Recent efforts to support businesses affected by the revenue lost during the pandemic, such as grants and loan programs, have been criticized for favoring larger businesses. New research from Washington State University found that federal agencies get more bang for their buck by channeling grant money to smaller startups.
Researchers from WSU, Indiana University, and the University of Central Florida say their work could provide valuable insights as federal and state governments look for ways to revitalize the U.S. economy after the pandemic, including recent Paycheck Protection Program loans.
“From a public policy perspective, giving grants to smaller businesses seems to produce better returns for economic development,” he said Alex Kier, Assistant Professor of Entrepreneurship at WSU Carson College of Business. “We heard the news on the news about large, multi-million dollar organizations that have received fairly substantial loans for the Paycheck Protection Program. Our research shows that money may have been better spent by distributing the PPP loans to smaller businesses. “
The study tracked the results of approximately 130 companies in eight incubators in the southeastern United States over a period of four years. Small businesses that received their first grant saw strong sales growth – an average of 1,000% over two years.
In comparison, medium-sized and larger companies in the start-up centers reported flat or declining growth paths after receiving a grant.
The results appear in the article in the Strategic Entrepreneurship Journal: “Do Policymakers Accept Grants For Granted? The Effectiveness of Public Sponsorship for Innovative Entrepreneurship. ”
Allocation of grants for economic development
Every year the federal government awards billions in grants to private companies through agencies such as the National Institutes of Health, the National Science Foundation, and the Department of Defense. Often the goal is to stimulate the economy by stimulating businesses to create jobs by developing new products and services.
Getting a modest grant to small businesses can improve the company’s long-term profitability, said Regan Stevenson, assistant professor of management and entrepreneurship and a scholarship holder of the John and Donna Shoemaker Faculty of Entrepreneurship at IU Kelley School of Business.
“Our data shows that even micro-cost grants represent a turning point for smaller businesses and can accelerate their revenue growth quickly,” said Stevenson, lead author of the article. “We also found that when small businesses get their first grant, they signal to investors that the company may be a good bet. As a result, smaller companies are immediately more attractive to investors and secure more external funding. “
No guarantee government will select winners
With larger companies in their incubator sample, the researchers found that “stretching companies” that use existing resources outperform “chasing companies” that want to acquire and expand current resources.
“Stretching companies are taking an innovative and entrepreneurial approach to survival, while chasing companies may be trying to develop grant writing skills to keep them from focusing on their core business,” said Stevenson.
By concentrating the grants on a few companies, the federal government could inadvertently crowd out many worthy competitors, Kier said.
“There is no guarantee that the government will select a winner,” he said. “When you think of venture capitalists or angel investors, they are in the investment business and sometimes even choose unproductive companies. Can you imagine how difficult this process is for government agencies? “