Open Capital Markets For Local Economies. William E. Scholz
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captures the breadth of open capital markets for the privately held, or local, economy.
Local Economies In A Global Context
In the 21st century, cities compete globally with other cities. Startups compete globally with other startups. What once was local, is now a global marketplace for resources, ideas, and people. Local economies are now operating in a global context, a change that may transform local economies and position the local as center of 21st century economic and political discourse.
Local economies have long occupied the periphery of twentieth century economic philosophy and discussion as globalization reigned and national economies grew. However, local economies are regaining interest as drivers of economic growth. There are many forces driving the reemergence of the local such as national partisan gridlock devolving power to local authority or the ability for investors and data providers to monitor and invest in privately held assets [1].
Equity investing in small business and startups is still a relatively new phenomenon. Private equity deal-flow grew from thirty-seven deals in 1996 to four hundred and forty in 2017 [2]. Similarly, venture capital grew from less than one hundred deals in 1995 to over two thousand seven hundred deals in 2019 [3].
Many local economies are also emphasizing the importance of real estate reinvestment. A tax incentive from the Trump administration, called Opportunity Zones, seeks to attract investment into distressed communities because of growing disinvestment and blight in American cities [4]. The Trump Administration often notes the disinvestment in declining cities including The Rust Belt, which played an important role in the 2016 Presidential campaign [5].
Reinvestment into real estate development, startups, small businesses, and private equity play an increasingly important role in local economies. Each investment vehicle is fundamentally rooted in the local. Real estate’s impact on the local is a bit more obvious than venture capital or private equity.
In venture capital, companies connect with local support resources and investors to help nurture and launch the company. Resources come in the form of accelerators, incubators, coworking spaces, and most importantly, investors who seek deals based on geographic proximity. Private equity can play an important role in healthy local economic development as a consolidator of declining assets. Smaller private equity funds can play an important role in stabilizing local sectors, and potentially preserving jobs, by consolidating successful assets within declining industries.
Privately held investment vehicles such as venture capital, private equity, and a renewed focus on real estate create a new capacity for local economies. This capacity includes funds, fund managers and analysts, data sources, and locally focused economic development resources and incentives.
Billions in reinvestment and countless new organizations are transforming the local economy into a complex but powerful resource for economic growth. The contrast between local economies thirty years ago and today is striking.
Thirty years ago, the hierarchy of industrial manufacturing supply chains simplified local economies and economic development efforts. Efforts focused on supporting large industrial manufacturers. They would, in turn, establish a supply chain of local subcontractors and component parts manufacturers. Smaller manufacturers exemplified the grit and determination of the small business owner, though they were unlikely interested in rapid, international growth like today’s startups.
Real estate efforts followed suit as regions established suburban shopping malls. Malls attracted big box retailers and franchise restaurants. Multi-national retailers won competitive advantage through internal analytics and cost engineering, often while regional ‘downtown’ cores suffered decades of disinvestment.
Today’s world demands that cities compete with other cities to provide amenities that attract talent, companies, and investment. A city’s downtown arts and entertainment amenities are compared with other cities across the globe. Similarly, a region’s industry is measured and compared. Cities now have core competitive clusters of industrial activity. Some cities stand out as robotics hubs, such as Pittsburgh Pennsylvania [6]. Cities such as Columbus, Ohio emerge as a hub for smart transportation [7].
Two clear trends emerge. The first is an explosion of resources that include local investment, fund managers and analysts, and new data resources to understand local economies. Local resources are just forming to support a new creative and digital economy. The second trend is that local economies are operating in an increasingly global context. Cities must build an economic and cultural identity to communicate their uniqueness and value to the world.
Local economies are undergoing nothing short of a sea-change from periphery to a greater share of the core occupant of economic discussion and attention. If not entirely the center in terms of economic production local economies now occupy the beginnings of how we perceive economic growth in terms of production.
How do we understand the shift in local economies from the 20th century, where local economies were more isolated, to the 21st century, where local economies are exposed to greater degrees of global competition and context?
One striking difference about local, privately held economies and international, publicly held economies is how capital flows to investment. National or international capital markets are open and accessible by residents across the world. Many are invested in national and international markets as owners of stocks, bonds, and mutual funds.
National and international markets have key characteristics. Regulation is standardized to ensure transparency and accountability. Companies report openly and regularly on progress, sometimes a difficult task when performance declines.
Speculation is not without its challenges. However, regular changes in price provide an open governance mechanism for firms. Price change also allows for investors to have more liquidity within their investment, which increases total investment volume in capital markets.
In the privately held and local economy, there is a trend to establish open capital markets across venture capital, private equity, and real estate development. The trend is the result of digital tools that allow for inexpensive information sharing. Companies do not need a physical market to distribute information about their offering and ongoing performance. Likewise, investors can verify information about a private investment offering across geographic boundaries.
The trend toward open capital markets includes local initiatives and national legislation and policy. It includes innovation that offers a permanent digital record when transferring ownership. Policymakers and practitioners alike see an important need to harmonize public capital markets with how private capital is exchanged. The potential result is more investment into private capital markets, as well as more accountability, transparency, and visibility to how private firms operate.
At the heart of how open capital markets operate is the reemergence of local economies as a force for economic growth. Local economies today have a robust set of economic development practitioners, creative new initiatives, and successful founders and small business owners. Empowering these individuals may quite possibly unleash the next century of American economic growth and ensure America’s leadership as a global hub of innovation and creativity. More importantly, open capital markets can unleash the reward and responsibility of liberty for more Americans who have more opportunity to invest locally and advance new businesses and initiatives.
Regulations And Incentives That Facilitate Open Capital Markets
Federal Government seems consumed with partisan discord. Republicans and Democrats are entrenched in opposition to one another. Around key issues, bipartisan compromise seems impossible.
Financial policy, however, offers rare bipartisan action and can cross party affiliation or voter demographics. The first quarter of the 21st century offers numerous examples of economic and financial policy that recognize the importance of local economic development that establishes open capital markets for local economies.
Policies range from Economic Development Administration (EDA) grants to support innovation and entrepreneurship to tax incentives that encourage wealthy investors to invest in distressed communities to, yet another example of 21st Century policy