A community’s social capital – the level of trust and cooperation among residents – is conventionally associated with the likes of higher SAT scores and less youth violence. But a new study drawn from Payment Protection Program (PPP) and U.S. Census data shows that the same metric also correlates positively with business development.

When the federal government enacted the PPP in 2020 to counter the job-loss effects of COVID-19-caused lockdowns, it set up a “giant experiment,” for researchers at the University of Maryland’s Robert H. Smith School of Business.

You had the government offering bank-administered, forgivable with very few questions asked,” says researcher and Maryland Smith finance professor Vojislav Maksimovic. “It presented an ideal setup to answer, ‘Why do small businesses exploit business opportunities better in some areas than others?’”

The short answer: PPP uptake by businesses correlated with census data-derived social capital levels — more so than proximity to a bank, says Maksimovic, the William A. Longbrake Chair in Finance and co-author of the working paper “Seizing Opportunities: Small Businesses, Social Capital, and Banks” with Maryland Smith Associate Professor of Finance Liu Yang and PhD finance student Sophia Xue.

The findings suggest that planners and policymakers at local levels looking to foster business development prioritize support for organizations and institutions that promote prosocial activity — as much or more so than ensuring the physical presence of banks.

Using granular data on business location and outcomes, the authors focused on the effect of local bank branches and local social capital on whether businesses took advantage of the program. They looked at 1.2 million consumer-facing small businesses, such as retail stores, restaurants and pharmacies.

“We found that proximity to bank branches mattered — being 200 yards from a bank was better than within 1,000 yards, for example, but the amount of ‘social capital’ in a community mattered even more,” says Maksimovic. “We interpret our findings as indicating small business resilience and growth requires infrastructure including proximity to banks, but the human element — a strong community — is an essential component.”

The authors derived four social capital measures from Census data, which explained about 25 percent of variation of PPP uptake across different communities. These measures are “local civic capital” (good-neighbor attitudes in the population), “social connections (citizens participating in the likes of local associations and religious groups), “pride in the community” and “trust in banks.”

Maksimovic describes “lots of uptake of PPP loans in communities where folks were members of associations — whether religious or the likes of a PTA — or where they took prosocial actions like returning Census forms.” The latter “is particularly interesting as it strengthens the community and society but has no obvious immediate benefit to the individual.” Filling out the Census form, he further explains, is a public good for the community in that it informs long-term decision making and may increase the flow of federal resources to community members.

Where does social capital matter most? “Social capital predicts loan uptake most in minority communities,” says Yang.

But different components of social capital interact differently with local characteristics. “For example, civic capital (extent to which individuals act for long-term community good without immediate personal benefit) has a more significant association with PPP uptake in highly educated neighborhoods with many stores that are stable with low business turnover,” Yang adds. And “local associations and organizations have a greater association with PPP in less store-dense communities and in minority neighborhoods but are otherwise less sensitive to zip code characteristics.”

The bottom line, Yang says, is that “social capital has significant explanatory power even for a simple project as a forgivable guaranteed zero-interest loan with minimal underwriting.”

For troubleshooting local planners and policymakers, he says, low business investment may stem not only from the financial infrastructure, including how information is processed within banks, but also from the extent to which their communities are seizing opportunities to cultivate their social capital.