Tuesday, December 3, 2013


 The debate on government's role in economic development is a hot one back home. We have a nagging feeling that all these grants to business aren't doing much, and when something clearly goes south like ATCON, Atlantic Yarns et al, we can even get pretty mad.  Yet the counter argument, asking if we are ready to accept that government does nothing but trust the market, always seems a bit too optimistic for a have-not province.

Well, today I met leaders at two economic development agencies that might help us find a third way on the topic. Directors at the Minority Business Development Agency (MBDA) and the Small Business Administration (SBA) took the time to give us in-depth briefings on what they do.

The MBNA focuses on marginalized groups who may struggle to be fully included in a market economy -- immigrants, African-Americans, Native Americans, Hispanics and others are statutorily presumed to be marginalized and others can be added based upon objective criteria.  Newcomers used to thinking of the U.S. policy landscape as dominated by laissez-faire economists will be surprised to learn that there is bipartisan support for the notion that lack of connections to investors, mentors and capital holds some groups back. As long as the solution is to lower barriers to free market businesses and not redistributive social programs, there has been support for programs whichever party holds sway in D.C.

The MBNA does not give grants or loan guarantees to businesses that have minority ownership.  Rather, they work with potential and actual entrepreneurs to reduce the impact of lower social capital and mentorship by creating opportunities to access the competitive bidding process for government contracts, and leveraging those successes to increase the business's ties to larger private sector companies. 

The federal government here is very big on "set-asides" -- legal mandates to reserve a certain percentage of government work for small and medium enterprises, or SME's. These set-asides don't weight the scales in favour of some businesses over others the way anti-free traders suggest, but they limit some competitions to small or minority players. They then use these competitions to allow companies to register for ongoing assistance learning how to compete in this arena. 

One advantage of this over weighted criteria is that companies excluded by the criteria don't bid and lose to government-chosen competitors, but instead have an economic incentive to include eligible companies in their supply chain. A small minority-owned business may not be big enough to have a contract to build tanks, but it might make specialized parts that will then encourage a big company to make them part of their team. This also creates an incubator effect where companies begin to grow less dependent upon their government advisors and starts to benefit from connections with major industry players, which is pretty much the point.

These set-asides are combined with local Centers Of Excellence. These are local community institutions that commit to mentor and aid entrepreneurs in regions with specialized economic opportunities and growth industries. Post-secondary institutions and community agencies bid to get funding and must agree to deliver content and be measured on outcomes to keep their funding year-to-year. The more bottom-up process allows for local priorities to drive the establishment of these Centers in a way that gives more sway to local trends than a centralized plan of establishment might do. These Centres are the program delivery mechanism that identifies companies that will benefit most from help, evaluates proposals and trains entrepreneurs in contracting processes.

The SBA oversees set-asides across a variety of targeted areas -- minority-run businesses, economically-depressed zones, and under-capitalized entrepreneurs. In addition to ensuring compliance from all government departments in meeting the 23% set-aside target for contract competitions, they also oversee loan guarantees and small business advocacy within the political structure.

The neat thing here is that these agencies are targeting businesses in a different way than we do in New Brunswick.  Our Strategic Assistance Fund often aids existing businesses that are failing or mobile companies that demand incentives to choose New Brunswick.  Recognizing that small business creates a disproportionate number of new jobs and is the least likely business to leave its home region, the US programs actually target businesses at the point where accelerator funds have the greatest impact on new jobs -- companies still growing and at around $1million annual sales. These are called "Gazelles", and it may be telling that I never heard that word used in economic aid decisions in all four years I spent in government.

Even the loan guarantees that exist through the SBA have a more bottom-up process. There is no political involvement in the decisions. (The agencies, in all things,  may make decisions and simply report to political masters on overall results but no executive authority is involved in particular decisions to aid particular companies).   Lending institutions must bid to partner with government and put some money up themselves to help the growing business, so that the government guarantee never fully replaces the judgement of the lender as it did in some of New Brunswick's debacles.

In short, government aid to companies in these federal programmes is marked by these differences:

It is completely depoliticized at the granting level.
It targets only growing, never failing, companies.
There is an embedded advisory role for government in helping companies.
The use of set-asides in tendering preserves unweighted competitions but limits eligibility.
There is a finite time period in a company's life for help.
There is an advocacy, or ombudsman-like, role for agencies defending small business interests within the political process.

Could some of these ideas offer New Brunswick a third way between the failed process of political bailouts and a complete reliance on the vagaries of markets and Upper Canadian bankers?  I will confess that some of these lessons seem worthy of debate among our policymakers, business leaders and academics.

1 comment:

  1. It strikes me that all of these ideas warrant further discussion in the New Brunswick context.