On Government Programs that Increase Small Firms’ Access to Capital

This comment addresses two interesting research projects in the field of entrepreneurship. The papers under discussion are Bradford (this issue) and Craig, Jackson, and Thomson (this issue). Both of these papers represent strong and effective research inquiries into important areas of small business development. These papers are linked in three key ways. First, they both question the role that government can and should play in the development of small business. Second, they further study the link between small business subsidies and overall economic growth. Finally, assuming that government intervention is effective, they then attempt to determine the most efficient allocation of scarce government resources. Both papers conclude that the role of government is an important one, not simply for the development of small business, but for strengthening the impact that small business has on broad economic performance. Bradford (this issue) takes a more microcosmic approach in terms of defining how the government should participate in (this issue) small business, whereas Craig, Jackson, and Thomson (this issue) determines that U.S. government participation is warranted. I shall discuss the papers separately, starting with Bradford (this issue), and proceed with Craig, Jackson, and Thomson (this issue) afterward. Bradford (this issue) studies South African entrepreneurs and makes practical and academically meaningful contributions to the literature. First, he makes the important distinction between firms that are legally formal and those that are economically formal. Legally formal firms, according to Bradford, are simply those firms that are registered (licensed). Economically formal firms are those possessing institutionalized processes that are most likely to lead to profitability. Examples might include record keeping or market research. This distinction is critical in the sense that legally formal firms, though being recognized by the government, may not be equally strong components in the engine of economic growth. Bradford argues (effectively) that economically formal firms are as likely to become profitable and productive as firms that are legally formal. He goes further to argue that by supporting strong businesses that lie on the fringe of legality (by not being licensed), the government can more effectively reach its economic objectives. The second important contribution of the Bradford study is that he carefully identifies the challenges facing township entrepreneurs. This is challenging in the sense that social norms in South Africa have not always promoted the support of township entrepreneurs. The history of apartheid in South Africa reflects an ugly past of racial discrimination. Additionally, the support of women has not always been encouraged. Bradford argues that by focusing on economically formal firms, rather than on legally formal ones, the needs of township entrepreneurs are more likely to be addressed. The final contribution of this paper is that Bradford identifies the types of entrepreneurs most likely to find success. Such a predictive framework simplifies the government's task of identifying the best uses of its scarce body of resources. He finds that male entrepreneurs operating out of formal buildings, those owning a vehicle, and those who hold credit cards are associated with higher profitability. Therefore, policy implications can be derived from these results. One primary concern with Bradford's work starts with the choice of methodology. Most of the tests are cross-sectional in nature, and many of the tests considered to be predictive are actually descriptive or exploratory in nature. For example, variables such as "age" and "gender" are very different from one another: gender is time invariant, age is not. Therefore, one should be careful when including them in the same regression, because any policy recommendation based on regression results may likely be flawed. …