Over the past few weeks, we have shared our Ewing Marion Kauffman Foundation-funded report and technical appendix examining the state of business incentives for entrepreneurial firms, implementation issues, and the outcomes that these incentives have on firms and regional economies.
The COVID-19 pandemic has shined a spotlight on the needs of small businesses and startup firms — they are taking the brunt of the recession while business startup rates are greater and particularly in some communities than we have seen before. Federal, state, and local relief and recovery funds provide economic development organizations (EDOs) an opportunity to spearhead support and recovery of these businesses. This week we offer three policy guidance recommendations for designing, implementing, and evaluating incentives so that they help state and local policymakers achieve their economic and entrepreneurship development objectives.
Incentives design
Policy makers should design incentives to leverage other resources and boost the ecosystem. Incentives—those for entrepreneurs or not—are most effective when implemented as part of a broader economic development strategy, rather than as standalone initiatives. This finding is even more important for incentives for entrepreneurial firms because they play such a limited role in business financing and within the entrepreneurial ecosystem. To register an effect, the incentives must be harnessed to the service of a broader strategy. In other words, incentive programs should be designed after needs or gaps in the entrepreneurial ecosystem have been identified, rather than starting with the assumption that a state or community should have a specific type of financial, fiscal, or service incentive.
Incentives management and implementation
Policy makers and administrators should strengthen incentive management and implementation procedures to improve program effectiveness. A clear finding from the research on entrepreneurial firm incentives is that how programs function matters as much as which programs are offered. We suggest guidance at multiple stages that can enhance implementation, including calibrating program targets and tools that fill ecosystem gaps, establishing clear goals and metrics, and ensuring application guidelines and procedures do not inadvertently exclude portions of your target audience.
Incentives data standards for improved evaluation of effectiveness
Research studies, program data, and formal evaluations still leave us with “it depends” and “the findings are mixed.” The problem is not with the individual analyses, but with systemic limitations including inconsistent terms and definitions across programs and states, severe data shortcomings, inappropriate or insufficient timeframes for assessment of firm- or community-level outcomes, and often important program details not adequately being addressed.
Policymakers, program administrators, entrepreneurial support organizations, economic development leaders, and foundations should establish data and research standards to help researchers and evaluators determine best practices. Conversations around shared standards have proven valuable in other multi-disciplinary fields to align key definitions, metrics, and data collection efforts and make research studies comparable to each other. This type of research leadership and support would ultimately help policymakers and practitioners by creating a stronger understanding of successful programs and offer clarity on ways to craft more effective incentives for entrepreneurial firms.
During the course of 2021, we are working on an update to our analysis of business incentives to assess the effects of COVID-19. We will examine how states and local governments are using federal and state relief and recovery funds to assist entrepreneurial firms and young small businesses. The new research will also address if and how inclusive and equitable efforts are designed to assist businesses owned by people of color, women, and located in disadvantaged locations. If you have insights into programs that your local and state governments are planning to offer, we’d appreciate your sharing these with us, darrene@smartincentives.org.
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