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Reciprocated community
support and small town small business success
Published online: 09 Nov 2010.

(1999) Reciprocated community support and small town - small business
success, Entrepreneurship & Regional Development: An International Journal,
11:3, 231-246, DOI: 10.1080/089856299283182
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ENT REP RENE U RSH I P & REGIONA L DEVE L OPM EN T, 11 ( 1999) , 231 246

R eciprocated community support and small tow n

small business success

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* Department of Economics: { Department of Statistics; { Department of

Sociology, I owa State U niversity, Ames, I A 50011, USA; e-mail: kilkenny@

This paper presents an empirical test of the signi cance of reciprocated community support, in
contrast with traditional economic factors and unilateral support, in the success of small businesses in small towns. The central hypothesis is that entrepreneurs who make non-market
contributions to their community and whose community supports them, are more likely to
consider their businesses to be successful. L ogistic regression is used to analyse survey data
from over 800 small businesses in 30 small towns of the state of I ow a ( USA) . The authors
found that the interaction e ect of an entrepreneurs service to the community, reciprocated
by community support of the business, is the single most signi cant determinant of business
success among dozens of indicators and characteristics of the respondent, the business, and the
small tow ns in the sample. I n addition, it was found that business people who feel successful
expect to expand. These ndings are relevant to rural development. The expansion of existing
businesses is an important component of regional job growth.
K eywords: reciprocity; community development; social capital.



Small tow ns are likely to be places where everybody knows everyone. L ocals know
each others jobs, politics, hobbies, families and friends. I n particular, a small tow n
business person may also be known as a donor to the local youth programme, as a city
councillor, or as a member of the church congregation. By the same token, small tow n
business customers and local suppliers are also known as neighbours, local leaders,
members of the congregation, and so on. Do the relatively dense personal and professional interdependencies, particularly with respect to community support activities,
contribute to the success of businesses in small tow ns?
Reciprocated community support is a non-market exchange that the authors argue
can be classi ed as a form of social capital, which is widely considered to be important
in regional development ( J ohn et al. 1988) . On the basis of historical evidence from
I taly, Putnam ( 1993: 37) claim s that social capital embodied in norms and networks
of civic engagement seems to be a precondition for economic development. The social
capital model ( Coleman 1988) is that there is a positive relationship between the stock
of goodwill that businesses have within the community and their success.
Furthermore, a communitys vitality often depends on the vitality of the businesses
in tow n ( Flora et al. 1997) . However, given that we have limited reliable data for
rural areas ( Zuiches 1994: 21011) , not enough is known about the relationship.
Zuiches also asks, W hat, for example, are the social attributes of a viable rural comEntrepreneurship and R eg ional D evelopment I SSN 08985626 print/I SSN 1464 5114 online # 1999 Taylor & F rancis Ltd
http://w w w LS/epn.htm
http://w w w .ta /JN LS/ep n.htm

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munity versus the economic attributes? The authors argue that reciprocated community support is one of those attributes, and that symmetry is the critical feature.
I n this paper, an econom ist, a statistician and a sociologist work together to analyse
the empirical signi cance of reciprocated community support, in contrast with traditional economic factors and measures of unilateral social capital, in the success of small
businesses in small tow ns. The central hypothesis is that small-business entrepreneurs
who contribute personally and professionally to their community, and who are supported by their community, are more likely to be successful. Furthermore, business
persons who feel successful are more likely to stay in the town, and/or expand. Business
retention and expansion ( M orse 1990) is important for regional development. The
expansion of existing businesses has been shown to be the strongest component in net
regional job growth ( Kraybill 1996) .

Reciprocated com m unity support

I n this section, the authors de ne concepts and develop a hypothesis from existing
theoretical and empirical work done by both economists and sociologists. According to
conventional de nitions in mathematics or logic, a relation must be symmetric ( go
both ways) to be reciprocal. This de nition of reciprocity was also assumed by the
sociologist Granovetter ( 1973) . Thus, to be reciprocated, support must be both given
and received. I t is argued that symmetry is the key feature of the community support
relation. I n this study, reciprocated community support is the joint occurrence of business support of the community and community support of the business. I t is argued
that both must be present together for small tow ns and small businesses to thrive. This
paper is an attempt to test that proposition.
The authors de ne business support of the community as a contribution to the
public good, according to the conventional economic distinction between private and
public goods. The bene ts of public goods cannot be entirely captured ( internalized)
by the transactors alone: others, who cannot be excluded, also enjoy bene ts ( nonrival externalities) without having to pay ( non-excludable) . I n contrast, private goods
must be purchased to enjoy their bene ts. For example, the employ of local citizens
and the sales or purchases to/from other local businesses are excludable, rival, and
private transactions undertaken in labour or commodity markets where money is
exchanged for work or things. Business contributions to the public good are nonmarket, unrequited transactions providing bene ts enjoyed by anyone.
A businesss unrequited contributions to its community may be pecuniary ( cash
donations) , material ( in-kind donations) or psychosocial ( leadership) . Furthermore,
since a business person has many roles in a community, one can distinguish prof essional
from personal contributions. Contributions, donations, provision of technical assistance,
or other in-kind transfers that are tax-deductible from business income are classi ed as
prof essional support of the community by the business. A businesss personal support of
its community includes the community activism of the business person as an elected or
volunteer public servant or activist.
Community support of a business should have a pecuniary outcome to be relevant
in business success ( Stendard 1992) . To support a business means to contribute to
business pro tability or sustainability. Community support for a business might be
expressed by individuals as loyal cu stomers or as providers of free advertising or
promotion. I t may appear in the form of reduced risk of theft, low er expenses on
insurance, or low er transaction costs in general. I t may also be provided by institu-

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tions, such as local government, via preferential tax or zoning treatment. Finally, it
may be totally non-pecuniary, for example, where the quality of life in the community
is such that a business person feels successful regardless of how low their nominal
business income may be.
Business motives for providing unilateral ( as opposed to reciprocated) personal and/
or professional community support can be understood from the perspectives of the
rational-choice view of social capital as a regional development resource ( Coleman
1993) , as well as from the social embeddedness of economic activity ( Granovetter 1985,
Putnam 1993) . A rational-choice view is that social capital is a resource generated
and used by individuals to serve their ow n interests ( Flora et al. 1997) . I n the extreme
( undersocialized view , Granovetter 1985) , businesses support their communities
because it pays o for them. Alternatively, businesses support their communities
and vice-versa, no matter what, because it is expected of them ( the oversocialized
view) . Granovetter ( 1985: 482) explains that in traditional societies, economic life was
submerged ( embedded) in social relations; and that if social capital is now merely a
rational choice, then the traditional situation has been reversed: social relations
become an epiphenom enon of the market.
Granovetter ( 1985: 485) also points out that both the undersocialized view that
behaviour is atomistic, and the oversocialized view that behaviour is driven entirely by
the desire to be favourably perceived by others, imply that social relations have only
peripheral e ects. I n other words, if the community activism of entrepreneurs is
purely unitarian ( the undersocialized view is correct) , a feeling that it is reciprocated
by the community would not be signi cant in business success. I f, on the other hand,
the extreme oversocialized view is correct, then neither form of unilateral community
support would be signi cant, while reciprocation would be.
Other sociological perspectives on unilateral community support as a rational business choice include the enlightened self-interest ( Keim 1978) and social investment
hypotheses, surveyed by Stendard ( 1992) , and by Gri n and M ahon ( 1997) . The
enlightened self-interest hypothesis is that there is a positive relationship between a
businesss contribution to the public good and the success of the business. The social
investment hypothesis is that business philanthropy is another method by which
businesses enhance revenues or reduce their costs. W ith the exception of recent
work by Besser ( 1997) , however, Thompson and Smith ( 1991) report in their survey
that the social investment literature focuses on corporations in the national context. I n
the present study, business persons are both entrepreneurs and private citizens who
are members of a community.
Economists interested in the political economy of growth have also investigated the
role of social capital. F ollow ing Hobbes, economists hypothesize that high-trust societies enjoy higher rates of growth. The empirical work, however, has focused on the
relationship between measures of social capital and macroeconomic performance.
They measure the dependence of growth in regional or national gross product on
region-wide indicators of associational activity, trust, and/or civic co-operation
( Fukuyama 1995, Knack and Keefer 1997) . They nd that high-trust societies
waste fewer resources protecting themselves from malfeasance; have cheaper, more
credible, and stable government institutions; have more access to credit; and risk more
on innovation; all of which lead to higher rates of investment and growth.
Knack and K eefer ( 1997) nd aggregate statistical evidence that trust supports
economic growth, but they do not nd an independent e ect of community involvement. The present authors share the premise that mutual trust supports economic

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growth, but they posit that the e ect of community involvement may be more apparent if one ( 1) focuses on individual businesses in a community context; and ( 2) considers interaction ( reciprocity) as well as direct e ects. The authors share the
sociologist Granovetters ( 1973) belief that the analysis of processes in interpersonal
networks provides the most fruitful micro-macro bridge.
Economists also study the role of voluntary contributions to the public good
( Sugden 1984) and non-market reciprocal exchange ( Kranton 1996) in raising
economic welfare. Sugden explains a principle of reciprocity by which agents pursue
their self-interest through the provision of non-excludable public goods by making
unrequited contributions at least as large as others do. Krant on explains that agents
engage in reciprocal non-market relationships to economize on search or transaction
costs and to avoid opportunistic behaviour among strangers. Kranton also shows that
the utility for reciprocal non-market exchange is higher the smaller the market, and
that personalized exchange is more likely when people expect to interact frequently.
These claim s, however, are purely theoretical. Here, an attempt is made to empirically
test these theories about the importance of reciprocated non-market relationships
between rms and the communities in which the ow ners reside and do business.
I n particular, the authors focus on small communities to test more explicitly the
embeddedness of economic behaviour within a communitys social setting. The small
tow n focus is a maintained ( untested) hypothesis. Flora et al. ( 1997: 624625) state
that social capital thrives when individuals within a social system interact with one
another in multiple roles over a period of time. Clearly, the probability of repeated
interaction is higher the smaller the tow n. F urthermore, mutual knowledge is more
feasible in smaller communities. This is important because one is constrained by the
available data to analyse one sides assessment of the other sides participation in
potentially reciprocal relationships. Also, with respect to business persons with multiple roles in small tow ns, Granovetter ( 1985: 507) argues that the persistence of large
numbers of small rms in the periphery may be better explained by the relatively
dense network of social relations overlaid on the business relations connecting rms.
Density of acquaintanceship is also cited as important by Freudenberg ( 1986) .
I n sum, an empirical investigation of the importance of reciprocated social capital
hypothesized by economists and sociologists is posed. The approach has three unique
features. First, individual business persons are the units of observation. This allows
( 1) a formal investigation of dyadic relations ( albeit subjectively reported) , and ( 2) a
separate ( unconfounded) analysis of the relative importance of professional compared
to personal forms of an entrepreneurs contribution to their community. Furthermore,
the distinction between forms of business support help to distinguish the signi cance of
self-interested or business-motivated behaviour from social, embedded or personal
behaviour. Second, the focus is on small tow ns, assuming that one is more likely to
observe reciprocal exchange in smaller communities with more dense, multifaceted
networks. Third, the authors formally test for the im portance of reciprocal relations by
looking at both unilateral and two-way support in the context of traditional economic
Figure 1 shows the plan of the hypothesis test that business persons subjective
assessment of their small tow n business success depends on reciprocated community
support, in contrast to other determinants of business success, including unilateral
support and economic factors. Reading from the left, unilateral community support
by a business is distinguished into two forms: personal, by the entrepreneur with no
direct payo for his/her business; or professional, deductible from business taxes. The

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Figure 1.


The general model of business success, highlighting reciprocated

community support.

heart of the issue is reciprocity: the importance of reciprocity is questionable if unilateral support by the business and/or unilateral support of the business by the community are found to be signi cant. Finally, community support is considered in the
context of traditional economically-relevant characteristics of the location, the business and the entrepreneur. The relative importance of the social and economic contexts for business success is to be ascertained from the relative statistical signi cance of
the various factors.

Em pirical analysis

I n this section the authors describe the data and explain the measurement of dependent and independent variables. The statistical techniques used to identify the signi cance of reciprocated community support in small town, small business success and
the role of business success in retention/expansion are explained. The results of a
variety of statistical tests are reported and interpreted.

T he data

Data collected by a team of sociologists for a previous study ( Besser 1997) was used for
the analysis. The team surveyed managers or ow ners of 1,008 randomly selected
businesses from 30 communities with populations of between 500 and 10,000 persons
in 30 di erent I ow a counties. The survey was conducted in three stages. First, a
strati ed random sample of businesses was identi ed from a business directory.
( Smaller communities were over-sampled.) The selected businesses were contacted
by mail. Second, those business persons who agreed to participate were interviewed
by telephone for about 35 min each, answering over 150 questions. There was an 89%
co-operation rate. Third, there was a mail-in survey ( with one-third fewer respondents) . I n this paper unweighted responses from the telephone interviews, as well as
some additional information about the community and business, are analysed.
The telephone survey collected concrete information about the businesses, communities and respondents, as well as more subjective information about the respondents
involvement in the community and their perceptions of the communitys support for

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Figure 2.

Statistical model variables .

their business. These were recorded on a 5- or 7-point scale ( Strongly disagree to

Strongly agree) . Thus, all of the measures of business success and community support
are ordered categ orical variables. One critical preparatory task was to carefully reverse
code responses to obtain consistent orderings from low to high with respect to a
positive business outcome or community social characteristic.
Figure 2 gives the general unrestricted statistical model. Figure 2 has exactly the
same scheme as gure 1, but named variables are listed in place of the concepts they
measure. The follow ing sub-sections explain these variables.


D ependent variables

Two survey questions concerned business success. Respondents were asked to rank the
success of their business {SU CCESS} and whether they expected to expand, stay the
same, or shrink in the future {FU TU R E}. A total of 77% of the sample indicated
feeling successful ( 47% ) , or very successful ( 30% ) . Note that 70% of the sample also
indicated that they agreed or strongly agreed that pro t measures business success.
Some 52% reported that they were planning to expand in the future, whereas 35%
reported that they were planning to stay the same size.
A direct application of the present model would entail predicting the respondents
ranking of the success of their business from 1 to 5, with 1 indicating very unsuccessful to 5 indicating very successful. There is a clear ranking among the categories, but
the di erences between any two adjacent categories cannot be assumed to be the
same. The nature of the dependent variables dictates the appropriate statistical
method to apply. I n particular, Ordinary Least Squares ( OLS) regression is inappropriate when modelling categorical variables because of the non-interval nature of
the dependent variable ( L iao 1994) . For mod els in which the dependent variable is
categorical and the explanatory ones are either continuous or categorical, the appropriate technique is logistic regression ( Anderson 1980, Fienberg 1980, Liao 1994) .
Logistic regression estimates the probability of each categorical response as a logistic

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function of the explanatory variables using the method of maximum likelihood. The
logistic functional form ( in contrast with OLS) also contains the estim ated dependent
variable ( probability of a ranking) to be between 0 and 100% .
I t was decided not to predict a ve-category dependent variable, however, to avoid
drawing interpersonal comparisons from individual rankings. Economists believe that
a persons choice of how to apply a ranking is idiosyncratic. Despite the clear ranking
among the categories, the di erences between categories will vary from respondent to
respondent. Thus, ordinal opinion rankings are non-comparable. As an illustration,
an American teenager could be quoted as saying that he would De nitely love a drink
on a hot summer day, whereas a well-mannered Englishman might say that he would
Like something to drink, only if it is no trouble, even if he had been lost in a desert for
days without water. W e should not conclude that the hot teenager in fact values a
drink more than the lost Englishman. W e can conclude that they both prefer having a
drink to not having one. The problem is neither the design of the question nor the
sincerity or accuracy of the respondent, but the impossibility of drawing cardinal
comparisons across respondents.
I t should not be concluded that a business person who replies that he feels very
successful is more successful than the one who replies that he feels successful. To
avoid associating cardinality or comparability to the v e scale rankings of business
success, the variable for business success was transformed into a {0, 1} variable. The
responses ( 1, 2, 3) very unsuccessful to indi erent were transformed to {0} to
represent not successful; and responses ( 4, 5) successful to very successful were
transformed to {1} to represent business success. This transformation of the dependent
variable converts the model from a ve category ordinal model into a binary model.
Likewise, the ordered categorical responses to the question abou t the expected
future for the business were converted from three categories to two. I f the response
was ( 1) expand, it remained coded as ( 1) . I f the response was ( 2) stay the same or
( 3) get smaller, it was re-coded as ( 0) .

M easures of community support

3.3.1 Business support of the community: Two measures of prof essional support given to
the community by a business: {DONATE} and {SUPP ORT} were generated as
functions of the variables listed in the upper left-hand box in gure 2. Two ordered
categorical questions concerned how often the business provided nancial {cash} or
technical assistance {in-kind} to community organizations or schools. Respondents
indicated the frequency, from 1 never to 5 very often. An average was generated from the non-missing responses by respondent, labelled {DONATE}, which is
a continuous variable bounded between ( 1, 5) . The second measure, {SUP PORT},
is an average of the non-missing ordered categorical responses to {local} I purchase locally regardless of cost, {help} I am willing to spend resources to help
the community, {youth} how often my business has provided support for local
you th programs, and {bond} how often my business provided support for local
bond issues.
I n addition, two di erent measures of the businesss personal support of the community were constructed, one re ecting community service {SERV}, the other re ecting boosterism behaviour {BOOST}. A series of binary responses document whether
or not the business person had ever held elected o ce ( 21% said yes to {elected}) ,
been in a leadership position ( 53% {lead}) , active in organizations {orgz}, or otherwise

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active in the community ( 68% {active}) . The non-missing answers of 1= no, 2= yes
were averaged by respondent to generate an indicator of the business persons service
to the community, and this was labelled {SERV}. This continuous variable {SERV} is
bounded between ( 1, 2) .
The second measure of personal support, {BOOST}, is an average of the nonmissing responses to seven questions re ecting the behavioural commitment of the
respondent with respect to their community. {BOOST} includes {co-op} a ranking
of co-operation with other local business as a business strategy; {work} ranking of
working to strengthen the local community as a business strategy; {image} ranking
of the importance of improving my business image in the community as a business
strategy; {close} rank of how true is the statement that living in this tow n is like
living among close friends, {brag} I brag about this tow n as a good place for
business, {home} I feel at home in this tow n, and {think} a ranking of how
much thought is given while at work to community involvements.
3.3.2 Community support of a business: The community support of the business is de ned mainly in terms of patronage and promotion. Note that other characteristics
of the community, such as the level of trust {TRU ST} or the friendliness of the
tow n {F RI ENDLY} are included in the analysis, but not as part of a potentially reciprocal community support relation. The respondents subjective assessment of how
much support they receive from the tow n was re ected in ve questions, which
were averaged into the variable labelled {TOW N}. One question directly asked the
respondents to rank the tow ns appreciation of their business {appreciate}; fewer
than one-half replied that they felt somewhat or greatly appreciated. Another question asked if residents support local business {supportive}; 45% of the respondents
agreed, and 6% strongly agreed. Almost 60% replied that they were satis ed
( 19% ) or very satis ed ( 40% ) with their relationships with their ow n customers
{satis ed}. Almost two-thirds reported their cu stomer loyalty {loyal} to be predictable ( 36% ) or very predictable ( 29% ) . Respondents felt that people of their tow n
cared ( 53% ) or really cared ( 6% ) about the fate of the business {care}. The nonmissing responses to these ve ordered categorical variables were averaged to generate {TOW N}, a continuous variable bounded between ( 1, 5) . The term {TOW N}
was used as a measure of unilateral, but potentially reciprocated, community support of the business.
The summary statistics for three of the ve unilateral support variables are presented in table 1. As explained above, a businesss unilateral support of the community
was de ned as taking one or both of two forms: cash or in-kind donations by the
business {PROF} {DONATE} and/or {SUPPORT}; or service or boosterism by the
business person {PERS} {SERV E} and/or {BOOST}. The de nition of the community unilateral support of the business included the communitys patronage of and
attitudes tow ard the business, as perceived by the business person {TOW N}. The
variables {SUPPORT} and {BOOST} had no signi cance as main e ects in the
model, which is why their summary statistics are not presented in table 1.
3.3.3 Reciprocity: Reciprocated support was previously de ned as the joint occurrence ( also known as the interaction e ect) of business support of the community
and community support of the business. Six versions of interaction variables were
considered, as shown in gure 2. Any/all of these interaction terms measure reciprocity. The summary statistics for three of the six reciprocity variables are also pre-



Table 1.

Summary statistics: unilateral suppor t and interaction (reciprocity)



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M ean


M inimum

M aximum






sented in table 1. The other interaction terms were not signi cant, which is why
those summary statistics are not given in table 1.


M easures of economic f actors

The objective is to consider as many alternative explanations for business success as

possible, to reduce the probability that any estimated e ects of reciprocated community support are biased due to the omission of relevant variables. According to
Kennedy ( 1992: 78)
Researchers should be obliged to show that their chosen model encompasses rival models. . .
The chosen model should be capable of explaining the data, and of emplaning the successes
and failures of rival models in accounting for the same data.

3.4.1 Characteristics of the business and entrepreneur: I ndicators of business scale, past
performance, product line, use of business strategies and technology, and human
capital variables were used as measures of more traditional economic factors explaining business success. F irst, the sampled businesses are indeed small. Almost
90% of the businesses responding employed no more than 15 people. Thus, there
was insu cient variability in the measure of size based on employment for this to
be an informative factor. The useful measure of size was annual sales category.
About 40% reported gross {SALES} of less than $50,000/year, while the average
was $1.5 million. Past performance was measured by the change in the number of
employees in the past ve years {EM P}. The average business in the sample grew
by one employee over the past 5 years {EM P}. Product line was indicated by the
Standard I ndustrial Classi cation {SI C}. Over 60% of the businesses were retail or
The variable {CP} was incorporated to indicate the Central Place order of the
respondent business, which was constructed according to the conventional hierarchy
( Sha er 1989) . {CP} is an ordered categorical variable ranging from 0 for input- or
resource-oriented businesses ( farming, shing, forestry and mining) to 1 for businesses
found in even the lowest-order hamlets; to 7 for the highest-order businesses found
only in major metropolitan areas. The Central Place Hierarchy helps to identify the
market orientation of a business. How ever it is not clear-cut. For example, Esparza
and Krmenec ( 1996) empirically document, for one industry category only ( producer
services) , that the ow nership status of a business contributes signi cantly to deviations
from the expected hierarchical pattern, leading them to suggest a healthy skepticism
about the prospects for services as a source of rural development growth.

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Bars and grocery stores are both low-order service businesses {CP 1} found everywhere from the smallest towns to major metropolitan areas. A small tow n tavern,
however, might cater entirely to drive-through or out-of-town patrons, whereas a
tavern in a metropolitan location might be strictly a neighbourhood establishment.
Thus, a low-order business is not necessarily dependent on local patronage. The
higher the CP order of the business, however, the more likely it serves non-local
clientele who come from lower-order places where those types of businesses do not
generally exist.
Resource-based industries are classi ed as {CP 0} because they range from inputoriented ( located close to the raw materials) to market-oriented ( located close to nal
consumers) , regardless of their export-orientation. Customers of resource-based industries, one step higher in the processing chain, often locate in close proximity to minimize on raw product transport costs ( K ilkenny and Thisse 1999) . Thus, even raw
material industries may depend on good relations with local customers in other industries, even though nal product demand may come entirely from outside the region.
Finally, the likelihood of links between local businesses are precisely the types of network structures that motivated Granovetter ( 1985) to o er his competing explanation
of the preponderance of small businesses in small tow ns. The informal links between
them obviate the need for institutionalized ( vertical or horizon tal integration) links.
The human capital model is that business success is positively related to the level of
training, experience and incentives of the entrepreneur. Two-thirds of the respondents
were middle-aged ( 4165 years old) ; and 7% were over 65 years of age. High school
was the highest level of education completed by over one-half of the respondents ( only
3% had not completed high school) ; 30% had completed a bachelors or vocationaltechnical school degree, and the rest had higher degrees. Also, the sample was representative of sustainable entrepreneurial behaviour: 80% ha d been in the business for
more than 12 years and 50% for more than 20 years. M easures of the human capital of
the entrepreneur include the respondents highest level of education completed
{EDU CTN}, the age of the respondent {AGE}, and their years in business {YRS}.
I n addition, the total household income of the respondent for the previous year
{HHI NC}, is included as an economic factor for a variety of reasons. First, it re ects
the human capital of the respondent. Second, when included in the regression it
controls for variations in the reported ranking of business success that are pecuniary
in nature. As such, the coe cients on the community support variables in the regression will re ect the contribution of variations in social rather than pecuniary sources of
business success. Speci cally, if donations or service vary with both household wealth
( as measured by {HHI NC}) and business success, the inclusion of {HHI NC} will
re ect the economic sources of the variance in {DONATE} and {SERVE}. Some
93% of the respondents reported total household income: almost 13% are below
the poverty level of U S$25,000/year; the average is U S$3545,000/year; and over
30% reported a total income from the previous year in the highest category of
U S$55,000 or more.
Two variables re ect the strength of economic incentives. {OW N} indicates
whether the respondent was the ow ner of the business or the manager. A total of
78% of the respondents were the ow ners, of which 63% were sole ow ners. {STATU S}
indicates if the rm is independent or branched. M ore than 70% of the businesses in
the sample were independent. Variables indicating the respondents rankings of three
strategies for business success were also considered: {I NV ENTORY} improving
inventory control, {NEW TECH} utilizing new/advanced technology, and



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{GOODS} o ering distinctive goods. These business strategy variables may

explain business success in the regression analysis.
3.4.2 Characteristics of the community and other controls: The towns are all small. The
sampled communities range in size from 500 to 8,000 population. Nevertheless,
variations in community size {POP} may matter, especially in interaction. The respondents rating of the level of trust in tow n {TRU ST} is also included. According to the economics literature discussed earlier, a positive correlation between
{TRU ST} and business {SUCCESS} is expected, regardless of unilateral or reciprocated community support. Furthermore, {TRU ST} and/or {POP } may be important control variables. To verify that the small tow n e ect was su ciently
homogeneous, the authors tested for and found no correlation betw een {TRU ST}
and the tow ns population {POP}. Furthermore, no systemic pattern across population categories in the model explaining business success was found. An alternative
measure of the extent of mutual trust is the ordered categorical variable that was
labelled {FRI ENDLY}. This is the respondents ranking of the level of friendliness
in the tow n from low to high.
Another version of community size is the size of the local business network, measured by the number of businesses in the tow n {#BI Z}. The average number of businesses is 186, and no tow n has more than 425 businesses in total. The variable
{DI STANCE} is the miles from the centre of the tow n to the nearest metropolitan
area. The average was 53 miles, and no tow n was more than a drive of 1.5 h ( 93 miles)
from the nearest city. The e ect of distance on a businesss success varies from business
to business ( positive or negative) because it can either insulate the business from
competition, or separate it from customers.


Statistical analysis

The dependent variables are binary, hence the error term is necessarily heteroskedastic, which means that OL S parameter estimates are ine cient. Furthermore, OLS
models can generate probability estimates outside the range of 0 100% . For these
reasons, logistic regression was used. The model estimates the probability of {Y 1},
business success, as an exponential function of the {X } variables described above:
Prob Y

1 e

I nitially all the variables listed in gure 2 were included, then the model was simpli ed systematically. The testing dow n approach is considered best practice among
economists as well as statisticians. According to Kennedy ( 1992: 77)
deliberate over tting involves a loss of e ciency ( and thus a loss of power) when compared
to a search beginnin g with a correct simple model. But this simple model may not be
correct, in which case the approach of beginning with the simple model and expanding
as the data permit runs the danger of biased inference resulting from underspeci cation.

I f any of the interaction e ects are found to be positive and statistically signi cant in
the best simple model, one rejects the null hypothesis that reciprocated community
support is irrelevant in explaining a small tow n business persons reported success. I f
the reciprocity variables are not signi cant, but unilateral community support variables are, one has results consistent with the rational choice or embeddedness views of

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social capital ( depending on which ones are signi cant) . I f none of the community
support variables are signi cant one would accept the null hypothesis that community doesnt matter in small tow n, small business success.
Four model selection procedures were applied: ( 1) backward, and ( 2) stepwise
selection procedures, ( 3) scoring, and ( 4) analysis of variance; in addition to estimating logit models. The backward elimination procedure starts with the estimation
of the large general model with 23 potential explanatory variables ( 23 main e ect
variables) . Explanatory variables that were not statistically signi cant in the mod el at
the 95% level ( < 0 :05) were eliminated. The stepwise procedure adds explanatory
variables, and retains only those signi cant at 95% . The rst two approaches
identi ed the same signi cant predictors: tw o unilateral support variables
{DONA TE} and {TOW N}, and three economic characteristics: {HHI NC},
Note that according to those rst two procedures, no measures of personal support
appeared to have a signi cant independent e ect on business success. This did not
however, mean that reciprocated personal support would not be signi cant, for two
reasons. First of all, due to the fact that only 732 respondents reported {SALES}, the
procedures applied to only a subset of the data ( potentially biased: what kinds of
respondents refuse to indicate the range of dollar value of total sales?) Second, interaction e ects can be signi cant even though main e ects are not, especially when both
types of terms are included in the same set of predictors ( Feinberg 1980) . Thus, it was
suspected that an interaction e ect of reciprocated personal support might be signi cant, even though neither {SERVE} nor {BOOST} were signi cant.
Next, the SCORE procedure was applied to identify signi cant sets of predictors.
SCORE searches for the best model among main, second-, and third-order interactions. The score criterion for best is goodness-of- t ( explanatory pow er) . I t showed
that the best predictor of business success is reciprocated personal support. This second-order interaction term, {SERVE* TOW N}, is the single most highly signi cant
predictor of business success. The SCORE procedure also indicated that the best set of
ve predictors are the rst three reciprocity variables ( interaction terms only, no main
e ects) along with {HHI NC} and {NEW TECH}.
The fourth procedure that was applied, GLM ANOVA, ts generalized linear
models to categorical ( classi ca tion) variables ( as well as continuous ones) and tests
for the signi cance of additional factors in stepwise and backward fashion. The analysis of variance indicated that reciprocity factors were not signi cant in models that
included both unilateral and reciprocal e ects. Either unilateral or reciprocal e ects,
however, appeared to be signi cant in models where they entered separately. A
technical explanation is that interaction variables include the contrasts for the main
e ects, so that main e ects are marginal to interaction e ects ( Feinberg 1980) . An
intuitive explanation is that the reciprocity measures are larger whenever either of the
unilateral support measures is larger ( and vice versa) . Thus, the reciprocity terms
already re ect the variations across respondents in the unilateral measures. The unilateral terms re ect only the additional variation across individuals.
3.5.1 Business success: The logit models were estimated under various restrictions,
considering sets of the variables identi ed as signi cant from steps ( 1) ( 4) . The
model of business success that was both simple and the most statistically signi cant
is the mod el shown in table 2. This model explains business success as signi cantly
and positively related to both economic and social factors. The estimated mod el ts



Table 2.

Logistic regression model of business SUCCESS.

( a) M odel tting inf ormation and testing g lobal null hypothesis


Intercept only

Intercept and covariates




for covariates

149.378 with 5 DF ( p

0 :0001)

( b) A nalysis of the maximum likelihood estimates

Parameter estimate

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V ariable
I ntercept

7 5.4912


Standard error

Pr >



O dds ratio

e i


the data signi cantly better than a model with only an intercept, as indicated by
the low probability ( p 0 :0001) of the 2 for covariates with respect to the global
null hypothesis.
Consider the interpretation of the parameter estim ates presented in table 2. Each i
show s the partial e ect of each explanatory variable in ( self-assessed) business
success, controlling for the e ects of the other variables in the model. All of the e ects
are signi cant at the 95% con dence level ( all Pr > ) are low er than 0.05) .
The estimated odds ratio ( e
) on the variable {TOW N} indicates that respondents are almost twice as likely ( 1.925) to rate their business as successful if they feel
supported by their community. The model also shows that there is a signi cant
positive e ect of reciprocated community support {SER VE* TOW N} and a positive
e ect of business donations {DONATE}. I n sum, the authors reject the null hypothesis
that a persons sense of his or her small tow n businesss success is not positively associated with reciprocated community support.
The estimated model predicts the probability of reporting success as a function of the
respondents characteristics {NEW TECH, HHI NC, TOW N and SERVE} as follow s:
Prob Y

5 :4912 0 : 3912 NEW TECH 0: 1751 HHI NC 0 : 1987 DONA TE 0: 655 TOWN 0 :1968 SERV E TOW N

e 5:4912 0:3912 N EW TECH 0 :1751 HHI NC 0 :1987 DON A TE 0 :655 TOW N 0:1968 SE RVE


For example, the probability that the average respondent says that business is successful is predicted by calculating the estimated logit function at the means of the
explanatory variables:
Prob Y

5: 4912 0: 3912 3: 884 0 : 1751 7 : 24 0 : 1987 3 : 0917 0: 655 3 :6103 0 : 1968 5 : 5633

1 e 5 :4912 0 :3912 3 :884 0 :1751 7:24 0 :1987 3 :0917 0 :655 3:6103 0 :1968 5:5633
0: 797

The estimated probability of success for the average respondent ( 0.797) is about 80% .
I n contrast, for a respondent with the average household income and average performance for using new technology, but who never donates ( DONATE= 1) , thinks
that the community is not supportive ( TOW N= 1) , and is not personally active in the



community ( SERVE= 1) , there is a 16% probability that they report their business as
being successful.
The explanatory power of the logistic model is indicated by the Gamma statistic:

C D = C

2c 1

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where C denotes the number ( and c denotes the percentage) of concordant pairs ( often
called the correct predictions) and D denotes the number of discordant pairs ( or
wrong predictions) . For this model and this data, there are 149,017 pairwise comparisons. The estim ated Gamma of 0.527 for this model implies that c 0: 7635, i.e. for
over 76% of the time that a higher probability of success for respondent A is estimated than for respondent B, it was in fact higher.

3.5.2 Business expansion: I t would be useful to know if business people who feel successful plan to expand. M ottaz ( 1989) would call staying or expanding a behavioural
commitment by small business to their small tow ns. Preliminary cross-tabulation
analysis indicated that successful respondents were almost twice as likely to expect
expansion. Following the same sequence of procedures as above, the authors systematically estimated a logit function for the probability of expand ( rather than stay
the same or get smaller) . The most statistically signi cant and theoretically interpretable model is presented in table 3. The model does not, however, include subjective assessments of either success or community support.
As expected, the older the business person {AGE}, the less he or she is to plan
expansion in the future. The negative contribution of another year in {AGE} is
small but highly signi cant. Positively related to expansion are household income
{HHI NC} and the change in the number of employees since 5 years ago {EM P}.
Again, these main e ects are small but highly signi ca nt, The other small but signi cant explanatory factors include two preferred business strategies: {NEW TECH},
and {I NVENTORY}. I t is also likely to be associated with large tow n types of
businesses {CP}, but not with large population locations. This was shown by the
positive signi cance of the {CP} variable, while population {POP} was insigni cant
in the model.
Table 3.

Model of Expand in the FUTURE.

( a) M odel tting inf ormation and testing g lobal null hypothesis


2 L OG L

Intercept only

Intercept and covariates



f or covariates

80.125 with 6 DF ( p

0: 0001)

( b) A nalysis of the maximum likelihood estimates

V ariable
I ntercept

Parameter estimate
7 2.5148
7 0.0300


Standard error

Pr >



O dds ratio

e i



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Putnam ( 1993: 37) concluded from his examination of several centuries of I talian
history that These communities did not become civic because they were rich . . .
they became rich because they were civic. . . . Development economists take note:
Civic matters. The present study found robust statistical evidence of the same. I n
contrast to statistical tests based on macroeconomic data ( Knack and Keefer 1997) , this
paper nds that social capital as measured by participation in the community is
positively associated with economic performance at the micro level. This logistic regression analysis of the categorical responses to a telephone survey of small business
persons in small tow ns in I owa suggests that reciprocated community support
makes a signi cantly positive contribution to business success.
The study lls three gaps in our understanding of the role of social capital in a small
economy. First, signi cant evidence supports the enlightened self-interest or social
investment views of business behaviour. Business donations have an independent
positive e ect on business success, indicating that social investing ( Stendard 1992)
pays o . Second, evidence was found that embedded social relations are just as important as economics for success at business. I n particular, personal service to the
community by the owner or manager of a business reciprocated by community support of the business in terms of loyal patronage and promotion, is the single most
signi cant determinant of business success among dozens of economic and other characteristics of the entrepeneur, the business and the tow n. Third, there is evidence
against an extreme rational choice view of social capital, since even though both
unilateral business support of the community and unilateral community support of
the business have signi cantly positive independent e ects, reciprocity also has a
signi cantly positive e ect. Contributing to the public good is not done only because
it pays o . Entrepreneurs are an active part of a community providing mutual,
symmetric, reciprocated support.
The ndings are also robust with respect to reverse causation. Consider the signi cantly positive unilateral e ect of {DONATE}, the lack of a signi cant unilateral
e ect of {SERVE}, and the signi cantly positive reciprocity e ect of
{SERVE* TOW N}. The implications are that while donations {DONATE} are
always positively associated with being successful ( controlling, via prior {HHI NC}
for the wealth of the respondent) , not all community service {SERVE} may be. For
example, taking a stand on a school bond issue might alienate some of ones customers,
to the detriment of the business ( Besser 1997) . Only when a business person feels that
his or her community activism is appreciated and reciprocated {SERVE* TOW N}
does it contribute to a sense of business success.
Further investigation about the mechanisms by which reciprocated community
support relates to regional development is needed. This study has analysed a singleperiod snapshot of the co-incidence of community support and business success. Of the
three types of empirical evidence: reduced-form evidence; structural evidence; and
historical evidence, this analysis should be classi ed as structural. I t is not reducedform because one cannot guarantee that the independent variables are in fact exogenous to business success. Neither reduced-form nor structural evidence, however,
can clarify the causal order of events. F or statistical evidence that higher levels of
reciprocated community support lead to higher or stronger business success, a timeseries panel of historical data is needed. I nformation about the timing and sequence of
occurrences will help us to distinguish the role of a stock of goodw ill from the role of a



ow , which would be particularly relevant for a model of the mechanics of social

capital in regional development.
A cknow ledgem ent

W ork on this paper was supported, in part, by a contract with the Tennessee Valley
Authority Rural Studies Program. J ournal Paper number J -17811 of the I owa
Agriculture and Home Economics Experiment Station, Ames, I ow a; supported by
Hatch Act and State of I ow a funds.

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