Does Social Capital Explain Small Business Resilience? A Panel Data Analysis Post-Katrina

How small businesses fare after a natural disaster and what it takes for them to survive is very important to the economy because they employ approximately half of America’s private workforce (SBA, 2013) and are a critical component of and major contributor to the vitality of cities, states, and the country (Cochrane, 1992; Robbins, 2001). It is widely known that small businesses tend to feel greater economic repercussions after natural disasters when compared to larger businesses (Schrank et al., 2013). Following a disaster, a business can be closed or remain operating, but this status varies with time and depends on the business’ vulnerability or its level of resilience (Alesch, 2003; Cutter, 2008), especially after considering that small business owners are hit twice by disasters: as business owners and as local citizens (Runyan, 2006). Post-disaster resilience is a multidimensional and complex process that takes place over time, is related to the rebuilding of the life of individuals, businesses, communities, and institutions, and is strongly influenced by the interaction of the agents that are affected by a disaster (Chang, 2010; Olshansky, 2005). Aldrich (2012) illustrated how social capital—networks that formally or informally offer resources—explains the ability to withstand a disaster and build resilience by quickly disseminating information and financial and physical assistance within a community. This study takes a step further and aims to understand how social capital explains the resilience of small businesses after Hurricane Katrina. Most studies have focused mainly on the macroeconomic impacts of disasters using aggregated data and have lightly addressed small business resilience using the business as the unit of analysis (Zhang et al., 2008; Aldrich, 2012). Although the aggregated analysis is useful to understand the effects of disasters on the recovery of businesses, it does not shed light on the how and why of the resilience process. This study uses the Small Business Disaster Recovery Framework (SBDRF) to assess how social capital explains the resilience of small businesses hit by Hurricane Katrina (Marshall and Schrank, 2014). Based on the SBDRF, post-disaster operating businesses were categorized as closed, survived, recovered, and resilient depending on the comparison between pre- and post-disaster indicators (Marshall and Schrank, 2014). After a disaster, a business can be closed or open, and for those businesses that are can be classified as survived, recover, or resilient. The SBDRF categorizes operating business as survived as those that have not reached pre-event levels, a recovered business has return to its pre-disaster state, and a resilient business has exceeded the baseline performance pre-disaster (Bruneau et al., 2003; Marshall and Schrank, 2014). A panel regression was used with the level of gross revenues pre- and post-Katrina as dependent variables (2004, 2011, and 2013). To assess the level of post-disaster business resilience this study used quantitative (e.g. gross revenues comparisons) and qualitative indicators (owner’s perceptions of success). The methodology addresses the assumptions that 1) simultaneity between resilience, recovery, and survival can create possible endogeneity, and 2) the status of the business as open or closed may involve a non-random sample selection. Business owner’s perceptions are key for studies on small businesses and these tend to be ignored if research and conclusions are drawn only from simulation models or aggregated data. This study addresses the lack of a finer measurement of social capital in economic and social studies by incorporating multiple categories of the key independent variable, social capital, such as bonding (support received from similar individuals such as family and friends), bridging (support received from dissimilar individuals such as communities), and linking (support received from institutions) (Aldrich, 2012; Hawkins and Maurer, 2010). This study incorporated several control variables at the community, family, and small business level often included in small and family business studies. For instance, this study included control variables for human capital, financial capital, location, a county socioeconomic vulnerability index, a rurality index, and demographic variables of the business and business’ owner that can affect the operation of the business after disaster. The data for this study comes from the first and second wave of the Small Business Survival and Demise after a Natural Disaster Project (SBSD). This data set is unique because it includes information about both open and closed businesses at different points in time and allows us to determine the differences to those that remained operating. The primary sampling unit within the model is the small business, which was defined as those that had 0-200 employees and were headquartered in the state of Mississippi. Of the 2,610 business owners reached, the cooperation rate was 19.12% providing a random sample size of 499 businesses. Preliminary results show that from the 420 small business used in this study, 11.90% of the business are closed and 88.10% are operating. From those operating, the majority have survived and only 18.81% have recovered and 25.00% are resilient. The results suggest that few business are resilient or even recovered. Small business that received social capital were significantly more likely to be operating after Katrina and the probability of being resilient significantly increases with the level of social capital. For instance, small businesses are 23.95%, 28.57%, and 21.35% (at P<0.001) more likely to be resilient when they received support from family and friends, the community, or institutions, respectively. In addition, the results suggest that linking is the most effective type of social capital to build small business resilience. This study bridges the gap existing between the impact of natural disaster and small businesses to analyze how social capital explains business resilience. Two main questions were answered. First, does social capital explain small business resilience after Hurricane Katrina? Second, what is the most effective type of social capital for building small business resilience? The results illustrate how small business owners, especially those who lack physical and financial resources, connected to their communities and forming part of tighter local networks can overcome disaster and build resilience. The more links business owners have to the community, families, friends, and institutions (i.e. the more social capital they have), the better off they will be when they go through a crisis; therefore, self-reliance only cannot assure post-disaster recovery. This study shows that social capital, sources of information and assistance during crisis, should be taken into account as another tangible asset for mitigation and recovery. Finally, scholars, planners, and government agencies can use these results to advocate for increasing social capital by incorporating incentives and interventions to support the creation and strengthening of bonds between citizens and local social networks through community participation and leadership development.