Seizing Opportunities: Small Businesses, Social Capital, and Banks

Abstract

Why do small businesses exploit business opportunities better in some areas than others? In a sample of 1.2 million consumer-facing establishments, stores differ significantly across neighborhoods in the uptake of risk-free positive-NPV forgivable loans to which they are entitled. Local social capital strongly predicts loan uptake after controlling for close-by bank branches, income, and education. Increasing our social capital measures by one standard deviation increases the loan uptake by 6.4 percent of the sample mean, accounting for 20 percent of the variation at the zip code level. The effect is higher than having a bank branch within 1000 yards. Large, low-growth stores in less-dynamic areas benefit more from strong social capital, while small, high-growth stores in more-dynamic areas benefit more from bank branches. Virtual connections act similarly to in-person social connections and significantly affect loan uptake in advantaged locations. Virtual connections within the county predict higher use of local banks over FinTech lenders, while out-of-county virtual connections predict increased use of FinTech lenders. Overall, we find that small businesses exploit opportunities better in areas with at least moderate civic capital.

Keywords: Small Business, Social Capital, Virtual Connections, Local Banks, PPP, Business Dynamism, Reciprocity

JEL Classification: G32, G21, Z1