How regions and states can use strategic sector investments to advance supplier diversity

Government incentives have played a major role in shaping those private investment decisions. Take, for instance, Micron Technology’s announcement in 2022 that it will build the nation’s largest semiconductor fabrication facility, promising to create 9,000 direct jobs just outside Syracuse, N.Y., and up to $100 billion in investments over the next 20-plus years. In April, Micron signed a preliminary agreement with the U.S. Department of Commerce to receive up to $6.14 billion in direct funding under the CHIPS and Science Act. Should it reach its investment targets and state requirements, Micron could become eligible for an additional $5.5 billion in incentives from New York State.  

Government incentivizing industrial development is not new: states, for example, have been using tax breaks to attract companies for decades, and the federal government has used facility-siting decisions, contracting, research and development (R&D) partnerships and other tools—most consistently in aerospace and defense-related industries—since the Second World War. But the scale of public subsidies in this new wave of industrial policy, along with an announced intent to promote economic inclusion and revitalization, has raised new questions about what government—and the constituents it represents—should expect from companies receiving such significant taxpayer 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. The policy has resulted in an evolved approach to maximize community benefits; Micron announced a joint Community Investment Framework in partnership with Empire State Development (ESD), the state’s economic development agency.

Along with commitments to workforce development, housing affordability, and community investments in childcare programs and more, the Framework articulates supplier diversity commitments, targeting 30% of eligible construction spending and 20% of ongoing eligible operation spending to businesses owned by socially and economically disadvantaged individuals (SEDI). By New York’s definition, SEDI businesses may include those owned by women, veterans, people of color, Indigenous people, and members of other underserved communities that have “had their access to credit…diminished as compared to others in comparable economic circumstances”; for the remainder of this paper, we refer to them collectively as “diverse-owned businesses” or “diverse suppliers”.

These targets are ambitious for a number of reasons, including, for starters, the limited pool of diverse suppliers that exist as of now. A recent analysis by the national advisory Initiative for a Competitive Inner City (ICIC) found that Black-owned businesses and Hispanic- or Latino-owned businesses account for 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, arise from a variety of structural barriers; these barriers include patterns of discriminatory lending, unequal access to capital (even after controlling for credit scores), and disparities in generational wealth traceable to slavery, redlining, and other exclusionary policies.

Eliminating these structural barriers and advancing supplier diversity will require intentional efforts to shift away from the status quo. Current practices—where procurement officers often rely heavily on the most familiar incumbents or invite other known suppliers to bid—hinder growth, both for the purchasing companies and for suppliers by concentrating opportunities in the hands of a few established supplier firms. Moreover, purchasers routinely impose excessive requirements on suppliers to their own detriment, as they unnecessarily shrink the pool of potential suppliers, including: requirements for unreasonable levels of past experience, expectations of excessive working capital on hand and/or bonding capacity, and thresholds that disqualify otherwise qualified suppliers simply by virtue of scale. Beyond immediate, deliberate efforts to move from these exclusionary status quo practices towards more inclusive systems, supplier diversity strategies will also require a longer-term focus on supporting the establishment and growth of new and existing diverse-owned businesses.

This is a particularly important issue for strategic sectors, whose domestic supply chains are particularly vital to the nation’s future competitiveness and security. The federal government’s intent to onshore supply chains in these strategic sectors opens new opportunities to strengthen supply chain resilience and enhance wealth-building opportunities for a broader swath of the U.S. population.

Given all these dynamics, how can states like New York shift the status quo such that new economic opportunities benefit more of the state’s diverse-owned businesses and bolster supply chain resilience? In this brief, we present three core pillars of a regional supplier diversity strategy—industry leadership, an ecosystem approach, and an enabling environment—drawing on leading examples and our latest insights on how regions can translate historic industry investments into inclusive growth. These recommendations were developed in the context of New York’s partnership with Micron, but they are relevant to a wide range of regional and state leaders working on supply chain development in strategic sectors.

Securing industry buy-in for supplier diversity efforts, particularly in the form of corporate leadership, is a critical first step

Effective, committed, and evidence-driven industry leadership is the first key pillar of any supplier diversity strategy. And indeed, there is ample evidence that is motivating new approaches to procurement and supplier sourcing. Supplier diversity initiatives—where large firms not only source from but also support the expansion of diverse suppliers—can have a range of firm-level benefits. A McKinsey analysis found that minority- and women-owned businesses (MWBE) provide their corporate partners with year-over-year cost savings of 8.5% on average, significantly higher than what most organizations realize (between 3 and 7%). Engaging diverse suppliers can also boost 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 skilled workers of color. Diverse suppliers tend to have more diverse employees, and supporting the growth of diverse suppliers is meaningful to workers of color—and others as well—at the purchaser firms.

What exactly does it mean for industry to “lead”? Effective supplier diversity initiatives require industry leaders to set goals related to supplier diversity, demonstrate a commitment to shifting procurement practices to help achieve those goals, and maintain dedicated staff with the right incentives and enough support to execute change. Even amid today’s more challenging climate towards diversity, equity, and inclusion initiatives, leading examples can be found at the Billion Dollar Roundtable, a corporate advocacy organization comprised of companies that spend $1 billion or more per year directly with diverse suppliers (this spending is assessed through a robust third-party auditing process). Bain and McKinsey, among others, have offered detailed guidance on how to implement supplier diversity strategies as well. Hundreds of major public sector buyers nationwide are likewise joining the push toward “procurement excellence,” and emphasizing equity goals as they remove onerous, dated and excessive requirements and other barriers that disadvantage a broad swath of potential contractor partners.

By demonstrating a genuine commitment to inclusive procurement practices, industry leaders can drive meaningful change, foster innovation, and achieve substantial economic benefits while building stronger, more resilient organizations.

Investing in the robust ecosystem required to support diverse-owned businesses is also crucial

Even if industry partners are motivated to diversify their supplier base, they may need support in sourcing and connecting with diverse suppliers. Contrary to popular notions, business success is not solely determined by the traits of the individual company. Economic evidence finds that companies do not exist in isolation, but rather enhance 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, wide networks of organizations undergird these clusters to support business development. Investors, entrepreneurship support organizations, incubators, accelerators, and service providers (e.g., lawyers, accountants, realtors), among others, all serve as nodes in such networks and seek to connect business owners to knowledge, capital, physical space, business partners, and customers. Navigating this constellation of resources can be a complicated endeavor, especially as no one entity controls or governs this network in any region. Instead, business owners access the network through both formal and informal channels, and those with greater social influence and connections—who tend to be white, due to aforementioned structural barriers—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 outcomes, it will be critical 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, pathways to achieving this more inclusive ecosystem:

1. Grow locally: Identify diverse-owned businesses that are already prepared to be suppliers. These businesses are typically operating at scale (i.e., at least $1 million in annual revenue) and are poised to scale into what Next Street identifies as the “early middle market” by becoming suppliers to large buyers (e.g., large- and mid-cap corporations, universities, local and state governments, hospital systems). Note that the potential pool of relevant diverse suppliers may be wider than a cursory scan 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 ways that expand the local economy. Then, to translate this potential into tangible outcomes, state agencies can work with regional economic development intermediaries and business support organizations to provide matchmaking support, creating opportunities for diverse suppliers to meet directly with purchasers. Importantly, these purchasers should put forth not only their supplier diversity representatives but also their high-level decisionmakers—who will be making procurement decisions—to meet directly with those diverse suppliers. These efforts must account for buyers’ differing levels of readiness to work with diverse-owned businesses and be designed to gradually evolve their strategic sourcing capabilities.
2. Attract nonlocally: Especially in strategic sectors like semiconductors, it is likely that regions and states have supply chain gaps that cannot be addressed by only local firms. Indeed, a recent analysis by ICIC found just 250 Black- or Hispanic- or Latino-owned original equipment manufacturers or large suppliers operating anywhere in the country in the 13 key supply chains targeted by recent federal legislation; in aggregate, they represent less than 1.5 percent of all privately owned businesses in those supply chains. State governments, in tandem with industry leaders, should identify supply chain gaps that require strategic business attraction. This will likely involve targeting larger businesses (i.e., at least $20 million in annual revenue), sometimes from more distant regions but sometimes from adjacent states (for example, in a multistate industrial “supply shed” like that of the industrial Midwest or Southeast). As economic developers and industry 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 businesses and local businesses to catalyze further local growth.
3. Facilitate mergers and acquisitions: Given looming retirements, regional leaders and major buyers committed to supplier diversity can advance these goals by seizing opportunities to pair retiring business owners who do not have succession plans with experienced, diverse talent. With the right introductions, tailored advising, finance, and other supports, established suppliers can transition into diverse ownership. The tradecraft is nothing new—investment funds, for example, have effectively combined these functions for decades—but can and should be put to use with greater intent and effort to support diverse business ownership. Now, as retirement cliffs threaten the future of jobs and growth in manufacturing and other industries, and at the same time as public and private investments surge in strategic sectors, proactive and intentional planning—with an eye towards diverse ownership and supply chain resilience—is more critical than ever.

Strengthen the enabling environment to sustain long-term success

The two sections above examine the two pillars of an effective regional supplier diversity strategy that directly engage small (and sometimes midsized) businesses and large corporations. However, to both actualize short-term progress and sustain long-term improvements in the business ecosystem, regional and state leaders must bolster the broader enabling environment, which includes three core components: policy, capital, and capacity.

1. Ensure policies are removing unnecessary barriers. Many companies seek diverse suppliers that have been approved by state and national certification bodies. Yet under the current certification program managed by the state of New York, for example, it can take over a year for a diverse-owned business to receive certification, which can delay that business’s ability to access the resources and opportunities available only to state-certified diverse-owned businesses. State policymakers could reduce these lags by standardizing and accepting city- or county-level certifications that have faster approval times, as procurement experts Leonard Greenhalgh and James Lowry suggest in Minority Business Success. They may also look to the City of Syracuse’s recent work with Harvard’s Procurement Excellence Network, which significantly cut the local government’s certification processing time, resulting in a tripling of the city’s list of certified diverse-owned businesses. Beyond certification, some states, such as Georgia, also offer tax incentives for companies to promote supplier diversity.
2. Take advantage of opportunities to secure and deploy the right kinds of capital to advance supplier diversity. A full review of the capital access landscape is beyond the scope of this piece, but there is clear alignment between the $500 million portfolio of capital programs funded through the U.S. Treasury Department’s State Small Business Credit Initiative (SSBCI), including some state programs’ explicit focus on diverse-owned businesses, and the pathways to invest in a more inclusive business ecosystem. In New York state, for example, the SSBCI portfolio provides products beyond venture capital; the range of funding opportunities broadens the program’s relevance for supplier diversity efforts, since suppliers often require a combination of loans, traditional equity, private equity, and revenue-based investments. And the State has already made a commitment to improving supplier diversity under SSBCI.
3. Build the capacity of intermediary institutions to develop and execute an ecosystem strategy. To reap the full benefits of strategic sector investments for the regional business ecosystem, intermediaries—for example, business support organizations, chambers of commerce, or industry associations—need additional capacity to better understand major employers’ procurement spend, identify sector-specific needs and priorities, and suggest potential avenues for unbundling contracts and otherwise improving procurement practices at large procurers. This is high-touch, tailored, relational—and therefore labor intensive—region-specific work. To cite one 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 Regional Technology Hubs proposal to the U.S. Economic Development Administration. SCAN would advance a four-pronged strategy, comprised of a) expanding services at Manufacturing Extension Partnerships to support suppliers, b) establishing a purchaser roundtable to facilitate networking and matchmaking, c) developing a directory of regional semiconductor supply chain assets and needs to track growth opportunities, and d) improving processes and governmental 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 spurred 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. While historically these businesses have experienced exclusion and disinvestment, dramatically expanding their participation in the supplier economy offers valuable opportunities to build wealth in disinvested communities, grow quality jobs, bolster innovation, and improve organizational and regional economic performance. By engaging industry leadership, taking an ecosystem approach, and strengthening several critical enablers, state and regional leaders and their partners can have a transformative impact.