Technology - Innovation - Entrepreneurship

Potential Realignment of Economic Development Policy

What is technology?
How land, capital, and labor are brought together to produce a specific output. Opportunities for patents exist.

Some technological advances represent changes in the output process.

Technology also reflected in the nature of products being produced. Ex: Shift from ag commodities to food products

Process technology in the form of how things are done. Ex: Just - in - time inventory process which may not be possible to patent

Definition:

Technology is a formal and systematic entity of knowledge and skills in order to realize and control complex production techniques / processes.

Technological Adoption
Two Phases: 1. INVENTION Either flash of insight providing new understanding of basic questions, or conceiving new combinations of preexisting ideas.
Result of both basic (no commercial end in mind) research and applied (practical end in mind) research. May not be driven by direct economic motive(s).

2.

Invention may remain unused for long period. An ongoing process

INNOVATION Adoption and application of new ideas to production process, marketing, or organization. Dependent on invention but driven by economic forces and entrepreneurial attitudes. Requires individuals / groups to organize needed resources and assume risks of failure.

The Communitys Role in Technological Adoption

Aspects of the creative / innovative community
1. Solid knowledge base Fluid flow of data / information (good communication)

2.

Synergism Interaction of inventor and innovator

3.

Structural Instability Uncertainty not an obstacle but a precondition of a creative state. Flexible (adaptive) approach to decision making Embracing change instead of avoiding risk.

A Key Institution: Entrepreneurship

Bringing about new ventures, enterprises, economic organizations, and sectors.

Potential for communities Enhance employment / income opportunities

Increase economic diversification

Improve quality of life.

Special characteristics of the entrepreneur: 1. Willing to accept new ideas.

2. 3. 4. 5. Drive to achieve. Sets appropriate, achievable goals. Accepts feedback. Seeks excellence.

 Community attributes contributing to entrepreneurial innovation 1. An indifference towards tradition.

2. Highly diverse social institutions

3.

Diffused power struture

4.

Opportunity for social mobility.

5.

Visionary attitudes Our philosophy of entrepreneurship is not something you do at a point in time. Rather it is a mind set, a lifelong journey, a commitment to dream, believe, pursue. -Falcone Center for Entrepreneurship, Syracuse University Risk taking Those who play it safe need not apply. Specific steps: Locally - based venture capital Business incubators

6.

Key source: http://www.house.gov/osborne/entrepreneur

Other Important Sources:

Better Business Bureau of the Heartland 2237 North 91 Court Omaha, NE 68134 Center for the Study of Rural America Federal Reserve Bank of Kansas City 925 Grand Blvd. Kansas City, MO 64198 816-881-2697 Ewing Marion Kauffman Foundation 4801 Rockhill Road Kansas City, MO 64110 816-932-1000 USDA - Rural Development Kansas State Office 1303 First American Place Suite 100 Topeka, KS 66604 785-271-2700 www.rurdev.usda.gov/ks South Dakota State Office 200 4th Street SW Federal Building Rm. 210 Huron, SD 57350 605-352-1100 www.rurdev.usda.gov/sd Iowa State Office 210 Walnut Street, Room 873 Des Moines, IA 50309-2196 515-284-4663 www.rurdev.usda.gov/ia Consumer Economic Development Research and Information Center Federal Reserve Bank of Chicago 230 South LaSalle St. Chicago, IL 60604 312-322-5322 Center for Rural Entrepreneurship 317 S. 12th St. Ste. 200 Lincoln, NE 68508 402-323-7339

North Dakota State Office Federal Building, Room 208 220 East Rosser Ave. Bismark, ND 58502 701-530-2037 www.rurdev.usda.gov/nd Nebraska State Office Federal Building, Room 152 100 Centennial Mall, North Lincoln, NE 68508 402-437-5550 www.rurdev.usda.gov/ne Missouri State Office 601 Business Loop 70 West Parkade Center, Suite 235 Columbia, MO 65203 573-876-0976 www.rurdev.usda.gov/mo

Financial Capital Markets

After all, capital is the economys link with the future. William Baumol Text. pg. 124

Financial Capital
The mechanism permitting the community to purchase or develop labor and physical capital critical for community economic development. Can be private or public Private capital has two forms Debt Equity

Financial Capital Market

Interface of capital suppliers and capital demanders with the price of money (interest rates) being the equilibrating force.
Table 7.1. Sources of capital available to businesses
Internally generated funds(profits) personal savings of entrepreneurs (including credit cards) FFA money or family, friends, and associates Commercial bankers Lease financing Account receivable finance companies Commercial finance companies Commercial fianc companies Public programs federal, state, local government Life insurance companies Bonding companies Investment banking Employee stock ownership programs Mortgage bankers Venture capital industry (including angelsa) Angel networks are individuals of high net worth who are willing to make investments in business ideas.
a

Financial Capital Markets are segmented into submarkets.

short term, long term operating, real estate commercial / industrial, farm debt, equity, venture geographic

Vast menu of financial capital products but financial institutions limit their own offerings due to:
1. 2. 3. 4. Information costs (knowledge) Types of liabilities Regulation Conscious decisions

Implications of limited offerings:

1. 2. 3. Some hesitancy to support new development opportunities. Inadequate capital funds for investment. Propensity to maintain status quo of local economy.

Forms of Capital
Debt Capital: Obligatory notes Legal right to recover debt Equity Capital: Conveyance of a share of ownership to the lender Secured obligation (ex: real estate mortgage) Venture Capital: Investment in high risk activities but with potential high rate of return.

Debt Capital via Community Capital Markets

Three major components 1. Households 2. Financial Institutions 3. Businesses Local business sector the major user of community capital Secondary Markets 1. Selling all or part of a loan into a regional or national money market 2. Loan risk (of financial intermediaries) reduced by guarantees: Small Business Administration (SBA) Economic Development Administration (EDA) Department of Housing and Urban Development (HUD) Correspondent Banking 1. Partnering of smaller banks with larger banks. 2. Larger banks may not be as sensitive to local economic needs 3. Partnering with public entities for higher-risk community development ventures. Ex: State Development Finance Programs

The Role of (Local) Banks in Community Economic Development Critical Actors

Key Issues: 1. Using dollars for local or nonlocal investment? 2. 3. 4. Mix of loans made locally? Financial services rendered? Cooperation with other local and regional banks? Additional Involvement Aspects: Information linkage for development projects? Participating in community visioning and long term development?

Venture capital
Typical Protocol invest in ventures capable of 30+% annual rates of return. Short term investment (3 to 7 years) Always strategizing for profitable (and timely) exit strategy. Four key tasks of venture capitalists: 1. Assemble pools of money 2. Identify investment opportunities 3. Monitor the management 4. Develop exit strategy Limitations in attracting venture capital to rural areas..

Conventional Capital Market Failures

Four Causes: 1. Mobility capital very mobile but not perfect. tied up in physical form community capital indivisible and lumpy differing tax structures differing private and social effects variation in risk perception (requires differing rates of return to attract capital investment)

2.

Information Cost of information / transaction a limiting factor

3.

Risk and uncertainty

4.

Regulation Protection of depositors money a key responsibility

Venture Capital Market Failures

Bias against business life cycle (invest early ... then exit)

Bias against undeveloped markets (seen as too risky)

Bias against giving up ownership Entrepreneur is often hesitant to do this

Bias against social rate of return (SRR) verses Internal Rate of Return (IRR)

Summary:
T Financial capital a key ingredient in community / economic development.

Unique needs and challenges accessing financial capital for rural economies.

Undeveloped venture capital markets for rural economies.