Academic journal article Journal of Small Business Management

Static Economic Theory, Empirical Evidence, and the Evaluation of Small Business Assistance Programs

Academic journal article Journal of Small Business Management

Static Economic Theory, Empirical Evidence, and the Evaluation of Small Business Assistance Programs

Article excerpt

A Reply to Wood

In a recent article in the Journal of Small Business Management, William C. Wood (1994) criticizes existing methods of evaluating the economic impact of small business assistance programs in the United States and Canada (for example, Chrisman et al. 1985, 1987a; McMullan, Long, Graham 1986). He contends that when a small business owner or entrepreneur receives valuable assistance from a small business assistance program, the subsequent gains in sales and employment it might experience are not a primary benefit of the assistance. In fact, according to Wood, those gains are not even secondary benefits since all or almost all come at the cost of offsetting losses to enterprises that did not receive such assistance in the "relevant jurisdiction." Wood goes on to state that, in general, the only way these "secondary benefits" (that is, net gains in sales and employment in an economy) can occur are when products or services are exported beyond the confines of a region or a nation (that is, outside the "relevant jurisdiction").(1) In this view, about the only way an economy of a region or nation can grow is at the expense of the economies of other regions or nations. According to Wood, small business assistance, except where exporting is possible, is essentially a zero sum game.

The debate which Wood has instigated on the validity of research on program effectiveness is certainly important. However, because of the significant contributions the small business sector makes to the U.S. and Canadian economies, and because of the potential that small business assistance programs promise to foster economic development, it is vital that both sides of the debate be aired. At stake is the credibility of the evidential base for continued funding of small business assistance programs. For example, the 57 Small Business Development Centers (SBDC) in the United States serve over 150,000 clients per year and have a combined annual budget in excess of $130 million. By law, the SBDC program must be periodically evaluated and subjected to Congressional oversight.(2) Such evaluations are necessary to ensure that the SBDC program is effective and efficient in fulfilling its charter.

As we shall demonstrate in this reply, Wood's critique of existing evaluation methodology is based on faulty assumptions and questionable applications of static economic concepts. Furthermore, the alternative evaluation methods he proposes are not only flawed, but fail to address the purpose for which small business assistance programs were initiated in the first place. The remainder of this article provides a response to Wood's criticisms, advancing alternative perspectives on the evaluation of small business assistance programs.

Response to Wood's Criticisms

Our response to Wood's arguments is divided into three parts. First, we consider his idea that one approach to cost-benefit analysis is inherently appropriate while another is not. Second, we comment on what Wood calls the "primary benefits" and "secondary benefits" of small business consulting and the assumptions underlying Wood's analysis. Third, we examine the merits of his alternative approaches to conducting cost-benefit analysis for small business assistance programs.

A Battle of Theory Versus Empirical Evidence

When attempting to evaluate the relative cost-benefit ratio of any social or economic program, one must be comfortable with both an over-abundance of facilitating assumptions and with grossly approximate outcome measures. The idea that certain methods are ultimately valid while others are not is rather more a statement about one's preference for relying on one set of ill-fitting assumptions over another set. Put differently, Wood quotes Mishan: "[I]t is advisable to place reliance upon rough estimates of relevant concepts [rather] than on more exact estimates of irrelevant ones" (1994, 70; from Mishan 1976, 96); this leads one to believe that he has proof that the cost-benefit analyses appearing in prior research (for example, Chrisman et al. …

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