Rural Economic Development: Alliance and Joint Venture Implications
BUSINESS NETWORKS AND ECONOMIC DEVELOPMENT IN RURAL COMMUNITIES IN THE U.S.[1]
J. Kirk Ring
Department of Management and Information Systems
College of Business and Industry
Mississippi State University
Mississippi State, MS 39762
tel: 662-325-0700
fax: 662-325-8686
Ana Maria Peredo
Faculty of Business
University of Victoria
B.C. Canada
Tel: 250 - 4724 435
Fax: 250-721-6067
James J. Chrisman
Department of Management and Information Systems
College of Business and Industry
Mississippi State University
Mississippi State, MS 39762
tel: 662-325-1991
fax: 662-325-8651
and
Centre for Entrepreneurship and Family Enterprise
University of Alberta
Accepted for publication by Entrepreneurship Theory and Practicefor Fall 2009
1
BUSINESS NETWORKS AND ECONOMIC DEVELOPMENT IN RURAL COMMUNITIES IN THE U.S.
Many rural communities in the United States are economically depressed. However, while poor rural communities are geographically isolated and small, they are likely to be rich in social capital. We first argue that the nature of the social capital in such communities can either facilitate or constrain the development of business networks among entrepreneurs. We then explain the community-level conditions that might increase the probability of business network effectiveness. The primary opportunities that such networks can exploit and their potential spillover effects on economic development are also identified. Finally, we provide directions for research that can contribute to better public policy decisions.
INTRODUCTION
Dramatic changes have been occurring in rural America. Agriculture, which once represented a primary income source for 25% of the rural population in the early 1970s, now represents the primary income source for only about 10% of the rural population (Drabenstott, 2003). Although rural locations have disadvantages in terms of small market sizes, geographic isolation, and reduced access to skilled labor, technology, and equity capital, some regions still flourish with above-average levels of firm births and high-growth ventures, particularly in the retail sector (Acs & Malecki, 2003; Henderson, 2002; North & Smallbone, 2000a).
Nevertheless, patterns of development remain uneven. Drabenstott’s (2000) analysis suggests that as many as 60% of the rural places in the United States did not experience economic gains in the 1990s. Porter, Ketels, Miller, and Bryden (2004, p. 7) note, “The general consensus is that rural areas in the U.S. are underperforming metropolitan areas, and that the gap is widening.” Furthermore while acknowledging that some rural communities in the U.S. have done well in recent years, especially those with retirement-based economies, regional trade centers, or scenic attractions, Atkinson (2004) points to pockets of persistent rural poverty in areas such as Appalachia, the Mississippi Delta, the Rio Grande Valley, and Native American Lands. Thus, research on the challenges of rural development cries for attention.
In the U.S., where federal policies for venture and rural development are largely absent (Acs & Malecki, 2003), state governments have committed valuable time and resources to economic development programs in an attempt to revitalize rural communities (Falcone, Allen, & Vatter-Vance, 1996; Lyons, 2002; Henderson & Novack, 2003). Unfortunately, many of the programs created to alleviate the problems do not work very well (Aziz, 1984; Cornwall, 1998). Researchers suggest that networks of rural entrepreneurs may be part of the solution to the rural development problem (e.g., Keeble, Lawson, Moore, & Wilkinson, 1999; Malecki & Veldhoen, 1993; North & Smallbone, 2006). The convergence of this suggestion with analyses offered from a number of disciplinary perspectives such as sociology (Flora, 1998), public policy (Woolcock, 1998) and political science (Putnam, 1993), makes this proposal a prime candidate for further inquiry, as does the considerable attention paid to the idea by trade organizations in other countries (e.g., InterTradeIreland, 2005). Business networks offer myriad opportunities for overcoming the scale and capability limits inherent in rural enterprises. Indeed, the social capital inherent in rural communities can lead to utilities that affect behavior, resource exchanges, and collective entrepreneurial activities (Westlund & Bolton, 2003; Woodhouse, 2006).
Similar patterns of agriculture’s declining prominence and varying rates of growth have been observed outside the U.S. (Meccheri & Pelloni, 2006; Terluin, 2003). Beginning in the mid 1980s, interfirm collaboration as a means of rural development, became a widely explored option in Europe (Rosenfeld, 2001; Sommers, 1998). The northern Italian region of Emilia Romagna provided the prototype for networks of small, independent firms formed to enhance competitiveness. Major initiatives were undertaken, beginning in Denmark, to translate the Emilian model into other European countries. As a consequence of the initiatives in rural communities in Europe, the number of vertical, horizontal, and complementary business networks in those communities has increased in the past two decades (Keeble, 1997; Murdoch, 2000). Although programs aimed at fostering and improving business networks have yielded discouraging results in the UK (Huggins, 2001), the well-financed programs in Denmark have had high participation rates and positive impacts in a number of areas (Rosenfeld, 1996, p. 251).
However, efforts to import European network models into the U.S. have yielded only mixed and modest success (Rosenfeld, 2001; Sommers, 1998). While this might be a consequence of differences between the American and European situations (e.g., national policies, culture, community dispersion), or of problems in funding, implementing, and assessing the relevant programs, some research results suggest that the issue may be related to the heterogeneity of rural regions, a heterogeneity that exists whether one focuses on intra-national or international comparisons (Meccheri & Pelloni, 2006; North & Smallbone, 2006).
While research has advanced our understanding of rural entrepreneurial networks, there have been relatively few studies of rural entrepreneurship in the U.S. (Chrisman, Gatewood, & Donlevy, 2002). There also have been few attempts to develop models that would help explain the conditions within rural communities that give rise to entrepreneurial networks or influence their success, the major exceptions being the work of Flora and colleagues (Flora & Flora, 1993; Flora, Sharp, Flora, & Newlon, 1997; Flora, 1998), and Rosenfeld (1993, 1996, 2001). Furthermore, the work that has been done has largely focused on network initiatives induced by government agencies or community/industry associations (e.g., Huggins, 2000; Johannisson, Ramirez-Pasillas, & Karlsson, 2002; Sommers, 1998; Tillmar, 2006; Torre, 2006) rather than on the initiatives of individual firms. There also remains a need to tie together the knowledge gained about the influence of community-level attributes that contribute to network formation with the economic opportunities present in rural areas that make networks an attractive option from the perspective of both the individual firms and the community-at-large (Huggins, 2000; Phillipson, Gorton, & Laschewski, 2006).
Purpose, Contributions, and Scope
In this conceptual article, we contribute to scholarly thinking about the role of business networks as a form of entrepreneurship for enhancing rural economic development. To do so, we develop a model and propositions concerning the community-level characteristics that may favor or inhibit the formation and success of rural networks in the U.S, recognizing that some but not necessarily all of our conjectures may apply to rural communities in other countries. We further contribute to the literature by discussing the nature of the opportunities that must be available or created in order for network formation to yield economic benefits for individual firms and communities, as well as the spillover effects of networking initiatives. A significant aspect of the paper’s contribution is that it draws together the literature from entrepreneurship, sociology, and regional development to develop a more nuanced and comprehensive understanding of the resources present in many rural communities and the challenges associated with achieving an effective balance between the different forms of social capital needed for the economic cooperation of individual entrepreneurs.
Our model and propositions concern networks formed by individual entrepreneurs and their firms both because such networks have been described as a way for firms to overcome the kinds of resource and market limitations (Brush & Changanti, 1996; Forrest, 1990; Hoang & Antoncic, 2003; Lei & Slocum, 1992) that are inherent in many rural communities and because of the limitations of network-formation efforts induced by external agencies. We apply the work of Flora and Flora (1993) and Flora (1998) to argue that the likelihood of network formation in rural communities will be enhanced when the social capital of a community permits constructive conflict, inclusive interactions of diverse groups, and permeable boundaries. More importantly, we extend their work by explaining why the probability of commitment, communication, and goal compatibility among network partners should increase in rural communities that possess these attributes. We focus on these attributes of business networks because previous research suggests that they will positively influence network success (Das & Teng, 1998; Elmuti & Kathawala, 2001). Finally, we extend the thinking inherent in the proposed model to outlining a research program that could assist in the formulation of policy on the development of business networks for rural economic development.
For the purpose of this article we concentrate on rural communities in the U.S. with small, dispersed populations that are located within a county that is not adjacent to any county containing an urban area (Chrisman, Van Deusen, & Anyomi, 1992; United States Census Bureau, 2002). These rural communities are generally constrained in their ability to provide or obtain a critical mass of products or services for inhabitants owing to resource and market limitations. In the European literature such communities or regions are generally referred to as “remote” as opposed to rural communities that are “accessible” to urban areas (e.g., Keeble & Tyler, 1995; North & Smallbone, 2000b; Smallbone, North, & Kalantaridis, 1999).
Our focus is on how the social and economic characteristics of a community affect the formation and success of rural business networks. Because these networks tend to be composed of small and/or new firms where the owner-manager dominates decision-making and the nature of a firm’s relationship with both network partners and other external stakeholders, our discussion deals with individual entrepreneurs, and is therefore roughly synonymous with a focus on entrepreneurial firms (cf., Johannisson et al., 2002). Thus, our independent variables are community contingencies. Our dependent variables are the behaviors and decisions of individual entrepreneurs (or entrepreneurial teams) that affect the formation and development of networks among small and new firms within a given community in order to develop innovative responses to economic opportunities and threats, which thereby contribute to economic development.
In the following sections, we further discuss the problems of rural communities, briefly review the literatures on social capital and business networks, and then use the insights from those literatures to develop a model and propositions on entrepreneurial network formation in rural communities. We conclude with a discussion of research and public policy implications.
THEORETICAL SETTING
Distressed rural communities face many of the disadvantages of distressed urban areas in terms of lower levels of education and worker skills, lack of business and technological expertise, and limited capital to finance development (Henderson, 2002; Perry, 1984). The small size and geographic isolation of rural communities as well as limited access to human resources, markets, and institutional support mechanisms tends to exacerbate these problems (North & Smallbone, 2000a). Nevertheless, rural communities also appear to have some advantages such as labor force stability and costs, rural image, and amenity-based “countryside” capital (Garrod, Wornell, & Youell, 2006; Keeble & Tyler, 1995). However, the most important advantage of rural communities may be the layers of interconnected social relationships necessary for the development of social capital (Woodhouse, 2006), which is “an attribute of the social structures in which a person is embedded” (Coleman, 1990, p. 315). Ironically, the social capital inherent in rural communities is engendered by, among other things, the small size and geographic isolation of these communities (Peredo & Chrisman, 2006).
The social capital present in rural communities can be an important resource for the development of entrepreneurial ventures (Aldrich & Zimmer, 1986; Cornwall, 1998; Jack & Anderson, 2002; Peredo & Chrisman, 2006; Westlund & Bolton, 2003), which being a catalyst of change and a source of job creation, offers a potential solution to the problems of rural economic development (Birch, 1987; Kirzner, 1973; Leff, 1979; Schumpeter, 1934). However, for entrepreneurship to take hold and have an impact, two conditions must be met, both of which are difficult to achieve in rural settings and both of which are addressed in this article.
First, the proper stimuli are needed in a community to unleash entrepreneurial activity. It is one thing to propose entrepreneurship as a solution to rural economic development problems. It is quite another to alter local conditions and individual mindsets in a way that makes entrepreneurship more attractive and feasible. As suggested by Minniti and Bygrave (1999), the amount of entrepreneurship in a community is an important determinant of an individual’s decision to engage in entrepreneurship. The self-reinforcing nature of entrepreneurship in a community helps explain why some rural areas are more prosperous than others. Individuals in areas without entrepreneurial role models or an entrepreneurial culture are less likely to take on the uncertainty and risks of venture creation. Thus, community characteristics or policies that do not have a long-term positive effect on the level of entrepreneurial activity are likely to have only a transitory impact at best on economic development (Minniti & Bygrave, 1999).
Second, the entrepreneurial activity that does occur must lead to the creation of substantial enterprises. By this we mean that the ventures created must be innovative in terms of adding new value to the community rather than just duplicating or replacing the products or services offered by existing ventures in the “circular flow” (Schumpeter, 1934). De Soto (2000) suggests that the problem facing many impoverished regions is not the lack of entrepreneurship, but rather the lack of entrepreneurial endeavors that could move those regions to new levels of development (also see Sommers, 1998).
Peredo and Chrisman (2006) address these problems by discussing the facilitating conditions, characteristics, and processes of community-based enterprises. They suggest that when triggered by social or economic stress, small communities that are rich in social capital and are able to learn from collective experiences have the potential to both identify opportunities and marshal and coordinate the resources required to seize those opportunities. Peredo and Chrisman argue that such conditions can lead to the development of community-based enterprises, where the community becomes the entrepreneur as well as the enterprise. This collective action allows the community itself to become an endogenous factor in a holistic local development cycle that begins with entrepreneurial activity. However, the processes and outcomes they discuss require community-wide participation in an enterprise, embedded in a collectivist culture.
Not all communities possess the degree of collectivist orientation that appears necessary to build community-based enterprises. Indeed, individualism rather than collectivism is a dominant cultural attribute in the U.S. (Hofstede, 1993). Nevertheless, if effectively harnessed the social capital within rural communities may increase the odds of successful business networks (Flora, 1998; Flora & Flora, 1993; Flora et al., 1997), which may be more conducive to the cultures of rural communities in the U.S. Networks and community-based enterprises may provide similar economic development benefits since both forms of ventures facilitate the discovery and exploitation of clusters of opportunities for entrepreneurial pursuits. Furthermore, individualism does not preclude cooperation and networks of one kind or another appear to offer an acceptable blend of independent and cooperative behavior. Indeed, there is a strong tradition of co-operatives as a form of business in the rural U.S., with 40% of the rural population belonging to one or more of the 47,000 registered co-ops (Martin & Stiefelmeyer, 2001, p. 91). According to Rosenfeld (2001), this was among the factors that contributed to the interest in networks among rural development strategists.
In the following sections we provide a general discussion of social and business networks as a prelude to the development of our propositions on the attributes of rural communities that influence the formation and characteristics of business networks.
SOCIAL NETWORKS AND SOCIAL CAPITAL
Social networks consist of social relationships that bind together individuals and organizations in a given community (Granovetter, 1973; Laumann, Galaskiewicz, & Marsden, 1978). Networks imply embeddedness, which is a dependence on social relations among network members that both constrain actions and offer benefits (Granovetter, 1985). The constraints and benefits offered from the embedded nature of the network will vary based on the patterns and features of the interpersonal relationships affecting the characteristics of the network (Erickson, 1988). One such feature is the level of frequency and intensity in the relational ties between the members of a network, which can be either strong or weak. Granovetter (1973) defines tie strength as a compilation of emotional intensity, intimacy, time, and reciprocity. Members of a network with strong ties will have access to more information about events that occur in the proximity of that network, but will not necessarily have access to new information from outside the network. On the other hand, weak ties — the relatively infrequent and informal connections with acquaintances — can connect dense pockets of strong tie groups to each other, allowing access to more information and resources. Granovetter (1973) explains that the strength of weak ties lies with their ability to foster information exchange across networks. Weak ties are particularly important when new information surfaces. Without contact with other strong tie groups through weak ties, networks may become fragmented and incoherent (Granovetter, 1973).
While weak ties are important (North & Smallbone, 2006), in the absence of strong ties they are likely to be ephemeral (Woodhouse, 2006), providing information but not the social capital based on trust and reciprocity that may be needed to act upon that information (cf., Beyers & Nelson, 2000). Thus, researchers who have studied entrepreneurial and rural networks tend to agree that a balance of strong and weak ties is necessary for economic development (Hoang & Antoncic, 2003; Huggins, 2000; Westlund & Bolton, 2003; Woodhouse, 2006).
Building on the work of Gittell and Vidal (1998), and consistent with Granovetter’s (1973) distinction between strong and weak ties, most scholars now also distinguish between “bonding” and “bridging” social capital (Harper, 2001; Putnam, 2000; Woolcock, 2001). Bonding social capital exists within comparatively homogeneous, tight-knit groups, such as families, close friends, and neighbors. Bridging social capital, on the other hand, reaches beyond the tightly bonded group to more heterogeneous groups with looser connections, such as networks of acquaintances and associates. Thus, bonding social capital tends to emerge from strong tie networks and provides the “glue” needed to link community members together (Anderson & Jack, 2002; Putnam, 2000). Bridging social capital tends to be characteristic of weak tie networks. It provides the lubricant to expand a network’s capacity to engage in mutually beneficial actions and exchanges (Anderson & Jack, 2002; Putnam, 2000).