The intrametropolitan distribution of economic development financing: an analysis of SBA 504 lending patterns. (Small Business Administration)

The declining federal role in economic development in distressed urban areas and concerns over the problems associated with metropolitan decentralization necessitate increased attention to the intrametropolitan distribution of business development programs. We examine the distribution of business loans made by the U.S. Small Business Administration's 504 development company program in the Chicago metropolitan area over a 5-year period and find that, after controlling for firm density, firm size, and industrial mix, higher income areas and outlying zip codes receive more loans than lower income and closer-in areas. We suggest a number of supply- and demand-side explanations for such patterns, call for measures to direct the flow of 504 financing more to lower income areas, and call for examining more loan and subsidy programs for their effects on intrametropolitan business development patterns.

This article examines the intrametropolitan geographic patterns of an important federal small business financing program: the Small Business Administration's (SBA's) 504 development company program. The declining federal role in economic development efforts targeting distressed urban areas makes it important to understand the spatial distribution of the federal economic and business development spending that remains. Moreover, with the recent increase in concern over the problems associated with metropolitan decentralization and polarization (Downs, 1994; Orfield, 1997), attention is merited regarding how government programs may be facilitating various patterns of development. Several major funding sources for place-based urban economic development programs, including the Urban Development Action Grants and Economic Development Administration, were scaled back sharply during the 1980s (Barnekov, Boyle, & Rich, 1989). As urban development monies have declined, some other sources of business development subsidy that are not spatially targeted have persisted and even grown. In particular, business development loan programs of the SBA have grown considerably since 1992. The two largest SBA programs are the 7(a) program and the 504 development company program.(1) The 7(a) program, which provides guarantees for 75% to 90% of bank loans to small businesses for working capital, equipment, or real estate needs, grew from $5.9 billion to $8.3 billion in guaranteed loans from fiscal 1992 to 1996. In fiscal 1996, the 504 loan program, which finances predominantly fixed-asset needs, totaled $2.5 billion in financing--up from $1.6 billion in 1992.

THE SPATIAL DISTRIBUTION OF BUSINESS DEVELOPMENT SUBSIDY

In recent years, there has been a substantial amount of research on the role and distribution of business development subsidies, including tax abatements, low-interest loans, and other forms of incentives (Bartik, 1991; Peters & Fisher, 1997; Rubin & Rubin, 1987). Much of this work seeks to test a thesis most commonly attributed to Bartik (1991): State and local governments experiencing high levels of unemployment and economic distress value economic growth more and thus are expected to spend more--or to be willing to spend more--on job creation and economic development. Green and Fleischmann (1991), for example, find that for suburbs, but not central cities, higher poverty positively influences economic development effort.

Yet, there exists little recent empirical research on the intrametropolitan spatial flows of federal economic development subsidies. This is due partly to the declining role of urban economic development programs. Although Bartik (1994) does not examine the distribution of federal business assistance programs, he does argue that the federal government should target its economic development efforts to distressed areas.

Whereas Bartik (1994) suggests targeting distressed metropolitan areas, a case can also be made for targeting at a finer geographic level. There are at least three reasons to be concerned about the intrametropolitan patterns of business financing programs. First, the literature on spatial mismatch suggests that labor markets are not entirely regional. Kain (1968) argues that the shift of jobs to suburban areas from central cities creates two types of barriers to employment for minority, central-city residents whose residential location is constrained by housing discrimination: increased commuting costs and a scarcity of information on job opportunities. In a review of relatively early literature, Holzer (1991) finds that the effect of job proximity on employment rates is statistically significant but that the magnitude of the effect is unclear. More recent literature has not resolved the question of how large an effect proximity to jobs has on employment rates (Mayer, 1996). Some researchers (Ihlanfeldt, 1992, 1993; Rogers, 1997) find substantial effects, especially for youth, whereas others (Carlson & Theodore, 1997; Immergluck, 1998a) find more modest effects. From her case studies of automobile parts suppliers in Detroit and on Holzer's (1996) multicity study, Turner (1997) concludes that nonminority-owned firms located far from lower income Black neighborhoods may have located in such places in part to avoid Black populations and that they reject Black job applicants at higher rates than do central-city firms. Kain (1992) also argues that firms flee central-city locations partly to avoid less educated and Black job applicants. Thus, social distance is embedded in spatial distance so that merely addressing commuting costs may be insufficient to improve the employment rates of Blacks.

Notwithstanding the limited effect of distance on employment rates, the literature on spatial mismatch has frequently overlooked benefits to local jobs, other than their effects on employment rates. For example, even if employment rates are unaffected, job proximity may reduce arduous commutes, which may be especially hard on working parents, youth, and low-wage workers reliant on mass transit. Immergluck (1998b) confirms the notion that job proximity has a sizable negative effect on commuting distance. Moreover, job proximity may be relatively more important to Black workers, as suggested by Zax and Kain's (1996) finding that the welfare loss of Black workers due to a central-city-to-suburb firm relocation is substantially greater than that for White workers.

The spatial mismatch literature carries at least three implications relevant to policy concerning intrametropolitan patterns of business development subsidy. First, commuting distance appears to have a significant (albeit limited) effect on the employment rates of residents of lower income areas. Second, although residents of these areas may be able to obtain work even with few jobs nearby, the presence of such jobs is likely to reduce hardships caused by distant commutes. Finally, because firms in more affluent, suburban areas may be more prone to avoid employing residents of inner-city neighborhoods, subsidies to such firms are less likely to benefit inner-city residents than are subsidies to firms that have located or remained in lower income or central-city locations. Exceptions are Black-owned firms, which are likely to hire Blacks at relatively high rates, regardless of firm location. Bates (1993) and Turner (1997) find that minority-owned firms--especially Black-owned firms--tend to employ Blacks at relatively high rates, even if located in nonminority areas. It should be noted, however, that only 1.6% of SBA 504 loans nationally were made to Black-owned firms in 1996. Even if the number of 504 loans to Black-owned firms grows at a substantial rate, such borrowers are unlikely to represent a substantial portion of overall 504 activity.

A second reason to be concerned with the spatial patterns of federal small business development loans is the already uneven distribution of establishments providing basic goods and services. Bingham and Zhang (1997) find that lower income urban areas suffer from lower levels of retail and service establishments, except in a few industries (such as check cashing and social services), than do higher income areas. Bingham and Zhang's results suggest a linear decline of establishment activity as income declines, with no clearly detectable threshold effect at very low income levels.

Bates (1993) suggests that inadequate public services, poor schooling, small local spending multipliers, discrimination, and other problems make prospects for economic development …