What Cities Should Be Doing for Small Business

Written by Janis Bowdler and Kim Zeuli

Originally published by Governing on November 8, 2016.

Small businesses are the backbone of urban economies: They play a critical role in creating jobs for local residents. Yet too often city leaders and economic developers are not prioritizing small businesses when allocating resources to drive growth, focusing their strategies instead on the attraction and retention of large businesses.

A new report by the Initiative for a Competitive Inner City may make public officials consider shifting these priorities. The report provides compelling evidence that small businesses rival, and often exceed, the impact of large businesses when it comes to job creation.

The research, conducted with the support of JPMorgan Chase, was released on the heels of the bank’s announcement that it was committing an additional $75 million to its Small Business Forward initiative, recognizing the contribution of small businesses to economic opportunity and reducing unemployment, especially for women, minorities and veterans.

ICIC’s report measures the current state of small business jobs in five cities: Chicago, Dallas, Detroit, Los Angeles, and Washington, D.C., and identifies key findings regarding small businesses and urban job growth.

In all five cities, the distribution of small businesses and large businesses is similar, with small businesses — those with 250 employees or fewer — representing at least 99 percent of all businesses in the city. Despite this parallel, small-business job creation varies across the cities ICIC studied, ranging from 48 percent in Dallas to 74 percent in Los Angeles.

• In four of the five cities, small businesses create most of the jobs: 58 percent in Chicago, 53 percent in Detroit, 74 percent in Los Angeles and 62 percent in D.C. In Dallas, small businesses provide slightly less than half of all jobs. Although “micro” businesses (those with one to five employees) make up the largest share of businesses in the cities ICIC studied, medium-sized businesses (those with five to 249 employees) are driving job creation.

• The importance of small business jobs is greater in the inner city. In four of the five cities, small businesses create a greater share of jobs in distressed inner-city neighborhoods than in the city overall: 70 percent in Chicago, 64 percent in Detroit, 77 percent in Los Angeles and 74 percent in D.C. Dallas is distinct in that large businesses employ more inner-city residents than small businesses, which only account for 38 percent of jobs.

• Inner-city unemployment is not insurmountable, and small businesses can play a key role in creating opportunities. In these five cities, a modest increase in small-business jobs could create enough employment opportunities for all unemployed inner-city residents. In four of the five cities, this growth translates to only about one additional employee per small business. Of course, this is not to suggest this growth will come easily for these small businesses, many of which have fewer than five employees. With relatively higher unemployment, Detroit would also require more aggressive small-business growth, just over three jobs per small business.

Despite the big impact small businesses can have on job creation, small-business support in most cities is an uncoordinated set of programs that focus only on the business owner’s education rather than on the larger business environment. City leaders will need to leverage new tools to maximize small-business job creation in their cities. ICIC offers five critical strategies:

• Create a comprehensive small business plan connected to regional and city economic assets.
• Expand contracting opportunities for small businesses so that they can compete on procurement contracts with government and anchor institutions.
• Design workforce programs for small businesses, since many do not have the resources or capacity to recruit and train new employees (especially those with barriers to employment).
• Coordinate resources and ease burdensome regulations by mapping and making more accessible the resources that already exist.
• Upgrade the inner-city business environment by improving infrastructure and neighborhood amenities to support small-business growth.

Big tax-revenue gains and economy of scale continue to shape how many economic-development professionals think about job creation. Yet ICIC’s report makes a strong case for city leaders to support the growth of small businesses with the same resources and intentionality as they do with their efforts to attract and retain large businesses.