Examining the local mom-and-pop phenomenon

Q. Hafa Adai! I look forward to reading your column everyday and one thing for sure, you are truly impartial and that I surely appreciate. I have a few concerns that I would like to share with you and hopefully will be able to see you address one or two in your column.

A good number of mom-and-pop stores are operating businesses in small spaces with very limited merchandise and obviously run and managed daily by family members or attendants who could barely communicate in English. It just makes me wonder; how and in what ways do such businesses contribute to the CNMI economy. Are they simply operating such businesses as a front just so they can continue residing in the CNMI? I am sure that their income verse their living expenses is a big negative. Or are they reporting their business gross income?

A. Certainly, I am pleased to hear of your great interest—like many others—in my Q & A column. My purpose for this column is to enhance public awareness on issues of common interest in the community. It’s my goal is to build a strong enough pressure from a well-informed public to compel the policymakers to develop and follow a socio-economic development plan that charts a successful development path for the people of the CNMI.

Let me begin my answer to your question by highlighting the socio-economic significance of small businesses, the so-called “mom-and-pop enterprises.” This type of small business is primarily operated by the owner and his/her family members. Small businesses employ almost 60 percent of America’s workers, contribute 50 percent of sales and account for half of private sector output. According to published government data, small and family owned businesses represented 98 percent of all U.S. employers, generated the third-largest economy in the world and contributed 50 percent of the gross domestic product in year 2000. According to the U.S. Small Business Administration’s Office of Advocacy, small firms made up nearly 90 percent of all exporters and produced one-fifth of the known export value in 2001. For that matter no national political leader can afford to ignore policies aimed at addressing the issues concerning mom-and-pop enterprises. Thus, invariably every federal administration has declared policies to improve the economic security of small businesses, provide them help to meet challenges by improving access to capital, ease the tax burden, expand the opportunity of access to new markets, make technology and information work for small businesses and help them in implementing policies that value families. However, development of specific policies addressing issues of small businesses by our local government may yet be in its infancy.

Further, I will mention some specific steps taken under the Clinton administration where the Small Business Administration doubled its loan volume to small businesses in three years. With no drop in loans to other business owners, the number of guaranteed loans to women-owned businesses was quadrupled. The 1993 Economic Plan made 90 percent of small businesses eligible for tax relief, helping them to keep money needed for growth. Also, targeted tax preference for capital gains, reduced record keeping requirements, raised the small business expense limit for equipment by 75 percent and extended the Research and Experimentation Tax Credit, reduced the burden of regulatory enforcement, overhauled export controls, and made it easier for small firms to do business with the federal government during the same time.

Similar policies such as tax write-offs for small businesses recently enacted by the Minimum Wage Increase Act, regulatory relief and reduction in paperwork requirements, easier access to needed capital, provision of health care insurance and retirement savings plans for employers and employees are continuing under the current administration of President Bush.

Why are mom-and-pop or family businesses more appreciated by the community, compared with the bigger chain store businesses? The reasons include the effectiveness of family teams, positive customer perceptions of family ownership, willingness of family members to sacrifice for their enterprise, trust among family members, commitment to integrity and reputation, family support and more. Family businesses enable people to work hard for something more important than either opportunity or ego and that’s family reputation.

Among the economic benefits of these businesses, studies show that the externally owned firms tend to purchase products from distant suppliers and channel profits to distant owners in other regions, thus generating smaller local multiplier effects than homegrown businesses. The addition of one new small firm results in an overall gain of 21 jobs in total employment, while the average direct employment effect of a large firm is fewer than 5 workers. Thus, small businesses have large multiplier effects of as much as up to five times that of bigger outlets. Moreover, small business development is strongly correlated with growth in employment and tax base while the businesses owned by external large enterprise is not. The strong effects of small businesses support the idea that independent firms tend to “keep money in the community.” A slower economic growth associated with the addition of new large firms suggests that they may be displacing small firms in the process.

From another angle one can see the role of moms and pops primarily operating retail stores where business person meets households, where enterprise meets the people in the community, where the value-added of the extraction, processing, manufacturing, wholesaling and distribution chain culminates with sales to the final customer. A retail store is most closely tied to our sense of community. Great, good place, where neighbors meet, community news is exchanged, and a sense of civic culture is built. Which is why we think the increasing distance between store and household and the equally rapid increase in absentee ownership of retail stores poses a threat to our sense of community. Also, local merchants are more than providers of goods and services; they participate in neighborhood organizations, sponsor community events, and contribute more time and money to local causes than outsider owned firms. In nutshell, local stores contribute far more to the economy. Locally owned retailers keep profits in the community and support a variety of other local businesses. Small stores create a sense of place and unique local identity. This not only enhances our quality of life but also gives us an edge in generating new investment and promotion of tourism.

Some legends will never fade away. Others just get better with age. The image of small-business owners as “mom-and-pop” operations, although outdated, continues to play an important role in American culture, for it serves to remind today’s entrepreneurs just how far they’ve come as an integral segment of the nation’s economy. Joeten Enterprise is a prime example in the CNMI. Big business is always in the news, but not in people’s lives because managers are usually outsiders as well, not owners of the businesses that they operate and manage.

Here are some additional interesting facts of a mom-and-pop business. Passing of the torch of ownership and business values to successive generation may be quite challenging. Unlike big business counterparts who see executives come and go, choosing a leader to head the business poses a unique hurdle for family companies. Sometimes the internal struggles associated with picking the next generation of executives can tear a family apart. More than 30 percent of family-owned businesses survive into their second generation, only 12 percent will still be viable into the third generation and 3 percent operating at the fourth generation level and beyond.

I have presented a very broad overview of the social and economic role of mom-and-pop at the national level. Do most of our mom-and-pop stores fit into this description? Obviously not, as you have indicated in your observation and question. Per your observation, they are mostly owned and operated by the outsiders. For that matter I would like to call them “lookalikes” and not the real mom-and-pop enterprises that are owned and operated by people from within the community. Then, it is fair to say that their social and economic effect on our community is very much likely to be similar to the bigger outsider owned businesses. Let us now pose this question to our policymakers: Were these owners of mom-and-pop stores been given residency in the CNMI under the pretext of foreign investors and what, if any, economic benefits we are deriving from them?