Canadian Rural Partnership
Research and Analysis

The Role of Small Businesses and Cooperative Businesses in Community Economic Development:

A Comparison of Leading and Lagging Rural Communities

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Acknowledgements

Executive Summary

Background
This report explores the ways in which small businesses and cooperative businesses contribute to the relative vitality of rural communities. By relative vitality we refer to the relative leading or lagging status of a community. We explore these contributions to community vitality through a lens of community economic development (CED).

The key questions in this context were:

• What types of leadership roles do small businesses and cooperatives play in rural communities?

• To what extent do small businesses and cooperatives benefit from, or contribute to, the "informality" of rural life?

• Are rural businesses and cooperatives "entrepreneurial" in nature?

• How do rural businesses and cooperatives access and use technology?

• What are the characteristics of success in rural businesses and cooperatives?

• What networks and information do rural businesses and cooperatives use and develop to enhance their operations?

Methodology
A small business is one that employs fewer than 50 people, located in one of several possible community locations (home based, storefront, or some other location), and with no restriction based on sales volume. A cooperative is any type of cooperative without regard to size, sales volume, or sector type. Thus it includes producer and consumer cooperatives, as well as those in the financial sector (credit unions and caisses populaires), and others. The data set is relatively small, comprised of 56 small businesses and 34 cooperatives from 20 different communities. The small sample sizes mean that analysis of subcomponents of the sample (by business types, for example) is extremely limited. It also means that the results must be viewed with caution. However, the findings do play an important part of informing a longer term inquiry about small businesses, cooperatives, and rural communities.

A total of 20 of the communities within the New Rural Economy sampling frame were chosen as locations to conduct interviews and surveys. Nine of these were leading communities and 11 were lagging communities.

Differences Between Small Business and Cooperative Sectors

• More of the cooperatives have experienced growth in each of sales, full time employment, and part time employment, in the past three years.

• Volunteer board members contribute almost twice as many hours per month to their volunteer work in the community, compared to that of small business persons.

• Small businesses are much more likely to contribute to community fundraising events than are cooperatives.

• Managers of cooperatives have a general impression that the community has the resources to offer financial help for people who are starting up a new business. Small business respondents do not share this view.

• There are few differences in the percent of cooperatives and small businesses which feel that they are leaders in their sector on a variety of business issues. However, many more of the cooperatives felt that they were leaders in the area of changing their pricing and in their purchasing practices.

• On a contrasting note, however, cooperatives were much less likely to feel that they, as a collective enterprise, exhibit entrepreneurial characteristics. In particular, many more of the small business respondents felt that they were innovative, that they liked to take on challenges, and that they take calculated risks.

• Cooperatives were much more likely than small businesses to have purchased new computer equipment in the past three years. Seven of the cooperatives and only two of the small businesses have e-commerce capacity (for completing transactions on-line), and 42% of cooperative managers compared with 26% of small businesses use the Internet for networking purposes.

• Small businesses were much more likely to invest in their business for the purpose of changing production or service patterns, while cooperatives were much more likely to invest for the purposes of improving customer service and modernizing their equipment and buildings.

• While there were few important differences related to the relative importance each places on the adoption of new technologies for various aspects of business activity, cooperatives were much more likely to place greater emphasis on this for the purposes of retaining existing markets and customers, and for training.

• Small businesses were much more likely to cite labour force problems as a disadvantage resulting from their rural location.

• Many more (almost one-third) of small businesses which had applied for a loan were turned down at some point, and almost all of these were in lagging communities.

• Small businesses were much more likely to suggest that local government and the federal government can and should be doing something to improve the business situation. Suggestions for action primarily related to the need for lower taxation at both levels.

• Many more of the cooperatives identified that increasing competition is a current challenge for their business operation.

• Many more in the small business sector are experiencing problems with high levels of payroll taxation.

• More of the cooperatives belong to formal networks and alliances, and many more of the cooperatives participate in regular face-to-face networking sessions within their communities and within their sectors.

• Cooperatives are more likely to participate in local trade shows than are small businesses.

Comparing the Business and Cooperative Sectors in Leading and Lagging Communities

Within leading communities, the small business sector is much more likely than the cooperative sector to:

• agree that for people starting a new business there is difficulty getting financing from sources other than banks for their venture;

• agree that they are creative, innovative, like challenges, and take calculated risks;

• place a greater emphasis on adopting new technologies to develop new products and services and to develop new markets;

• state that the high quality of their products and services and their good reputation are leading factors explaining their business success.

Within leading communities, the cooperative sector is much more likely than the small business sector to:

• have experienced increases in full time employment in the past three years;

• contribute to fundraising activities;

• give prizes for events and to award scholarships to students;

• be impacted by provincial and federal government regulations as they relate to their ability to expand their business operations;

• to participate in local trade shows.

Within lagging communities, the small business sector is much more likely than the cooperative sector to:

• agree that they are innovative and like to take on challenges;

• be impacted by federal government regulations as they relate to their ability to expand their business operations;

• state that the high quality of their products and services and their good reputation are leading factors explaining their business success;

• participate in regional trade shows.

Within lagging communities, the cooperative sector is much more likely than the small business sector to:

• have experienced growth in sales and part time employment;

• have board members involved in community organizations as leaders;

• contribute to fundraising activities;

• see themselves as leaders in adopting new technologies, human resources management, changing their pricing, and adopting new purchasing practices;

• place a greater emphasis on adopting new technologies to retain existing markets, to develop new markets, and to develop new suppliers.

Conclusions
The small business and cooperative sectors have a number of skills and experiences which are transferable to a community economic development process. However, there are some limitations. Access to capital, lack of community support for new business startups, lack of community entrepreneurship, labour force challenges, and a generally (perceived or real) poor business climate create real barriers for significant impact and participation in community economic development.

There are significant limitations to business growth and expansion as a revitalization strategy in rural communities. Entrepreneurs and cooperatives face significant challenges which must be addressed before they can make important contributions to local CED processes, and before they can be a driving force of rural revitalization. One might argue that few businesses or cooperatives in our sample can be considered as entrepreneurial at all. They are not risk takers by their own admission, and risk aversion is a major blockage to rural growth.

Policy Issues

• Targeted initiatives to increase access to information about the adoption of new technologies for a variety of business purposes is required. This is needed for both the small business and cooperative sectors.

• The federal government must advance its efforts to assist more businesses and cooperatives to use of e-commerce as a means to enhance competitiveness in the business sector. Very few of the respondents are providing e-commerce opportunities for the customers, and very few have plans to do so in the near future.

• Changes in the regulatory environment, as it affects both sectors in their business development, is warranted. At all three levels there was a universal call for lower taxation of all types, particularly as it relates to payroll taxes and the employment insurance system at the federal level, and property taxes at the local level. The cooperative sector identified that changes at the provincial level in the form of updating and even reinventing the Cooperatives Act, is needed.

• For both sectors, employees and accountants figured prominently as primary sources of information from important business decisions, for advice and guidance, and for general business information. Perhaps a targeted effort by government and sector organizations to provide these groups in particular with critical information about business and market issues would be helpful in strengthening their role as information sources.

Research Issues

• There is a need to understand more about the local dynamics of financial and moral support for people attempting to start new businesses. More research about personal and community values may help to understand the "moral" issues; more research about awareness of and access to alternative forms of financing, including emerging forms of micro-credit, community loan funds, and community foundations, and existing vehicles within banks, credit unions, community business development centres, the Business Development Bank of Canada, and the various federal and provincial development agencies, would be helpful. Furthermore, existing research related to this issue should be reviewed with an eye to potential policy and program reforms that might improve the situation for rural business startups.

• There is an opportunity to explore more thoroughly the nature of collective and community entrepreneurship. It also appears that business people born locally identify quality of life reasons more so than economic ones to explain why they are located where they are, while those from away are more likely to identify economic reasons. What are the successful models for building an entrepreneurial culture? Further research on the entrepreneurship characteristics of the locally born business people (who are more concentrated in lagging communities) compared to business people born in other communities (more concentrated in leading communities) might help to uncover critical points related to relative business success and entrepreneurship. Research on the linkages between the education system (specifically its curriculum) and entrepreneurship development should be reviewed with a view to exploring how best practices or success can be modelled elsewhere.

• For both sectors there is a greater emphasis on technology use for product / service development and for market development, and less emphasis related to human resources, employee training, and working with suppliers. More research on the potential workplace opportunities and barriers for using technology for internal and external training, and the support elements required for that, will help to understand how best to deliver this support.

• Small businesses and cooperatives have difficulty with building awareness about their businesses during startup and first year of operations, and particularly in lagging communities. There are issues here related to adequate financial resources for generating this awareness, but there may be other issues related to the effectiveness of identifying appropriate target markets for promotion, and to the relative support in the local community. Is the problem specific within their community, within the market they target, or germane to particular sectors? We could speculate that insufficient business marketing skills combined with a lack of capital for marketing and advertising could be part of the problem. More research on this issue is required.

• Businesses generally face significant challenges to expand their sales in markets beyond the immediate community. Many of our respondents felt that businesses in their community faced problems in expanding to meet demand and opportunity, and many felt that businesses generally lack skill and knowledge for expansion. More research is required to understand the specific barriers.

• While it is clear that "amenity" related factors are the most frequently cited, it is less clear what the specific amenities are that lead people to choose a rural business location, or the extent to which the location is freely chosen or chosen by default due to a lack of choice or mobility. Further research on these issues is needed, particularly from a CED and a business growth perspective.

• From a research perspective, there is an opportunity to learn more about the transfer of skills and knowledge business people and cooperative leaders bring with them from their business experiences into community activities. What are the specific skills and knowledge they employ in their broader community activities? To what extent do they "transfer" these to others, in a capacity building context?

• Many of the small businesses use personal finances for their operations, and only half use their business profits for operations financing. It is unclear how much of this pattern is due to the pluriactivity of rural businesses, and how much of it is part of a survival strategy. More research is required in this area.

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