UMD Grand Challenges Grant Funds Work to Better Understand How Small Business Thrive

In the United States, small businesses account for 44% of economic activity and create two-thirds of new jobs. But their success often varies by location and hinges on small-business owners having relationships with the right people. University of Maryland researchers and students are working to understand what that means locally.

Research from Vojislav Maksimovic and Liu Yang, finance professors at the Robert H. Smith School of Business, shows how small businesses with high social connections tend to thrive. As part of a University of Maryland Grand Challenges Grant, the researchers are also working with faculty and students at UMD’s Philip Merrill College of Journalism. This past spring, student reporters for the school’s Capital News Service used the research as a jumping-off point for a series of articles about small businesses in Baltimore.

The reporters spent five months interviewing more than 70 small-business owners and staff in Baltimore to understand how they survive in the era of big-box stores and online shopping. Capital News Service also worked with the Baltimore Banner and the Greater Baltimore Black Chamber of Commerce to share preliminary findings with small businesses and get their feedback on the project. The reporting backed up the findings in Maksimovic and Yang’s research: social connections matter for small businesses.

In the research, Maksimovic and Yang look at why some small businesses exploit business opportunities better in some locations than others. They ask whether outcomes, such as growth and profitability, are determined by the availability of investment opportunities and infrastructure in a locality. They also look at how the deeper characteristics of localities and the people who live there impact business outcomes.

“Our research examines the impact of social capital on economic and social outcomes at the local level, including business creation,” says Maksimovic.

The researchers leveraged extensive, detailed data from the U.S. Census Bureau and foot traffic analytics. Their results show the startling significance of social capital on small businesses’ funding success.

Here, social capital is all about how well a small-business owner can work their personal connections and network to obtain resources, favors or information to achieve better business outcomes.

An initial study of 1.2 million consumer-facing businesses nationwide reveals that social capital significantly influences small business financing, more so than local bank presence, income, and educational levels, says Yang.

“Specifically, social capital accounts for 20% of the variation in loan uptake across U.S. zip codes, exceeding the effect of having a bank within 1,000 yards of a business,” she says.

The influence of social capital versus bank branches differs markedly based on region, the research shows. Strong social capital is more beneficial to larger, established stores in less dynamic areas, while bank branches are more helpful to smaller, growing businesses in dynamic regions.

The researchers also looked beyond in-person relationship connections.

“Our analysis of virtual social connections, such as Facebook links, shows they predominantly benefit well-off locations,” Maksimovic says.

Yang says the research shows just how important a personal network can be as a community-level determinant of small business dynamism.

“This research underscores the nuanced role of social capital in supporting small businesses, suggesting that fostering community engagement and networks could be a key strategy for promoting economic development and equality.”

Read the research, “Seizing Opportunities: Small Businesses, Social Capital and Banks .”