Southeastern Geographer

Economic Geography in the South, Spring 2011

Robert Brinkmann, Graham A. Tobin

• Publisher: The University of North Carolina Press
• Year: 2011
• eBook ISBN: 9780807882849
• Topic: Social Sciences
• Subtopic: Human Geography
• Index: Social Sciences

Southeastern Geographer is published by UNC Press for the Southeastern Division of the Association of American Geographers (www.sedaag.org). The quarterly journal publishes the academic work of geographers and other social and physical scientists, and features peer-reviewed articles and essays that reflect sound scholarship and contain significant contributions to geographical understanding, with a special interest in work that focuses on the southeastern United States. Table of Contents, Volume 51, Number 1: Introduction: Robert Brinkmann and Graham Tobin Economic Geography in the South
Guest Editor: James O. Wheeler Introduction: Economic Geography in the South
James O. Wheeler The Furniture Foothills and the Spatial Fix: Globalization in the Furniture Industry
Susan M. Walcott Mapping NASCAR Valley: Charlotte as a Knowledge Community
Ron L. Mitchelson and Derek H. Alderman The Southern Culture of Risk Capital: The Path Dependence of Entrepreneurial Finance
William Graves Renewable Energy in North Carolina: The Potential Supply Chain
and Connections to Existing Renewable and Energy Efficiency Firms
Keith G. Debbage and Jacob F. Kidd African American and Hispanic Self-Employment in the Charlotte Metropolitan Area
Qingfang Wang Papers
Hurricane Katrina as a Lens for Assessing Socio-Spatial Change in New Orleans
Case Watkins and Ronald R. Hagelman, III Drought and Other Driving Forces behind Population Change in Six Rural Counties in the United States
Justin T. Maxwell and Peter T. Soule Mapping Existing and Potential River Cane (Arundinaria gigantea) Habitat in Western North Carolina
Joni L. Bugden, Christopher D. Storie, Carey L. Burda Under-Tapped? An Analysis of Craft Brewing in the Southern United States
James Baginski and Thomas L. Bell Citizenship Contested: The 1930s Domestic Migrant Experience in California's San Joaquin Valley
Toni Alexander Book Reviews: Perspectives on Carbon Trade
Reviewed by Mary Finley-Brook Carbon Markets: An International Business Guide
Arnaud Brohe, Nick Eyre, and Nicholas Howarth Carbon Trading: How It Works and Why It Fails
Tamra Gilbertson and Oscar Reyes

The Southern Culture of Risk Capital

The Path Dependence of Entrepreneurial Finance

WILLIAM GRAVES
University of North Carolina at Charlotte

The U.S. South has experienced remarkable job growth over the past quarter century; however few of these jobs were endogenously created. While the primary economic development strategy in the region has been to rely on branch plants to create locally-owned spillovers, recent efforts have shifted to the promotion of entrepreneurship via industrial district spillover (e.g., North Carolina’s Research Triangle Park). Despite these efforts, rates of entrepreneurship remain low throughout the U.S. South. This research identifies elements of the dominant regional culture which contribute to this entrepreneurial weakness in North Carolina’s Research Triangle Park. A series of interviews with regional venture capitalists were conducted to identify the role of culture in their industry. The significance of regional culture on this form of entrepreneurial finance is identified via inter-regional comparisons and surveys of entrepreneurs. Finally, the iterative effects of Southern culture are traced through the four phases of entrepreneurial finance.

El sur de los EE.UU. ha experimentado un crecimiento notable en materia de empleos en el último cuarto de siglo, sin embargo algunos de estos puestos de trabajo fueron creados endógenamente. Si bien la estrategia principal de desarrollo económico en la región ha sido el depender de plantas subsidiarias para que incentiven la economía local, los esfuerzos recientes se han desplazado a la promoción empresarial a través de los incentivos que ofrece un distrito industrial (por ejemplo, el Research Triangle Park de Carolina del Norte). A pesar de estos esfuerzos, las tasas de iniciativa empresarial siguen siendo bajas en todo el sur de los EE.UU. Esta investigación identifica los elementos dominantes de la cultura regional que contribuyen a esta debilidad empresarial en el Research Triangle Park de Carolina del Norte. Una serie de entrevistas con inversionistas regionales de riesgo se llevaron a cabo para identificar el papel de la cultura en su industria. La importancia de la cultura regional en este tipo de financiación empresarial se identifica a través de comparaciones interregionales y encuestas a empresarios. Finalmente, los efectos iterativos de la cultura del sur se trazan a través de las 4 fases de la financiación empresarial.

KEY WORDS: Southern Culture, Risk Capital, Finance

INTRODUCTION

The financial collapse of 2007 triggered much discussion over international variations in capitalism. Comparing the marketled capitalism of the United States and Britain to the corporateled capitalism of Japan and Korea, to the stateled capitalism of France and Germany confirms that economic systems are products of the cultures in which they operate (Mitchell 1995). This cultural contingency in capitalism has caused economists to default to the nation as their preferred scale of analysis of economic systems (Storper 1997). Unfortunately, nations are rarely atomistic elements of the global economy since few countries are culturally and therefore economically, homogenous. The disconnect between theory and reality leads to the misapplication of nationalscale economic policy on heterogeneous regional economies. Fortunately, geographic studies such as Saxenian’s 1994 examination of the cultural uniqueness of Silicon Valley and James’ 2005 documentation of the role of Mormon culture in shaping the Salt Lake City innovation complex have begun to illustrate the extent to which regional cultural factors can impact economic systems.

Perhaps no region of the United States is more culturally distinct that the South. The former Confederate states have been readily identified as exceptional via dialect (see Reed 1986), foodways (see Edge and Hobbs 2002), politics (see Webster 2007) and social proclivities (see Alderman 2007). While numerous studies have documented the historic economy of the region (Cobb 1999; Vance 1932), few have examined the interplay between the culture and the post-industrial economy of the region. Such studies are thought to be unnecessary since modern capital markets are expected to quickly eradicate any regional shortages of capital—in essence, the Southern economy is assumed to operate identically to the national economy. This assumption has been shown to be false by a growing array of economic geographers (Lowe 2007; Graves and Woodey 2006; Leigh and Walcott 2002).

PURPOSE

This study will document the extent to which market forces are influenced by Southern culture. Specifically, this paper identifies the degree to which the regional venture capital (VC) industry is influenced by the culture which surrounds it. A series of key informant interviews were conducted with venture firm principals, entrepreneurs and limited partners (the providers of capital to the venture industry) to isolate the effects of Southern culture on the regional venture industry.

The venture capital industry was selected for this case study due to its fundamental role in the creation of new, high-tech firms and its geographically constrained nature. The industries limited reach is a product of its fundamental risk-minimization strategy, the direct supervision of their portfolio companies. Because of this constant interaction venture capitalists typically only invest in firms within one hour of their offices (Gompers and Lerner 2004 discuss the 60 mile rule in great detail). Given its spatial constraints, venture capital is the portion of the financial industry that is most influenced by regional culture (Martin et al. 2002). While this research is, by necessity, a regional case study, its findings will have implications for global studies on economic development policy, market efficiency and entrepreneurship.

BACKGROUND

The efficiency of financial markets is an article of faith in the field of finance, considerable effort has been expended to validate the concept (Fama 1991). The less explored corollary of market efficiency is that regional economies must operate under the same rules, customs and expectations. This faith in the frictionless flow of capital has profoundly influenced economic development policy—the assumption that capital will flow to the most deserving firms and, by extension, regions allows economic development policy to ignore the problem of finance. Despite the paradigmatic status of market efficiency, there is considerable evidence that capital shortage has limited entrepreneurship and industrial development in both the historic and contemporary South (Carlton and Coclanis 1989; Cobb 1999; Lunde-gaard 1999; Graves and Woodey 2006).

In practice, the Southern shortage of capital has been addressed via an industrial succession strategy for economic development. The industrial succession strategy was based on luring externally financed branch plants to move to the region with the hope that the branch plants would create jobs without consuming scarce local capital. It was assumed that the branch plants would ultimately create local entrepreneurial spillovers as the facility, supply chain and workforce matured (Erickson 1976; Park and Wheeler 1983; Lugar and Goldstein 1991; Johnson 1997).

While the industrial succession strategy is generally associated with mid 20^th century Southern economy (Cobb 1999), elements of the approach persist in the region’s post-industrial development strategies. The most notable example of the post-industrial succession strategy is North Carolina’s Research Triangle Park. The park was opened in the late 1950s (see Link 1995 for a description of the park’s creation) and continues to be dominated by the laboratory facilities of externally headquartered firms. These facilities have developed into one of the nation’s most respected technology complexes. These facilities have created more than 50,000 jobs and significantly increased incomes in the area (www.rtp.org 2010).

While the success of Research Triangle Park is not in dispute, nearly 30 years of analysis has documented the Park’s inability to significantly stimulate local entrepreneurship (Schell 1983; Schell 1984; Goldstein and Malizia 1985; Lugar 1985; Whittington 1985; Lugar and Goldstein 1991; Graves and Campbell 2001; Graves 2003). Profit extraction, corporate disinterest in local spillover investments and park design were thought to have combined to severely limit spillover entrepreneurship and prevent the industrial succession process from occurring (Lugar and Goldstein 1991). In the cases where local spillovers did occur, many of the new firms left the state to obtain financing that was not available in North Carolina (Lundegaard 1999; Graves and Campbell 2001; Cook 2010).

The entrepreneurial weakness of the Triangle area is often dismissed due to the Research Park’s lack of maturity—Park promoters insist that entrepreneurship will eventually arrive given the human capital and infrastructure which is in place. It is posited here that the entrepreneurial weakness is actually a structural, rather than a temporal, issue. North Carolina’s historic Achilles’ heel, a shortage of risktolerant financial capital, has been cited as an impediment to Southern entrepreneurship since the 19^th century. Economic historians David Carlton and Peter Coclanis (1989) documented the connections between capital scarcity and equity market failures during the state’s early industrial period: “The fragmented, localized, ad hoc capital markets of the early industrializing Piedmont posed grave obstacles to the region’s ability to achieve healthy economic development (p 92).” The 19^th century capital markets shared the strong local biases of the modern venture market. The majority of investors in North Carolina’s 19^th industrial firms were local, and relatively poor, this relative poverty, prevented them from allowing dividends to be reduced in order to finance corporate expansion. While the linkages between entrepreneurial success and capital shortage were clear in the context of the state’s early industrial period, Carlton and Coclanis (1989) assumed that modern market mechanisms rectified these inefficiencies.

The linkages between regional culture and entrepreneurship have been frequently explored by geographers. The most notable of these studies was Saxenian’s (1994) groundbreaking comparison of the culture of innovation in Boston’s Route 128 and Silicon Valley. Her narrative contrasting the rigidly hierarchical “Puritan” culture of the East with the less structured “Pioneer” culture of the West explicitly focused on the role of regional risk tolerance in stimulating entrepreneurship, a cultural phenomena more recently verified by Micklethwait and Wooldridge (2000). Similar cultural influences on entrepreneurship were identified by James (2005) when he explored the role of Mormonism on the development of the Salt Lake City technology cluster. Despite migration diluting the influence of Mormon culture on the Utah economy, James noted the extent to which the religion continued to shape interfirm relationships and thus the entire innovative milieu. James concluded that the effect of religion on the Utah technology cluster is not atypical of cultural dependence in other regions. While no studies of Southern culture and entrepreneurship exist, both Lowe (2007) and Leigh and Walcott (2002) explored the role of Southern culture on the labor market dynamics in the biotechnology industry—each study concluding that the Southern labor market followed a set of customs and expectations that were unique to the region.

While studies which link culture and production are relatively common, little research has examined the influence of regional culture on financial markets. Two notable exceptions include Francis et al. (2007) who measured higher costs of borrowing for rural firms due to the barriers to information flow. Grote and Umber (2006) found a distinctive proximity bias in the mergers and acquisitions process of US firms. These findings, when dovetailed with the information flow caveats of Fama’s (1991) studies of equity market efficiency, support ...

Table of contents

• Cover Page
• Southeastern Geographer
• Copyright Page
• Contents
• INTRODUCTION
• Introduction: Economic Geography in the South
• The Furniture Foothills and the Spatial Fix
• Mapping NASCAR Valley
• The Southern Culture of Risk Capital
• Renewable Energy in North Carolina
• African American and Hispanic Self-Employment in the Charlotte Metropolitan Area
• Hurricane Katrina as a Lens for Assessing Socio-Spatial Change in New Orleans
• Drought and Other Driving Forces behind Population Change in Six Rural Counties in the United States
• Mapping Existing and Potential River Cane (Arundinaria gigantea) Habitat in Western North Carolina
• Under-Tapped?
• Citizenship Contested
• REVIEWS