Small businesses, Institutions, and Regional Incomes

Abstract

Regional small businesses may rely on customers who earn income in local and global markets. Small business must transact with suppliers of knowledge and resources, transform those resources into innovative and saleable products or services, and transact with customers. Transformation, transaction and social activities, and the institutions which support them, are necessary for successful small businesses. Regional income and small businesses depend on innovation and trade provided by social and transaction institutions. In this paper we demonstrate this proposition empirically using a model and by investigating the relationship between regional income, transaction institutions, transformation institutions, and social institutions for 140 functional economic regions (FERs) in Australia. The model suggests that social institutions create a macro-environment in which transaction institutions and the transformation and trading activities of businesses can thrive, and help to generate regional income and prosperity. We follow others (Cooke et al., 2007) in arguing that strong transaction institutions are a necessary condition for regional innovation. Social institutions complement transaction institutions by providing education and training, arts and recreation, health care and social services. In the studies reported in this paper the capacity for search and intermediation of exchanges of all kinds (goods, services, knowledge etc.) is measured by the share of transaction institutions in regional employment. The capacity of social institutions is measured by the share of employment in social institutions. We argue that the market failures which cause regional failures to thrive may be made solvable by mobilising market making services to extend and provide governance for regional transactions with faraway markets