During an enlightening conversation with CanadianSME Small Business Magazine, Professor Ufuk Akcigit, a renowned global economist and Arnold C. Harberger Professor of Economics at the University of Chicago, delved into the intricacies of economic growth and entrepreneurship. His interest in economic disparities highlighted the pivotal role of technological innovation in driving growth. Addressing post-pandemic challenges, Professor Akcigit noted the reliance of small businesses on credit cards due to stricter lending norms based on the 2023 Small Business Index Annual Report. He emphasized the transformative power of digital tools in today’s business realm and advised policymakers to invest in digital infrastructure, offering robust support to businesses navigating the complexities of the contemporary economy.
Ufuk Akcigit is the Arnold C. Harberger Professor of Economics at the University of Chicago. He is an elected Research Associate at the National Bureau of Economic Research, Center for Economic Policy Research, and the Center for Economic Studies, Research Professor and the Head of the “East-West Germany Economic Gap” Research Group at the Halle Institute for Economic Research in Germany. He has received a BA in economics at Koc University, 2003, and Ph.D. in economics at Massachusetts Institute of Technology in 2009. As a macroeconomist, Akcigit’s research centers on economic growth, technological creativity, innovation, entrepreneurship, productivity, and firm dynamics.
Throughout your distinguished career, spanning from your early days at Koc University to your pivotal role at the University of Chicago and various research institutions, what motivated you to focus on economic growth, innovation, and entrepreneurship? How has this journey shaped your perspective on the challenges and opportunities faced by small businesses today?
I have always been intrigued by the disparities in income among nations. Today’s leading nations have consistently maintained a trajectory of steady economic growth, while others find themselves caught in stagnation. This stark contrast prompted me to delve into the determinants of economic growth. The economics literature extensively underscores the fact that, over the long term, the sole driver of economic growth is technological progress and innovation. Small-business entrepreneurs and large-business entrepreneurs contribute distinct forms of innovation, and this distinction is very important to understand economies and design effective industrial policies. Thus, my quest to answer the question of income disparities led me into the realms of economic growth, innovation, and entrepreneurship.
The report indicates a significant increase in credit card expenditure for small businesses post-pandemic. How do you interpret this trend, and what implications might it have for small business growth and sustainability?
Rising economic uncertainty in the wake of the COVID-19 pandemic has prompted lenders to adopt stricter lending standards to mitigate the increased risk of borrower defaults. Small businesses have been perceived as a high-risk group by lenders, thus bearing the brunt of these challenging financial conditions. Consequently, small business owners have been forced to seek alternative financing options. In many cases, this has led them to rely on personal or business credit cards. While credit cards offer accessibility, they also come at a cost with high interest rates and potential debt accumulation.
Considering the funding challenges emphasized in the report, particularly for emerging businesses, can you elucidate the reasons behind the pronounced difficulty younger enterprises experience in obtaining financing compared to more established ones?
Small businesses typically have a limited credit history, especially if they are young. Banks rely on credit histories to assess the risk of lending, and a lack of credit history can make it difficult for small businesses to qualify for loans. In addition, banks perceive small businesses as riskier borrowers compared to larger, more established enterprises. They often require collateral to secure a business loan. Small businesses may struggle to provide valuable assets as collateral, which can be a barrier to obtaining loans.
The report highlights a notable link between digital tool adoption and business expansion. Can you delve into the nuances of this relationship and its ramifications for small businesses maneuvering through the present economic landscape?
Digital tools help small businesses in several important dimensions. First, digital tools automate tasks and processes, reducing manual effort and increasing productivity. This enables small businesses to do more with fewer resources. Second, many digital tools and software are cost-effective, enabling small businesses to streamline their operations without significant upfront expenses. Third, these tools can be accessed from anywhere with an internet connection, allowing small businesses to work remotely and serve customers more flexibly. Finally, digital tools offer data analytics capabilities, allowing businesses to gather insights about their operations, customer behavior, and market trends for better decision-making.
Based on Intuit QuickBooks’ insights and suggestions, which key areas would you identify as paramount for policymakers and industry leaders to prioritize in order to foster a more conducive environment for the growth of small businesses in Canada?
Small businesses are vulnerable to macroeconomic shocks. They often serve as early indicators of impending economic changes, much like canaries in coal mines. Therefore, it is imperative for policymakers to closely monitor the small business sector in near-real-time using modern economic indices, such as the Intuit QuickBooks Small Business Index.
In addition, it’s important to recognize that high levels of inflation and interest rates can severely undermine the prospects of small businesses. Our research demonstrates that small businesses face considerable limitations in obtaining bank loans during such economic conditions, often resorting to credit cards for survival. This necessitates the provision of additional financial support for those who have incurred substantial debt during the turbulent aftermath of the pandemic.
Finally, policymakers should appreciate the transformative potential of digitalization for small businesses. To expedite this process, investing in digital infrastructure, including high-speed internet access, is essential. This ensures that even small businesses located in remote or underserved areas have the connectivity required for efficient digital operations. Moreover, they could offer training and educational programs, focusing on digital skills, cybersecurity, and data management through workshops and online courses. These initiatives can empower small businesses to thrive in an increasingly digitized economy.