The impact of three important federal laws has triggered a wave of investments in strategic sectors of the U.S. economy, such as clean energy, semiconductors and electronics, biomanufacturing, and other advanced industries. Since 2021, companies in these sectors have announced more than 525 billion dollars in new investments, a trend that is already influencing the broader economy. For example, spending on construction in the manufacturing sector increased by 37% in 2023, more than triple the general construction spending. Government incentives have played a crucial role in private investment decisions. A notable example is Micron Technology‘s announcement in 2022 to build the country’s largest semiconductor manufacturing facility, promising to create 9,000 direct jobs near Syracuse, New York, and up to 100 billion dollars in investments over the next 20 years. In April, Micron signed a preliminary agreement with the U.S. Department of Commerce to receive up to 6.14 billion dollars in direct financing under the CHIPS and Science Act. If Micron meets its investment goals and complies with state requirements, it could be eligible for up to 5.5 billion dollars in additional incentives from the State of New York.
Government incentivization of industrial development is not new. States have used tax exemptions to attract businesses for decades, and the federal government has used decisions about the location of facilities, contracts, research and development (R&D) partnerships, and other tools, primarily in the aerospace and defense industries, since World War II. However, the scale of public subsidies in this new wave of industrial policy, along with the declared intention to promote economic inclusion and revitalization, has raised new questions about what the government and the constituents it represents should expect from companies receiving this significant tax-funded support. For example, the State of New York enacted new legislation to create the Green CHIPS Program, which established new community and environmental sustainability requirements for semiconductor companies. This policy has led to an evolved approach to maximizing community benefits; Micron announced a Joint Community Investment Framework in partnership with Empire State Development (ESD), the state’s economic development agency. In addition to commitments to workforce development, housing affordability, and community investments in childcare programs and more, the Framework outlines commitments to supplier diversity, allocating 30% of eligible construction spending and 20% of eligible ongoing operational spending to businesses owned by socially and economically disadvantaged individuals (SEDI). SEDI businesses can include those owned by women, veterans, people of color, indigenous people, and members of other underrepresented communities who “have had their access to credit… diminished compared to others in comparable economic circumstances.” These goals are ambitious for several reasons, including the limited number of diverse suppliers that currently exist. A recent analysis by the Initiative for a Competitive Inner City (ICIC) found that black-owned businesses and Hispanic or Latino-owned businesses represent only 0.8% and 0.4%, respectively, of all businesses in the semiconductor supply chain. These extremely low shares and the disparities they reflect in business ownership stem from a variety of structural barriers. These barriers include discriminatory lending patterns, unequal access to capital (even after controlling for creditworthiness), and generational wealth disparities that can be traced back to slavery, segregation, and other exclusionary policies. Eliminating these structural barriers and advancing supplier diversity will require intentional efforts to move away from the status quo. Current practices, where procurement officers often rely heavily on familiar incumbents or invite other known suppliers to bid, hinder growth for both buying companies and suppliers, concentrating opportunities in the hands of a few established suppliers. Additionally, buyers routinely impose excessive requirements on suppliers, harming themselves by unnecessarily reducing the pool of potential suppliers, including unreasonable levels of past experience, expectations of excess working capital on hand and/or bonding capacity, and thresholds that disqualify otherwise qualified suppliers simply due to scale.
Beyond the immediate and deliberate efforts to move away from these exclusionary status quo practices toward more inclusive systems, supplier diversity strategies will also require a long-term approach to support the establishment and growth of new and existing businesses owned by diverse individuals. This is a particularly important issue for strategic sectors, whose national supply chains are vital for future national competitiveness and security. The federal government’s intention to onshore the supply chain to these strategic sectors opens new opportunities to strengthen supply chain resilience and improve wealth creation opportunities for a broader segment of the U.S. population.
Given all these dynamics, how can states like New York change the status quo so that new economic opportunities benefit more of their diverse-owned businesses and strengthen supply chain resilience? This document presents three fundamental pillars of a regional supplier diversity strategy: industrial leadership, an ecosystem approach, and an enabling environment, based on leading examples and the latest ideas on how regions can translate historic industrial investments into inclusive growth. These recommendations were developed in the context of New York’s partnership with Micron but are relevant to a wide range of regional and state leaders working on supply chain development in strategic sectors.
Ensuring industry commitment to supplier diversity efforts, especially in the form of corporate leadership, is a critical first step. Effective, committed, and evidence-based industrial leadership is the first key pillar of any supplier diversity strategy. There is sufficient evidence to motivate new approaches in procurement and supplier management. Supplier diversity initiatives, where large companies not only source supplies but also support the expansion of diverse suppliers, can have a variety of benefits at the company level. An analysis by McKinsey found that minority and women-owned businesses (MWBE) provide their corporate partners with average annual cost savings of 8.5%, significantly higher than what most organizations achieve (between 3% and 7%). Committing to diverse suppliers can also increase innovation and resilience by providing companies with access to new business networks, markets, and communities. Other studies have found that supplier diversity initiatives improve organizational performance and strengthen companies’ ability to recruit and retain qualified workers of color. Diverse suppliers tend to have more diverse employees, and supporting the growth of diverse suppliers is significant for workers of color and others in the buying companies. What does it mean exactly for industry to “lead”?
Effective supplier diversity initiatives require industrial leaders to set supplier diversity-related goals, demonstrate a commitment to changing procurement practices that help achieve those goals, and maintain dedicated personnel with the right incentives and sufficient support to execute the change. Even in the most challenging climate toward diversity, equity, and inclusion initiatives, leading examples can be found in the Billion Dollar Roundtable, a corporate advocacy organization composed of companies that spend one billion dollars or more per year directly with diverse suppliers (this spending is evaluated through a robust third-party audit process). Bain and McKinsey, among others, have provided detailed guidelines on how to implement supplier diversity strategies. Hundreds of public sector buyers across the country are also joining the push toward “excellence in procurement,” emphasizing equity goals as they eliminate onerous, outdated, and excessive requirements and other barriers that disadvantage a wide range of potential contractor partners. By demonstrating a genuine commitment to inclusive procurement practices, industrial leaders can drive significant changes, foster innovation, and achieve substantial economic benefits while building stronger and more resilient organizations.
Investing in the robust ecosystem needed to support diverse-owned businesses is also crucial. Even if industrial partners are motivated to diversify their supplier base, they may need support to find and connect with diverse suppliers. Contrary to popular notions, business success is not determined solely by the characteristics of the individual firm. Economic evidence finds that firms do not exist in isolation but improve their competitiveness by being embedded in “clusters” of complementary firms and institutions. For potential suppliers, connecting with larger firms through these clusters can be a powerful source of growth. In any given region, broad networks of organizations sustain these clusters to support business development. Investors, entrepreneurial support organizations, incubators, accelerators, and service providers (e.g., lawyers, accountants, real estate agents), among others, all serve as nodes in such networks and seek to connect business owners with knowledge, capital, physical space, business partners, and customers. Navigating this constellation of resources can be a complicated task, especially because no single entity controls or governs this network in any region. Instead, business owners access the network through formal and informal channels, and those with greater social influence and connections, who tend to be white due to the structural barriers mentioned earlier, often have an easier experience navigating these networks because they can rely on existing relationships to help them identify and secure relevant resources. This pattern continues to reinforce the large racial disparities in business ownership across the country. To generate more inclusive results, it will be crucial to evolve how these regional networks operate and, over time, build a more inclusive business ecosystem. There are at least three main, though not mutually exclusive, paths to achieve this more inclusive ecosystem: Grow locally: Identify diverse-owned businesses that are already ready to be suppliers. These businesses generally operate at scale (i.e., with at least one million dollars in annual revenue) and are ready to scale to what Next Street identifies as the “early mid-market” by becoming suppliers to large buyers (e.g., large and medium-sized enterprises, universities, local and state governments, hospital systems). Note that the potential pool of relevant diverse suppliers may be broader than a cursory inspection would show; suppliers may be working in one industry but have capabilities that, with the right support, could help fill gaps in strategic sectors in a way that expands the local economy. Then, to translate this potential into tangible results, state agencies can work with regional economic development intermediaries and business support organizations to provide matching support, creating opportunities for diverse suppliers to meet directly with buyers. It is crucial that these buyers put not only their supplier diversity representatives but also their senior executives, who will make procurement decisions, to meet directly with those diverse suppliers. These efforts should take into account the different levels of readiness of buyers to work with diverse-owned businesses and be designed to gradually evolve their strategic sourcing capabilities. Attract non-locally: Especially in strategic sectors like semiconductors, regions and states are likely to have supply chain gaps that cannot be addressed solely with local businesses. In fact, a recent analysis by ICIC found only 250 original equipment manufacturers or large suppliers owned by blacks or Hispanics or Latinos operating anywhere in the country in the 13 key supply chains targeted by recent federal legislation; together, they represent less than 1.5% of all private businesses in those supply chains. State governments, in conjunction with industrial leaders, must identify supply chain gaps that require strategic business attraction. This will likely involve targeting larger businesses (i.e., with at least 20 million dollars in annual revenue), sometimes from more distant regions but sometimes from adjacent states (e.g., in a multi-state industrial “supply basket” like the Midwest or the Southeast industrial). As economic developers and industrial leaders identify these supply chain gaps and pursue business attraction, they should explore and pursue opportunities to align incentives, research strategies, and selection criteria with their supplier diversity goals. These leaders may also consider facilitating joint ventures and other partnerships between out-of-state and local businesses to catalyze additional local growth. Facilitate mergers and acquisitions: Given the impending retirements, regional leaders and large buyers committed to supplier diversity can advance these goals by leveraging opportunities to match retiring business owners who have no succession plans with experienced diverse talent. With the right introductions, personalized advice, financing, and other supports, established suppliers can transition to being owned by diverse owners. The craft is not new; investment funds, for example, have combined these functions effectively for decades, but they must and should be used with greater intention and effort to support diverse business ownership. Now, while retirement storms threaten the future of jobs and growth in manufacturing and other industries, and at the same time, public and private investments are increasing in strategic sectors, proactive and intentional planning, with a focus on diverse ownership and supply chain resilience, is more critical than ever.
Strengthen the enabling environment for long-term success
The two previous sections examine the two pillars of an effective regional supplier diversity strategy that directly involve small (and sometimes medium) businesses and large corporations. However, to achieve both short-term progress and maintain long-term improvements in the business ecosystem, regional and state leaders must strengthen the broader enabling environment, which includes three fundamental components: policy, capital, and capacity.
Ensure that policies eliminate unnecessary barriers. Many businesses seek diverse suppliers that have been certified by state and national certification bodies. However, under the current certification program managed by the State of New York, for example, it can take more than a year for a diverse-owned business to receive certification, which can delay that business’s ability to access resources and opportunities available only to state-certified diverse businesses. State legislators could reduce these delays by standardizing and accepting city or county-level certifications that have faster approval times, as suggested by procurement experts Leonard Greenhalgh and James Lowry in Minority Business Success. They can also seek the recent work of the City of Syracuse with the Harvard Procurement Excellence Network, which significantly reduced local government certification processing time, resulting in a tripling of the city’s list of certified diverse businesses. Beyond certification, some states, like Georgia, also offer tax incentives for businesses to promote supplier diversity. Leverage opportunities to secure and deploy the right types of capital to advance supplier diversity. A comprehensive review of the capital access landscape is beyond the scope of this article, but there is a clear alignment between the 500 million dollar portfolio of capital programs funded through the U.S. Treasury Department’s State Small Business Credit Initiative (SSBCI), including some state programs that explicitly focus on diverse-owned businesses, and the paths to invest in a more inclusive business ecosystem. In the State of New York, for example, the SSBCI portfolio provides products beyond venture capital; the range of financing opportunities expands the relevance of the program for supplier diversity efforts, as suppliers often require a combination of loans, traditional capital, private capital, and income-based investments. And the State has already made a commitment to improve supplier diversity under SSBCI. Build the capacity of intermediary institutions to develop and implement an ecosystem strategy. To maximize the investments in strategic sectors for the regional business ecosystem, intermediaries, for example, business support organizations, chambers of commerce, or industry associations, need greater capacity to better understand the procurement spending of large employers, identify sector-specific needs and priorities, and suggest possible ways to unbundle contracts and improve procurement practices in large buyers. This is region-specific, relational, and labor-intensive work. To cite a promising example of expanding intermediary capacity: leaders in New York have developed a new Supply Chain Activation Network (SCAN) to facilitate lasting change in the business ecosystem as part of their winning 40 million dollar proposal for Regional Technology Hubs to the U.S. Economic Development Administration. SCAN would advance a four-pronged strategy, composed of a) expanding services in Manufacturing Extension Partnerships to support suppliers, b) establishing a buyers’ roundtable to facilitate networking and matching, c) developing a directory of regional semiconductor supply chain assets and needs to track growth opportunities, and d) improving government processes and resources to better reach and support small and diverse-owned businesses. Many of these assets are present in other states and could be deployed for similar objectives. As historic federal investments have driven a “big build” across the country, regional and state leaders have a unique window of opportunity to strategically direct these investments toward diverse-owned businesses. Historically, these businesses have experienced exclusion and disinvestment, but the dramatic expansion of their participation in the supplier economy offers valuable opportunities to build wealth in disinvested communities, generate quality jobs, increase innovation, and improve organizational performance and regional economies. By engaging industrial leaders, taking an ecosystem approach, and strengthening several critical enablers, state and regional leaders and their partners can have a transformative impact.
