Employment and Jobs

The Procurement Economy as a Path to Equity and Small Business Growth

January 5, 2023  • Jorge Jimenez

The Covid-19 pandemic and the subsequent economic slump have propelled the United States into a moment of federal largesse. Since 2020, Congress has authorized $3.8 trillion, a staggering sum of economic development spending. This is not the first time the country finds itself awash in federal money, but something is different. The White House has stated that the Bipartisan Infrastructure Law—the largest of the recent bills—will “grow the economy sustainably and equitably.” The Inflation Reduction Act, for its part, will grow the economy “from the bottom up and the middle out.” This is no traditional economic development narrative. This time, the narrative communicates directly with people. Then, to be successful, this Main Street economic development narrative will have to center around the small businesses that form the cornerstone of the American economy, with pointed attention to the minority- and women-owned businesses that are ripe for growth.

Federal dollars are disbursed through a system of procurement that can create unequal results in the development of small businesses. At the local level, systems of procurement often present technical and financial barriers to smaller enterprises. They require firms to have previous experience with large contracts. They ask that businesses have bonding insurance in amounts sometimes larger than the entire worth of the company. Small businesses who manage to jump over these first few hurdles then find themselves navigating a large and fragmented system of separate government entities—including agencies, departments, and special districts—all with different requirements, application systems, and even technical language. These present serious barriers for resource-strapped firms. Fortunately, structural reforms to a procurement system of rules and regulations are entirely approachable in the near term.

To address procurement reform, we must first fix government fragmentation, perhaps the biggest barrier to small businesses’ procurement. Cities should create common portals where all local government entities post opportunities, iron out inconsistent language and application requirements, and allow businesses to upload their credentials for faster processes when applying to multiple opportunities over time.

Financing requirements need to be overhauled. Firms should be allowed to use the value of their current contracts as collateral, or revenue-based financing. Small firms are unable to prove they can service a contract because they lack the financing needed to hire employees and buy equipment, but they are also less likely to score a loan from a bank, especially if they are a minority-owned firm. They know this and seek risky alternatives: Latinos are more likely than others to seek a loan based on their personal credit, assets, or use family capital. Vulnerable businesses need access to affordable, quality financing, and the public, private, and non-profit finance sectors need to work together to achieve this.

We must first fix government fragmentation, perhaps the biggest barrier to small businesses’ procurement.

Ultimately, we must look beyond rules and regulations and create a system that is geared towards equitable bottom-up development. One example is eliminating low-bid contracts, which disadvantage smaller firms, and are designed to get the most bang for the buck from cities and agencies. This makes fiscal sense but is not a sound economic development strategy. Instead, contracts should be awarded based on the principle of best value, meaning to bids that portend to bring direct and substantial socioeconomic benefits to their communities. This would give local, small businesses the needed edge since they inject most, if not all, of their revenue back into the local economy. They are also less likely to concentrate capital, instead spreading the benefits wide to their workers. In one telling example by Stanford University researchers, more Latino businesses were found to provide healthcare and retirement benefits to their workers than comparative white businesses, regardless of revenue.

If reversing inequality is a policy choice that promises to fuel economic growth, investing in minority and women enterprises can be the engine that accelerates it. These businesses are far more likely to be small. In fact, 93% of Latino businesses have no employees at all. Investing in these companies promises to return the highest and most direct dividends to local communities. What’s more, many minority businesses are predictably located in minority neighborhoods, where persistent under-investment in infrastructure and human capital often invite displacement. Investing in local, minority-owned businesses therefore plays a double role, not only strengthening regional economic development, but also reinforcing cultural, social, and human capital, bringing long-term stability to cities.

Our work in the Latinos and Society City Action Lab with six cities across the country routinely encounters the spirit and resilience of growth-minded entrepreneurs. It is always evident in interviews and focus groups, as well as community and official convenings. Time and again, community-based entrepreneurs remind the members that form a procurement ecosystem that their companies, though small, are entirely local. They hire their neighbors and their neighbor’s kids; they source capital and materials from other local businesses; they pay their taxes and rent back to their cities. Yet they remind us just as much of a system that does not always take these benefits into account. They implicitly ask an important question for local policymakers: what is the opportunity cost of leaving our small businesses behind?

Previous moments of federal largesse have all had one theme in common: the intent to rescue the American dream. For this moment to be successful, policymakers must understand that the American dream lives in the ambitions, the hustle, and the innovation of small businesses. This is a moment easily missed if we do not move fast to reform the systems that largely decide to whom this federal largesse is afforded. These systems must recognize that we are not growing an economy for the benefit of communities, rather communities embody the economy we are trying to grow. Therefore, economic development is the development of small, minority businesses across America.

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