The Role of Community Development Financial Institutions in Supporting Inclusive Economic Development

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Abstract: While prior scholarship examines the relationship between community development financial institutions (CDFIs) and economic development, little is known about their effectiveness and impact on cultivating inclusive urban entrepreneurship. The authors contend that greater attention directed toward young firms’ persistent needs for early resource acquisition, coupled with increased emphasis on the activity among business owners from minoritized groups, can extend the extant literature in a more inclusive manner. To do so, the authors trace the diffusion of CDFIs across the United States between 2013 and 2021 to examine their association with underrepresented minority-owned and/or young firms. One finding is that the presence of CDFIs bolsters the share of minoritized firms at the city level. Further, the authors find that this positive relationship holds for young firms owned by minoritized groups. The empirical results are contextualized with a case study of a nonprofit community bank seeking CDFI certification. This example highlights the importance of providing business assistance and financial capital to urban entrepreneurs.

Keywords: inclusive economic development, community development financial institutions, minority entrepreneurship, public policy