Improving Ohio’s Economy: Second in a Series

In my last email, I discussed the emerging weakness in Ohio’s employment growth. Although the state’s growth matched the national average in the early years of the recovery, it has slowed significantly. Most areas of Ohio are doing even worse than this average because the average is increased by the strength of Central Ohio. As I discussed, this weak statewide growth has been a recurring pattern for decades.

Most areas of Ohio are doing even worse than this average because the average is increased by the strength of Central Ohio

I suggested that one way to address this weakness is to encourage cooperation among Ohio’s diverse regions and fill supplier gaps in one region with strong firms and industries in another region. (If you didn’t get that email, you can find it at http://regionomicsllc.com/improving-ohios-economy/.)

My second idea to improve the economy of Ohio and its communities is to foster entrepreneurship – all entrepreneurship.

Ohio has done this well with tech entrepreneurs. Initiatives such the Third Frontier, technology-focused business parks and incubators around the state, and the work to attract venture capital are all focused on building tech businesses. This is all for the good, but it addresses only a tiny sliver of the startup landscape.

The argument runs that these tech companies are the most likely to be “scalable” – having the potential of growing to national or international scope – and the most likely to generate high-paying jobs. Businesses serving a local market only circulate income that is in the community already. And in any event, the argument continues, these businesses just develop and grow on their own based on the community’s needs. Trying to force the process is a waste of time and ultimately sets firms up to fail. I used to make this same argument, but it is wrong. Here’s why.

Chain retailers and restaurants centralize purchasing, distribution, and business services in order to be efficient. Franchisees pay for these services with their franchise fees and payments to suppliers in many cases far outside Ohio. As a result, many of the dollars spent at these establishments leave the local economy immediately and consequently their local impact is zero.

Locally-owned businesses, on the other hand, build local networks of suppliers and service providers so that much more of the money from their sales stays in the local economy. The expenditures of the store or restaurant become income for these service providers. Profits and executive salaries stay local as well. In this way, a dollar’s worth of sales leads to far more than a dollar’s worth of regional income, supporting jobs and increasing income in the community rather than elsewhere.

My second idea to improve the economy of Ohio and its communities is to foster entrepreneurship – all entrepreneurship.

Civic Economics (http://www.civiceconomics.com/indie-impact.html) quantified this impact. Nationwide, locally-owned retailers recirculate an average of 48 cents of every dollar in their local economy, while chain retailers retain less than a third as much – only 14 cents.

The point is that growing and nurturing local retail businesses creates jobs and wealth by giving consumers additional choices, and thereby prevents dollars from leaving the local economy. That has exactly the same effect as bringing dollars into the community.

The current situation for entrepreneurship in Ohio is not good. Ohio’s large metros mostly rank toward the bottom in measures of small business development. Among the 100 largest metros nationwide:

In the birthrate of small firms (fewer than 20 employees): Columbus ranked 82nd, Cleveland ranked 87th, Toledo ranked 91st, Youngstown ranked 95th, Cincinnati ranked 96th, Akron ranked 98th, and Dayton ranked 99th.

In the percentage of all firms with fewer than 20 employees: Cleveland ranked 40th, Youngstown ranked 76th, Cincinnati ranked 77th, Columbus ranked 85th, Akron ranked 89th, Dayton ranked 98th, and Toledo ranked 100th – dead last.

In the percentage of all workers who are self-employed: Youngstown ranked 49th, Akron ranked 76th, Cleveland ranked 77th, Dayton ranked 83rd, Columbus ranked 88th, Cincinnati ranked 94th, and Toledo ranked 98th.

The result of the weakness in small business formation and concentration is that much more money than necessary flows out of Ohio communities and the state as a whole. As a result, income is lower, wealth is lower, and jobs are fewer.

The current situation for entrepreneurship in Ohio is not good

Solving the problem requires understanding why it exists. After extensive analysis, I am confident that economic strength (or lack thereof) has nothing to do with it, economic structure has nothing to do with it, and population size and structure has nothing to do with it.

However, metro areas in the Western U.S. are significantly more likely to have strong entrepreneurial development and presence, metros in the Midwest are far less likely, and those in the Northeast and South are somewhere in between.

Because nothing else explains it, I am wondering whether it could be the stereotypical caution and risk aversion of Midwesterners. If that is true, it is good news: attitudes can be changed far more easily than economic characteristics.

The result of the weakness in small business formation and concentration is that much more money than necessary flows out of Ohio communities and the state as a whole. As a result, income is lower, wealth is lower, and jobs are fewer.

Addressing this problem really deserves a post of its own, and will get one. Briefly, we need to increase both the supply of entrepreneurs and the demand for their goods and services. We need to expose more K-12 and college students to the idea of business ownership, we need to promote the many resources available to prospective and current entrepreneurs, and we need to encourage consumers and larger businesses to buy locally when it makes sense to do so.

More ideas to come. I welcome your reactions and thoughts.

About Regionomics® and Dr. Bill LaFayette

Regionomics is a firm specializing in community and regional economic and workforce strategy. Dr. Bill LaFayette, who founded Regionomics in 2011, previously spent 16 years in economic development organizations in Central Ohio. Bill holds a PhD in real estate economics from The Ohio State University and an MBA and BS, Summa cum Laude, in finance and accounting, both from Wright State University. Please visit http://regionomicsllc.com to learn more.