Thoughts About Small Businesses And The Economy Of The Future

Thoughts About Small Businesses And The Economy Of The Future

While getting a haircut I was struck with the thought that I was not aware of the existence of a local “operating” barber or beautician. While the owners of several shops may be local, I am relatively certain that few provide the actual day to day service – which is certainly OK. Nor, can I recall a local watch or shoe repair person. The vast majority of these small businesses are operated by non indigenous people most of whom are not U. S. citizens.

The more I thought about it I could only think of three locally operated businesses on Hotel Street. While no doubt many of the buildings are owned by indigenous people, few seem to actually operate a daily business activity. Why don’t we have more dynamic, creative, risk taking entrepreneurs developing businesses such as: Efrain Camacho – (Engineering); Tony Muna, (Accounting); Ron Sablan and Ben Camacho, (Hotels); Joe Ayuyu, (restaurateur); Tony Camacho, (Printing) and several others whose names are not included because of space limitations? There are many opportunities for local participation in business, several which come to mind are: the provision of lagoon tours in traditional proa canoes, manufacture of beach wear, sugar cane sticks packaged as nature’s natural candy, commercial fishing, Hafa Adai shirts and dresses similar to the Hawaiian “mu mu”, cut flowers (which have high value in relation to bulk and can thus be flown to Asian markets), bottled water on Rota, marine biological laboratory associated with a Japanese university, fishing vessel repair facility to service Asian fleets operating in the western Pacific, shrimp mariculture, cultured pearls in the Northern Islands, and health spas to mention only a few. Must the tourist sector forego these services if no local person seizes the business opportunity?

One would think that the bus company and jungle tours would be locally owned and operated along with greater stock ownership in airlines. In the vibrant tourist dominated economy of the Northern Marianas only six percent, or 210, hotel rooms within the total of 3,561 rooms are owned by indigenous people. However, a substantial number of apartments and office buildings are locally owned. Twenty five years ago when the Northern Marianas was a part of the Trust Territory it was the policy of the Department of Interior to encourage local ownership of businesses and toward this end an economic development loan fund was established to provide long term, low interest capital. Today the Commonwealth Development Authority stands ready to provide financing for qualified projects. It was also during those early years that the United States Government counseled against the sale of land in fee simple. In an economy dominated by the tourism sector few local people are directly participating in the rewards generated by the industry. Unless this record changes the local people will not be full participants in the Commonwealth’s future growth potential. According to data from the CNMI Department of Commerce of the 4,575 business licenses issued in 1992, (the most recent data available to me), only 299 or 6.5 percent were issued to United States citizens and of this number only 143 (48%) were issued to indigenous people. These licenses were as follows: tours, charters and car rental – 27; speciality shops – 79; general merchandise – 45; food outlets – 30; hotels, night clubs and bars – 38; commercial farming and fishing – 30 and general export/import – 50. Turning to the issue of foreign investment and the long term foreign business entry permit current regulations require a minimum investment of $50,000 on the part of the foreign investor. For sometime it was my opinion that this was too low preferring instead a minimum of $250,000 as the base line. But always there are exceptions that need addressed. For example, the investment in a beauty shop would rarely require a $50,000 investment. When you have major world class hotels making significant contributions to the economy these hotels must provide their guests with world class service and one such service is a beauty shop, to cite a single example. Beauty shops don’t require $50,000 to set up.

You can’t realistically say, “let the hotel operate the beauty shop.” The business of hotel management is to operate the hotel, not to set hair. Hotels usually only lease space for such services. So what is the answer when a foreign beautician wants to lease the space to provide the service but can’t qualify because the investment is lower than the $50,000 baseline and no local person has stepped forward to provide the service the hotel wants to make available for its guests? An investment requirement of $250,000 would certainly prohibit the provision of this service if no local person invested and operated the business. The above is only one example and there are many other businesses that require less than $50,000 to start up. So at what level of investment should the base line be? Still another matter to be pondered concerns the survival over the long term of locally owned “mom and pop” stores. There are some in the Commonwealth that may not have given a great deal of thought to the various economic linkages which, when multiplying financial expenditures throughout the economy, tie it all together. The adage "an economic chain is only as strong as its weakest link" has not always been fully appreciated by some and there are now several indications in the Commonwealth's economic life that may not bode well in the future for many of the smaller “mom and pop” businesses currently operated by local people. Few probably haven’t considered to any great degree that a foreign investor leasing land from one local owner may eventually spell the demise of another locally owned business. Of the 41,971 land transactions recorded since 1986 a very large number involved the lease of land to non indigenous investors. No foreign investor is going to pay a high price for leased land and then leave it idle. He is going to develop his investment either for residential use or for some commercial endeavor, often with superior financial resources as compared with that of many local businessmen and women. Many of the new foreign owned businesses are larger, well stocked and possibly more efficient. While it is a free country and competition is a good thing in the market place eventually the smaller, locally owned businesses will feel the pressure of lost customers. When that happens it will become a case of survival of the fittest. Too often, it will be the smaller local business person who will lose out. Returning to the initial land transaction that occurred in the first place. Frequently when a site is leased from a local owner by a foreign entity, in the early period following the exchange of funds for land, many such transactions resulted in two construction projects.

The investor implements his project by constructing a structure and the local person who leased the land now has funds for his own project. Tax for the transaction is paid to the government. The investor starts construction, materials are imported with excise taxes paid. The contractor hires workers and they pay taxes while the contractor pays a gross revenue and the NMTIT tax. The workers purchase food and other commodities from merchants who in turn pay taxes and hire sales staff who also pay taxes and have money for outside purchases. Automobiles, clothing, food, supplies, telephone communications, vacations, restaurant meals, boats, fuel, airline tickets and hundreds of other items are all purchased – again generating business gross revenue upon which tax is paid to the CNMI Treasury providing funds to hire employees, build roads, finance power and water lines, provide for public safety, furnish schools and employ teachers, doctors and nurses. Money flows through the economy – up and down – in and out – all the while turning over and over again as it circulates throughout the economy before it leaves the island in the form of remitted profits or to pay for imported commodities, etc. Economists refer to this as “leakage.” Few people think about and appreciate these connections and the interlocking elements of "trickled-down" investment and business activity. One occasional and lamentable “trade-off” being that the new foreign owned business can often force another locally owned enterprise out of business – all a result of a land transaction and the subsequent issuance of a long term business entry permit. I certainly believe in free enterprise and competition, and I’m not xenophobic since an individual’s ethnicity or nationality means little to me. I also believe in taking care of your own people first. There are a lot of young people coming along that will need the opportunity to participate in their own businesses. Will any of the smaller opportunities be left for them to implement? In the 1994 -’95 school year there were 3,767 secondary and 9,767 elementary students enrolled in both the public and private school systems. Exactly how many of that number will want to own and operate a business is impossible to say but certainly many will wish to pursue such a career. So here is the dilemma. While large “outside” investment is welcome and, hopefully, will continue to be so saluted, one is astonished at the large number of smaller, lower capital investment enterprises that are foreign owned which have also located in the CNMI. A few years ago the primary concern of many was to lease land to anyone from anywhere. It should not come as a surprise that the outside investor would develop the leased land to his or her advantage. So, in effect, the more land that was leased to, and developed by, outside investors, the more control over the local economy was lost by the indigenous people.

It was a “trade off” that was accepted if not fully realized at the time. Very often the profits from such businesses are fugitive in that they are not reinvested in the local economy. Certainly a government cannot on the one hand invite outside investment at a point in its economic evolution and later “uninvite” it. To do so would seriously jeopardize its investment reputation and creditability around the world and I certainly don’t advocate such action nor has the CNMI Government. However, the question remains if the investment opportunities, particularly the smaller endeavors, that are available in the Commonwealth are open and available to all comers – what opportunities will remain for the local people and the graduating youth that come forward in the future?