June 2003

Entrepreneurship is the new focal point for rural devel-

opment. This was the consensus of 200 rural policy officials

and experts who gathered in Kansas City on April 28-29 for

the fourth annual rural policy conference hosted by the

Federal Reserve Bank of Kansas City’s Center for the Study of

Rural America. For much of the past half century, rural devel-

opment has been driven by twin incentives aimed at business

recruitment and retention. This strategy is no longer working

so well, however, for one simple reason—globalization. In a

global marketplace, lower cost business sites abound, making

rural incentives much less effective. Now, more and more

rural regions are turning their attention to the “third leg of the

development tool”—growing more businesses on Main Street.

The new focus is long overdue, participants agreed, and has

great promise for boosting rural economic growth.

CENTER FOR THE STUDY OF RURAL AMERICAFederal Reserve Bank of Kansas City

Main Streets of Tomorrow: Growing and Financing

Rural Entrepreneurs

Commentary on the rural economy

The Main Street Economist

Mark DrabenstottVice President & Director

Nancy Novack Bridget AbrahamAssociate Economist Research Associate

Center for the Study of Rural America

The Main Street Economist June 2003

Making entrepreneurship the newfocus of rural policy will not be easy.Entrepreneurship cannot offer a quick fixsince businesses take time to grow. Thatruns counter to the short-term focus ofelected officials. Existing entrepreneurshipprograms do not offer a systematicapproach to future business innovationand may need to be overhauled; yet thereis still much information needed on whichprograms work best in which rural regions.Many rural entrepreneurs lack sufficientequity capital, but there is little consensuson what policy can do to fill the gap.

Despite these challenges, most confer-ence participants agreed that rural policiesbuilt around entrepreneurship offer thegreatest chance of helping rural regions.Key to adopting such policies, however,will be a concerted effort to better under-stand the links between entrepreneurshipand regional economies, to inform policy-makers of these benefits, and to develop amore systematic approach to supportingthe unique needs of rural entrepreneurs.

Rural entrepreneurship in the 21st century

In the first session of the conference,David Sampson discussed the economicproposals of the White House and howthese would help entrepreneurs by reduc-ing taxes, encouraging investment, andremoving obstacles to growth. He recog-nized the important role that small entre-preneurial companies play in the U.S.economy—such companies created overtwo-thirds of new jobs and accounted fortwo-thirds of the innovation in the last20 years. Sampson referred to smallentrepreneurial companies as the “enginesof innovation” that “transform new ideasand technology into real products andservices sold to real customers in realmarkets, creating real jobs.” He notedthat innovations need not be high-tech,but rather focused on superior quality,efficiency, and cost.

Federal policies can play a role inspurring more entrepreneurs on MainStreet. Sampson suggested that federal

economic development programs shouldencourage and strengthen innovation,entrepreneurship, and competitiveness ofareas and ultimately add more jobs.Federal programs should empower regionsand communities, especially those withstruggling economies. The EconomicDevelopment Administration is payingparticularly close attention to creating apositive business environment for compa-nies referred to as “gazelles”—small, inno-vative companies that grow quickly.However, conference rapporteur, BrianDabson, along with other participants,argued that high-growth entrepreneurs arerare and perhaps should not be the solefocus of entrepreneurship strategies.Sampson also pointed out that innova-tions do not have to be based solely onnew technologies, but rather on superiorexecution—beating the competition basedon quality, efficiency, and cost.Companies can achieve high rates ofgrowth by being innovative with their ser-vices, processes, or marketing techniques.

Four characteristics are used to describeentrepreneurs, as outlined by Sampson.First, entrepreneurs view globalization not asa challenge, but as a whole realm of opportu-nities. They continuously look to the futurefor new business opportunities rather thanfocusing on past prosperity.

Second, entrepreneurs exploit innova-tions to create opportunity. Such innovationsinclude new technologies, new productsor services, new markets or risk manage-ment, and new distribution channels.

Third, entrepreneurs build and growcompanies to bring their innovation tomarket. Entrepreneurs gather the resourcesto transform the innovation into aproduct, process, or service and find theappropriate market outlet.

Finally, entrepreneurs take significant,calculated, personal risks in building theircompanies. Only communities willing totake risks and accept some level of failurewill see results.

Policy’s role is to help regions create an“entrepreneurial ecosystem.” Four key ele-ments define such a system. Policies and

programs should create a culture of entre-preneurship where entrepreneurial behavioris encouraged and supported by the com-munity. Sampson cited EntrepreneurshipRecognition Programs as one way toencourage this shift to entrepreneurial think-ing in areas still tied to traditional industries.

Entrepreneurship education andtraining are also critical in economicdevelopment strategies. Sampson arguedthat intellectual capital drives economicprosperity and that the skills and educa-tion of a region’s workforce will determineits ability to compete in a global economy.

An entrepreneurial ecosystem alsofosters the creation of business networks thatlink entrepreneurs to suppliers and capitalsources. Networks are also the avenuethrough which entrepreneurs share ideasand create synergies. While rural local net-works may be limited, tapping into externalnetworks eliminates the distance barrier.

Ensuring access to capital is anotherkey element of the entrepreneurial ecosys-tem. The EDA’s Revolving Loan Fundscan be important sources of capital, andSampson suggested the funds should begeared more toward entrepreneurs.Sampson described the EDA’s appetite forrisk as high when providing funds forrural initiatives. He argued that societyhas become so risk averse that people areafraid to make risky decisions with thepotential for large payoffs.

Finally, infrastructure and institu-tional support are critical in programsbased on entrepreneurship. Good high-ways and access to air transportation areimportant, but perhaps the distinguishingpiece of infrastructure is broadbandaccess. Sampson referenced EDA’s PublicWorks program as a potential resource forcommunities in gaining broadband access.

Zoltan Acs provided an overview ofthe status of entrepreneurship in ruralAmerica. He recognized that entrepre-neurship can be more challenging in ruralareas, given their remoteness, which limitstheir access to skilled labor, technology,and capital, and creates barriers to build-ing networks. However, Acs was quick to

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point out that differences in survival ratesof new firms do not fall exclusively alongrural versus urban lines.

Although data are limited on entrepre-neurial activity and firm formation, Acspresented statistics on the rate of firmbirths to identify the most entrepreneurialregions in the United States. In the mid-1990s, the highest level of business startsoccurred in the Rocky Mountain states andFlorida, with pockets of high levels in thePlains and the Ohio Valley. The lowestfirm birth rates occurred in the Northeastand Upper Midwest. This corroboratesother findings that show entrepreneurialactivity shifting from the Northeast to theSouthwest and West.

To distinguish between rural and urbanareas, Acs considered the size of the labormarket areas (LMAs). The majority of theLMAs in the two smallest size categories arerural or nonmetropolitan, according to theCensus Bureau. Overall, smaller LMAs areamong both the highest and the lowest innew firm births. But firm births in smallLMAs have been concentrated in lowerpaying retail businesses, with few firm birthsin the high-wage category of business ser-vices. It is evident that location is a disad-vantage for rural areas in business services,as the largest LMAs, or more metropolitanareas, are typically characterized as havingvery high firm birth rates in services. Someanecdotal evidence, however, suggests thatgreater mobility and new career optionshave allowed some entrepreneurs in othersectors to move to rural areas.

Growing rural entrepreneurs:Recent lessons

The conference took a closer look attwo rural regions undertaking new pro-grams to boost entrepreneurship. The firstcase examined a “bottom-up approach” toeconomic development in the Appalachianregion. The second examined a more “top-down approach” in Maine. Both studiesconcluded that traditional thinking in eco-nomic development must incorporateentrepreneurial ideas, and that new part-

nerships are necessary in economic devel-opment strategies.

Boosting entrepreneurship inAppalachian Ohio. A key to growing moreentrepreneurs in Appalachian Ohio is theAppalachian Ohio Regional InvestmentCoalition (AORIC), a partnership of expe-rienced organizations and communityleaders. The six AORIC partners all sharethe same concern: The region needs abetter set of services to encourage entrepre-neurs who live and work there.

Larry Fisher described the coalition’sstrategy as an effort to build a sustainableentrepreneurial economy through programsand services that promote successful entrepre-neurs. Partners of AORIC are stronglyfocused on developing entrepreneurial capac-ity, community or civic capacity, and a policyagenda that supports entrepreneurship. Theyencourage local economic development offi-cials and small business organizations to bepart of their overall strategy. Overall, the part-nering organizations provide entrepreneursbasic start-up resources and access to capitaland marketing.

Brenda Emery described PlanningAdams County Tomorrow (PACT), agrassroots development organization insouthwestern Ohio and a close ally in theregional initiative. PACT bases its strategyon coaching and assisting entrepreneursthrough a diverse team that can provideexpert services in a variety of areas.

With the support from AORIC,Adams County has been able to supportentrepreneurship activity from conceptionthrough startup. Emery stressed that tospur entrepreneurship PACT must stillcreate more relationships in its communitywith local vendors. Building these relation-ships takes time and resources.

Don Macke concluded that whileAppalachian Ohio has written encouragingsuccess stories, it continues to face seriouseconomic and social challenges. Economicdevelopment initiatives are still traditionalin thinking, failing to build new economicengines in the region. AORIC’s focus onentrepreneurship is among the most inno-vative in rural America, but multiple part-

ners and programs create a challenge to thestructural organization of AORIC, andstrong communication is necessary toensure success. And the current supportsystem must survive until entrepreneurialsuccess takes root.

Maine’s new focus on entrepreneurs.Jay Kayne, Brian Dancause, and YvonneDavis took a look at a different approachto boosting entrepreneurs. In Maine, threespecific challenges inspired an entrepre-neurial push: Many prominent employerswere leaving the state. State tax revenueswere dropping. And young people wereleaving rural areas.

A study by the Maine RuralDevelopment Council identified majorroadblocks to a healthy entrepreneurialeconomy—culture constraints, communitybusiness climate, a lack of networkingopportunities, limited technical assistance,and scarcity of capital. To overcome theseobstacles, the state focused on six new areas:K-12 education, higher education, adulttraining, support systems, policy, and anentrepreneurship team (e-team) dedicated toeducating youth on entrepreneurship ideas.Task forces were formed to tackle each issue,and a representative from the KauffmanFoundation served as a resource for eachtask force.

Some initial successes of Maine’sprogram promise to sustain and expandinterest and support for entrepreneurshipinitiatives in the future. It has identified andaddressed issues that have impeded entrepre-neurial activity in many rural areas of the

The Main Street Economist June 2003

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The three speakers from Maine stressed that encouragingentrepreneurs requires government and nonprofit entitiesto be just as entrepreneurial as their clients.

state. It has created models for supportservice delivery that are now being tested inrural Maine. It has expanded opportunitiesfor entrepreneurship training for rural resi-dents. It has seeded a relationship betweenthe Kauffman Foundation and local groupsthat will support the introduction of anentrepreneurial education program in publicschools. And, it has served as a catalyst forcollaboration among campuses of theUniversity of Maine system to deliver entre-preneurship education to students.

All three speakers stressed thatencouraging entrepreneurs requires gov-ernment and nonprofit entities to be justas entrepreneurial as their clients.Marketing entrepreneurship ideas to thepublic at-large and regional thinking areboth necessary for success.

Policy options for ruralentrepreneurship

The final session of the conferenceexplored policy options for growing moreMain Street entrepreneurs. Presentersagreed that rural businesses have uniqueneeds, and the options for addressing thoseneeds are promising. That said, newapproaches are needed, as past efforts havegenerally proven ineffective.

Alistair Nolan reviewed entrepreneurshippolicies across developed nations. He notedthat entrepreneurship is broadly recognized asa critical component of local and regionaleconomic development. At the regional level,a growing number of studies are drawing astrong link between high rates of businessstarts and strong economic growth.

Nolan described a widening patternof entrepreneurship policies throughoutthe world. He cautioned, though, thatthe new focus on entrepreneurship hasan important constraint. Encouragingentrepreneurs does not yield short-runresults. Entrepreneurship strategiesshould be “policy constants rather thanresponses to short-term crises.” Thiswas, in fact, a strong theme echoed bymany other participants—entrepreneur-ship strategies will almost certainly paydividends long after current elected offi-

cials leave office. Thus, consistent, long-term support for these policies takesspecial effort to sustain.

Nolan identified six major innovationsin entrepreneurship policy throughout thedeveloped world:

• Greater attention to markets as thesource of business services to entre-preneurs, as opposed to direct publicassistance to companies.

• A greater focus on business networksand clusters rather than individual firms.

• A shift in focus from more businessstarts to assisting young firms with highgrowth potential.

• Promoting greater public awareness ofentrepreneurship and its social legiti-macy, including a stronger emphasis onentrepreneurship from primary schoolsto universities.

• Promoting the potential of informationand communication technologies, bothas business opportunities and as waysof providing services to businesses.

• A new focus on promoting entrepre-neurs among target groups, such aswomen, ethnic minorities, and youth.

Nolan drew particular attention tonetworking and awareness as key policylevers going forward. Evidence clearlyshows that entrepreneurs who develop andmaintain ties with other entrepreneursoutperform those who do not. Thisfinding is especially relevant for ruralpolicy, since business networks are muchless well-developed in rural regions.

Social awareness of entrepreneurshipand the value society places on it are alsokeys in the future. Scotland, for instance,discovered that the Scottish public had lowlevels of interest in starting a business andlimited appreciation of the economic func-tion of entrepreneurs. To address theproblem, more than a hundred initiativeswere undertaken, including designating1995 as Scotland’s Year of theEntrepreneur and creating six Centres ofEntrepreneurship in Scottish Universities.Between 1995 and 1997, the annualgrowth in Scottish business startupsexceeded 7 percent.

Tom Lyons argued that policies tospur rural entrepreneurship must beregional in scope and systematic inapproach. Most rural communities havevery limited economic critical mass,with little margin for error. Whereasurban communities can afford to wasteresources and still succeed economically,rural communities cannot. Thus, poli-cies to spur more rural entrepreneursmust be regional.

In addition, Lyons argued, entrepre-neurship strategies must take a muchmore systematic approach than pastattempts. He proposed a new approach,the Entrepreneurial Development System,aimed at helping entrepreneurs master arequired skill set. His premise is that allsuccessful entrepreneurs need a core set ofskills, yet they start with different skilllevels. The new EDS system, therefore,must recognize the starting skill set, whatskills still need to be developed, and thebest way for the individual to acquirethem. The EDS has a diagnostic tool forclassifying the beginning skill set. Thesystem also encourages service providersto specialize in “coaching” entrepreneursat different skill levels.

The EDS is currently being tested inKentucky, North Carolina, and WestVirginia. While the programs are too newto yield any strong conclusions, earlyresults suggest the system can help anyregion become more entrepreneurial, nomatter what industry its business is in.

The Main Street Economist June 2003

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Alistair Nolan cautioned that, while entrepreneurship strate-gies will almost certainly pay dividends in the long run, sup-port for these policies takes special effort to sustain.

On the Web: www.kc.frb.org

The Main Street Economist June 2003

David Barkley addressed a majorproblem for successful entrepreneurshipdevelopment strategies—equity capital.Entrepreneurs and small businesses inrural areas simply do not have similaraccess to equity capital and support ser-vices as their urban counterparts.Venture capitalists avoid rural businessbecause of the relatively high costs offunding, supporting, and liquidatingdeals in rural areas. The policy responseto this rural equity capital gap has beena wide variety of programs to fundventure capital programs or provide taxincentives to increase private funding. Atthe federal level, efforts include the NewMarkets Venture Capital Program andRural Business Investment Companies.At the state level, there are a panoply ofprograms, ranging from state-funded,privately managed capital funds to state-assisted angel networks.

The wide mix of efforts providessome insights into the future directionof public policy in rural equity capitalmarkets. First, Barkley concluded, thefederal government is not likely to solvethe equity capital needs of rural entre-preneurs. Eligibility requirements tendto be drawn too broadly, with invest-ments drifting toward suburban areas orto real estate investments. To succeed,he suggested, federal programs mustfocus specifically on venture capital andrural businesses.

Second, the real innovation in ruralequity programs has been at the stateand local levels; but the results aremixed and too little effort and too fewresources are put to understanding bestpractices before programs are replicated.States often copy another state’sprogram before asking if it suits theneeds of its own businesses. Related tothis is the need to educate public offi-cials on programs that are oftencomplex and poorly understood.

Third, there is a thin line betweensuccessful and unsuccessful rural equityprograms. The successful ones appear to

pay greater attention to detail in theplanning phase of the program.

ConclusionsIn the end, conference participants

agreed that entrepreneurship is likely tobe at the center of rural policy in thefuture. While there was not universalagreement on what entrepreneurshipreally means from a policy point of view,most agreed that it must include theideas of starting a new business, exploit-ing a market opportunity, and thengrowing the business to fill that niche.By all accounts, entrepreneurs of thistype face tougher going in rural areasthan in urban ones.

Participants also agreed that entre-preneurship is becoming a more impor-tant rural growth strategy simplybecause other strategies are beginning tofail. Issuing incentives to recruit andretain businesses is simply much moredifficult in a global economy—and withthe tight state and local budgets that willlikely prevail in the future. But partici-pants also suggested that entrepreneur-ship needs to be more than just a“default” development strategy. Itdeserves to be the first choice on its ownmerits, although some speakers sug-gested that researchers must do a morerigorous job of defining those benefits.

In his rapporteur remarks, BrianDabson concluded there is much work tobe done in making entrepreneurshipmore central to rural policy. “There isstill no real traction in the notion ofentrepreneurship as the new economicdevelopment paradigm.” Dabson sug-gested four steps are needed before entre-preneurship can be universally acceptedas the preferred economic developmentstrategy. His list flowed out of severalthemes echoed at the conference andprovided a road map to the future thatresonated with conference participants.

• Improved information and research.Better data sets on entrepreneurshipby region are needed to establishthe link between business innova-

tion and economic performance. Inaddition, more information andanalysis are needed of best practicesthat sustain entrepreneurial regions.

• Adopting entrepreneurial strategies.Some elements of entrepreneurshippolicy are ready for wide-scaleadoption, and such steps should betaken. For instance, embeddingentrepreneurship education couldbe adopted in the school curriculanationwide.

• Capacity building and leadershipdevelopment. Many state and localeconomic development officials stilldo not understand the value ofentrepreneurship in economicdevelopment. More widespreadprograms are needed to address thisproblem. While some groups havepiloted successful programs, theyare still few in number.

• Mobilization and advocacy.Ultimately, there will be a need forwidespread system reform at thestate and local levels, and the publicwill benefit from efforts to mobilizeexisting entrepreneurship networksto make sure this happens. At thefederal level, Dabson argued, policyand procedural changes are neededto ensure entrepreneurship is on thefront burner in a wide range of gov-ernment agencies, including thenext farm bill.

The conference concluded that entre-preneurship has great power to guide anew generation of rural policy. It canunlock the economic potential of ruralpeople and communities. It can make thebest use of scarce local resources to securesustainable economic development. It canchallenge unnecessary constraints on localinitiatives. And it can identify newopportunities and futures for ruralAmerica. The challenge now is to figureout how to make entrepreneurship thecenterpiece of rural policy.

Edited by Bob Reagan

MAIN STREETS OF TOMORROW:Growing And Financing Rural Entrepreneurs

Rural Entrepreneurship in the 21st CenturyDavid A. Sampson—Assistant Secretary of Commerce for Economic Development, Department of Commerce, Washington, D.C.

Edward J. Malecki—Professor and Director, Center for Urban and Regional Analysis, The Ohio State University

Zoltan J. Acs—The Dorris and Robert McCurdy Distinguished Professor of Entrepreneurship and Innovation, University of Baltimore

Growing Rural Entrepreneurs: Recent Lessons LearnedBrenda Emery—Coordinator, Planning Adams County’s Tomorrow, Manchester, Ohio

Larry Fisher—Director of Food Ventures, ACEnet, Inc., Athens, Ohio

Don Macke—Co-Director, Center for Rural Entrepreneurship, Lincoln, Nebraska

Maine’s New Focus on EntrepreneursBrian Dancause—Manager, Small Business Assistance, Maine Department of Economic and Community Development

Yvonne Davis—State Director of Career and Technical Education, Maine Department of Education

Jay Kayne—Senior Associate, Center for Rural Entrepreneurship, Leawood, Kansas

Policy Options for Growing and Financing Rural EntrepreneursAlistair Nolan—Administrator, Organization for Economic Cooperation and Development, Paris, France

Thomas S. Lyons—Associate Professor & Director, Center for Research on Entrepreneurship and Enterprise Development,University of Louisville

David L. Barkley—Professor and Co-Coordinator, Regional Economic Development Research Laboratory, Clemson University

Brian Dabson—President, Corporation for Enterprise Development, Washington, D.C.

Entrepreneurs are the building blocks of the new rural economy. With continued con-solidation in traditional rural industries, regions are turning to new economic engines. Many arecounting on entrepreneurs to seize the new opportunities. Yet, launching and growing a busi-ness remains a bigger challenge on Main Street than in the nation’s cities. Business assistance is

sparse and equity capital is often limited. What are the special challenges facing rural entrepre-neurs? What can be learned from recent efforts to spur entrepreneurs in some rural regions? Andgoing forward, what steps can public and private leaders take to grow more rural entrepreneurs?

To help answer these questions, the Center for the Study of Rural America hosted a confer-ence, Main Streets of Tomorrow: Growing and Financing Rural Entrepreneurs, April 28-29 inKansas City, Missouri. The first session examined the importance of entrepreneurship to thenew rural economy and identified the unique challenges confronting business owners on MainStreet. The second session drew some practical lessons from recent initiatives to grow more ruralentrepreneurs in Ohio and Maine. The final session identified the best policy measures for creat-ing a more entrepreneurial climate in rural America.

The conference proceedings will be available this fall. To receive a free copy, please visit ourwebsite at www.kc.frb.org or write us at:

Public Affairs DepartmentFederal Reserve Bank of Kansas City925 Grand BoulevardKansas City, Missouri 64198

MAIN STREETS of TOMORROWGrowing and Financing Rural Entrepreneurs