make them affordable, and it requires innovative approaches to addressing the transport of information and services into the region.
Yet another major barrier to entrepreneurship in this region is the general poverty of the area. This limits local markets and the capital available to entrepreneurs for starting and growing their businesses. These businesses are often small, making it difficult to engage in the research and development necessary to be competitive in global markets and to pursue larger contracts on their own. Thus, entrepreneurs face market availability obstacles that require them to try to sell outside the region. They also face availability, affordability and skill/capability obstacles to acquiring core competencies and capital.
Finally, the region is dominated by agriculture and extraction industries. This limits innovation and the diversity necessary for a healthy economy (Lichtenstein and Lyons 1996). This situation creates creativity obstacles to obtaining all needed resources and availability obstacles to acquiring physical, core competencies/skills, and market resources.
ACEnet, which is headquartered within the region in Athens, Ohio, a town with a population of approximately 25,000, has as its mission moving people out of poverty through employment or business ownership ( www.seorf.ohiou.edu). It pursues this mission by focusing on encouraging a variety of forms of collaboration, as noted above.
At the heart of ACEnet's enterprise development efforts are its two hubs - the Cooperative Business Center incubator and the Community Kitchen Incubator facility (Holley 1999). The business incubator concept has been defined in the previous section of this paper. The Cooperative Business Center is a mixed-use incubation facility that houses 12 small businesses. It provides a variety of business services to its client companies at below market rates ( www.seorf.ohiou.edu).
A kitchen incubator is a form of industry-focused business incubation, much like the Foodworks Culinary Center examined above. As was the case with the Foodworks, ACEnet's Community Kitchen Incubator focuses on the food processing industry. Access is provided to a licensed kitchen and to retail facilities to permit clients to test market their wares. The incubator provides other services that are more typical of traditional business incubation programs as well, including access to business equipment and storage, a library, and office and workshop space ( www.seorf.ohiou.edu).
Perhaps most importantly, both the Cooperative Business Center and the Community Kitchen Incubator bring entrepreneurs from the immediate area together. These include both tenants of the residential incubators and affiliate companies from the larger community. These clients are given the opportunity to get to know each other and to work together in a variety of ways. This is what makes these incubators "hubs" for networking activities ( www.seorf.ohiou.edu).
ACEnet pursues a variety of links among the businesses they serve in Central Appalachia. These include creative partnerships, joint venturing, resource pooling, and joint marketing efforts. ACEnet serves approximately 200 small businesses in the region. These firms are not only in the food processing industry, but in furniture manufacturing and computer services as well. Some examples of the linkages developed among various of these companies include:
- Partnerships among businesses engaged in the canning or bottling of products for jointly acquiring supplies. This reduces the costs to each of these companies considerably;
- A joint venture among twelve small furniture making companies to manufacture adjustable furniture for the physically disabled (something no one of these firms could undertake alone);
- Linkages between local restaurants and makers of specialty food products. ( www.seorf.ohiou.edu)
ACEnet provides business development assistance directly to its start-up and expanding clients in the form of guidance with business plan development, costing, technical matters, finance, and legal issues. In order to offer comprehensive business development assistance it networks with other service providers in the region. ACEnet attempts to connect their client entrepreneurs to these service providers and to link the providers themselves. With regard to linking providers, many of these networks are informal and involve Small Business Development Centers, banks, loan funds, graphic artists (for sales and marketing efforts), universities and technical schools. Routinely, arrangements are made with university professors of business to provide assistance to ACEnet clients through their classes. Upon occasion, more formal, contractual partnerships are arranged; however, these mostly involve joint efforts to pursue grant monies for maintaining or expanding service delivery, and not for the delivery itself (Holley 1999).
The building of these relationships has taken place over many years. Interestingly, though, it has reached a point where partnerships have become self-perpetuating. Recently emerging are what ACEnet staff call "network leaders". These are individuals who have taken it upon themselves to create additional networks for specific types of information and resource sharing (Holley 1999). Thus, social capital building for enterprise development in Central Appalachia has become engrained in the culture.
Relative to linking clients to service providers, ACEnet has created formal agreements of various kinds. For example, one such arrangement has been established with the Center for Innovative Food Technology in Toledo, Ohio and with Ohio State University. This gives food-processing clients access to leading edge thinking and technology in their industry that they would otherwise not be able to afford; thus, the social return on investment is good. The financial return on investment to ACEnet is excellent as well. For the $5,000 per year that ACEnet pays to maintain this relationship, ACEnet receives $25,000 per year worth of research and technical assistance for its clients ( www.seorf.ohiou.edu).
To link with providers outside its rural region, ACEnet brings clients together to attend trade shows, sell equipment on-line, and build relationships on-line. ACEnet also involves high school students from the region in computer-based business ideas. In addition, they have established a list-serv called FoodNet that links small food businesses owned by low- income entrepreneurs to specialty food markets across the country.
Besides business development assistance, ACEnet is involved in various vehicles for delivering capital to its client enterprises, a precious commodity in this region, as noted above. One of these vehicles is an effort to coordinate with traditional lenders in the region in developing less traditional capital sources. ACEnet also operates its own loan fund that is industry focused. It is in the process of building a fund to support product development by its client companies that it will support using royalties. It is also creating a new venture capital fund for the region ( www.seorf.ohiou.edu).
Maintaining these networks requires constant diligence on the part of the ACEnet organization. ACEnet employs a software package that permits them to regularly survey their clients on who they are networking with and the benefits of those linkages. This information can then be used to periodically evaluate existing networks and identify gaps in the system. This evaluation effort also provides useful data, such as the finding that ACEnet's fastest growing client companies are those that had ten to 20 times the networks of other clients. This kind of information can be used to demonstrate the value of networking in order to attract new clients and encourage the creation of new networks.
However, merely creating and perpetuating the creation of networks is not enough. Conflicts regularly arise that threaten the viability of these networks and of ACEnet, itself. ACEnet staff is frequently involved in clarification and conflict resolution efforts (Holley 1999).
ACEnet has also come to recognize that in order to continue to develop and sustain its business networks, the organization must build linkages with the regional community (Holley 1999). In this way, the community infrastructure necessary to a healthy economy can be developed and sustained as well.
It is clear that ACEnet addresses the obstacles faced by the entrepreneurs of the region it serves using a synergistic collection of practices that focus on a networking strategy. This is imminently reasonable given the isolated nature of the region and its deficient and widely dispersed resource base.
The three case studies elaborated in this paper have provided an opportunity to explore the concept of social capital building for rural enterprise development as an approach to addressing the unique needs of rural entrepreneurs as presented by the specific context in which they operate. Because rural entrepreneurs tend to be more physically isolated and, therefore, have less immediate access to markets and other resources, the kinds of networking and resource and risk pooling accomplished through social capital building, as defined in this paper, appear to be especially helpful to them. Each of the three cases demonstrates some success on the part of the enterprise development service provider in developing linkages that specifically address the needs of their client entrepreneurs.
It should be emphasized, however, that social capital can be difficult to build, and still more difficult to maintain. In all three cases, considerable effort has been put forth, and continues to be exerted, in this regard. Looking across the three cases, several implications for successful social capital building in the rural enterprise development arena emerge:
- The old adage about "it takes a village..." appears to apply. Success hinges on multiple linkages among numerous actors. ACEnet, which is the oldest and most established of the service providers studied, epitomizes this strategy. By continually looking for opportunities to build both internal and external linkages, they appear to have succeeded in developing a culture of networking in their region. They are no longer the only ones initiating these relationships. Furthermore, ACEnet uses a variety of vehicles for sustaining these networks, including computer technology.
- All three cases involve the concept of business incubation, which, as already noted, lends itself well to social capital building. Both the Northeast Alabama Entrepreneurial System and the Foodworks Culinary Center identify themselves as business incubation programs. ACEnet bills itself as a regional economic development system; however, it acknowledges its business incubators as being the "hubs" of its networking activities. In all three cases, however, the service providers are actively extending their programs beyond the traditional incubator model. The System seeks to build a regional network of incubators. The Foodworks has extended its enterprise development reach through its alliance with the Arcata Economic Development Corporation (which serves a six-county area) and by partnering with Humboldt Harvest. ACEnet has made its incubators centerpieces for sector-focused manufacturing networks, based on models created in northern Italy and in Denmark ( www.seorf.ohiou.edu/~xx001/history.html). In describing this approach, ACEnet points out the following:
"The major difference between this new paradigm and previous economic development strategies is that it is not based on implementation of new structures, such as business incubators or revolving loan funds. Rather, the new paradigm focuses on implementing new processes - or system dynamics - in the economic development community, enabling it to respond and improve on a continual basis." ( www.seorf.ohiou.edu/~xx001/history.html)
- In two out of the three cases an industry focus appears to be a key element of the enterprise development strategy. The Foodworks's operations and networks are built around developing and growing a food processing industry in its region. Food processing is one of three industries that ACEnet fosters (Furniture manufacturing and computer services are the other two.). In both cases, these service providers find that they can more efficiently and effectively meet their clients' needs by focusing on industry sectors, particularly when those sectors are selected strategically for their compatibility with existing economic activities in the region.
- In all of the cases studied, social capital building practices are closely linked to the obstacles to entrepreneurship presented by the specific nature of the rural region. For example, entrepreneurs in Humboldt County, Califormia and Central Appalachia have limited local markets and are physically isolated from the nearest large markets. For this reason, the Foodworks and ACEnet have made extensive efforts to link their clients to external markets. This is less of a problem in northeast Alabama because of the strong local manufacturing base and military presence; however, the Northeast Alabama Entrepreneurial System recognizes a need to expand its clients' markets beyond the region. It merely does not have the financial resources to do so at this time. Access to affordable capital and skill-building resources is also limited in all three regions. All of the service providers have built, and continue to maintain, networks with nontraditional capital sources and with entities in their regions that provide business management assistance.
- It is apparent from these case studies that when it comes to finding ways to build the social capital necessary for successful enterprise development in a rural community, service providers must be just as entrepreneurial, if not moreso, as their clients.
- The type of social capital built must fit the situation. Informal linkages are most common and will suffice for many relationships. These involve situations where implicit norms and expectations govern. For example, information sharing among clients, resource-pooling relationships among clients, and simple referrals between service providers all lend themselves to informal networking. However, some relationships must be formalized to ensure their proper functioning. For example, it has been found that in some circumstances, cooperating service providers may have less incentive to provide quality service to the clients of other providers. Therefore, formal contracts are entered into to clarify expectations with regard to service quality. As another example, certain relationships between client companies require more formality. This would include joint ventures and formal partnerships.
- Building social capital for enterprise development is not a short-term activity. It requires diligence in maintaining the networks created over time. All three of the service providers under study emphasized the need to continually monitor relationships and resolve any conflicts.
- Davidson, O. G. 1996. Broken heartland: The rise of america's rural ghetto. Iowa City, Iowa: University of Iowa Press.
- Flora, J. L. 1998. Social capital and communities of place..Rural Sociology , 63(4), 481-506.
- Flora, Sharp and Flora. 1997. Entrepreneurial social infra-structure and locally-initiated economic development in the nonmetropolitan United States. The Sociological Quarterly ,
- Foodworks.bizconnect.org/about.hmtl. 2000. "Foodworks Culinary Center". March 27.
- Grisham, Vaughn L., Jr. 1999. Tupelo: The evolution of a community. Dayton, OH: Kettering Foundation Press.
- Holley, June, ACEnet. Telephone interview. Fall, 1999.
- Jacobs, Jane. 1961. The Death and Life of Great American Cities . New York: Vintage Books.
- Lichtenstein, G.A. 1992. The Significance of relationships in entrepreneurship: A case study of the ecology of enterprises in two business incubators. Unpublished Dissertation. Wharton School, University of Pennsylvania.
- Lichtenstein, G.A. and T. S. Lyons. 1996. Incubating new enterprises: A guide to successful practice . Washington, DC: The Aspen Institute.
- Lin, X., T. F. Buss, and M. Popovich. 1990. Entrepreneurship is alive and well in rural America: A four-state study. Economic Development Quarterly , 3: 254-259.
- Lyons, T.S. 1990. Birthing economic development: How effective are Michigan's business incubators? Athens, OH: National Business Incubation Association.
- McDaniel, Giles. 1999. Creator and Executive Director of the Northeast Alabama Entrepreneurial System. Telephone interview, Fall, 1999.
- Meyer, P B. and M. Burayidi. 1991. Is value conflict inherent in rural economic development?: An exploratory examination of unrecognized choices. Agriculture and Human Values , Summer, 10-18.
- Palmquist, John. 2000. General Manager, Foodworks Culinary Center. Telephone interview conduct on June 6.
- Reid, J. N. and M. Frederick. 1989. Rural America: Economic performance, 1989 . Washington, DC: United States Department of Agriculture, Economic Research Service, Agricultural Information Bulletin No. 609.
- Reynolds, P.D. and S. B. White. 1997. The entrepreneurial process: Economic growth, men, women, and minorities. Westport, CT: Quorom Books.
- Servon, L. 1998. Credit and social capital: The community development potential of US microenterprise programs. Housing Policy Debate, 9(1), 115-149.
- Tolbert, C.M., T.A. Lyson, and M.D. Irwin. 1998. Local capitalism, civic engagement, and socioeconomic well-being. Social Forces, 77(2): 401-427.
- US Department of Commerce. 2000. Bureau of Economic Analysis. Data for 1999.
- www.acenetworks.org. "Regional and National Collaboration". November 18, 1999.
- www.seorf.ohiou.edu/~xx001 . November 18, 1999.
- www.seorf.ohiou.edu/~xx001/history.html. "History". May 30, 2000.
- Williamon, Jennifer. 2000. Administrative Manager of the Northeast Alabama Entrepreneurial System. Telephone interviews conducted June 1 and June 5.
1 See Lichtenstein, Gregg A. and Thomas S. Lyons. 1996. Incubating New Enterprises: A Guide to Successful Practice . Washington, DC: The Aspen Institute. In this book, identify and define the major resources required by entrpreneurs. They also identify nine different general categories of obstacles, typically faced by entrepreneurs, to obtaining those resources.