Economic Research
Small Business Dynamics in Rural
& Urban America
Dr. Chad Moutray
Chief Economist & Director, Economic Research
Office of Advocacy
U.S. Small Business Administration
Economic Research
What is a small business?
• The Office of Advocacy defines a small
business for research purposes as an
independent business having fewer than 500
employees.
• Reality: It varies by industry, number of
employees, and annual revenues.
– See SBA’s Office of Size Standards for a
complete list.
• There are nearly 24 million small businesses
in the United States.
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Regulation & Small Business
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What is the Office of Advocacy?
• Independent office within the U.S. Small Business
Administration
• Enforces:
– Regulatory Flexibility Act (RFA) of 1980
– Small Business Regulatory Enforcement & Fairness Act
(SBREFA) of 1996
– Executive Order 13272 (August 2002)
• Conducts economic research on the importance of
small businesses to the U.S. economy and issues of
relevance to them
– Advocacy usually explores the nonfarm private sector
Economic Research
Crain & Hopkins (2001) Study on
Federal Regulatory Burden
• Firms with less than 20 employees spend
nearly $7,000 per employee to comply with
federal regulations versus almost $4,500 per
employee for large firms with more than
500 employees.
• In terms of tax compliance, small businesses
pay twice as much as their larger
counterparts.
• Note: This study is being revised by Mark
Crain and should be released later this year.
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State Model Regulatory Flexibility
Legislation
• Introduced and endorsed by the American Legislative
Exchange Council (ALEC) in December 2002.
• Since then:
– 16 states have introduced regulatory flexibility legislation in 2004
– 6 states have enacted new legislation (including Kentucky just two
days ago) either in 2003 or 2004
– That will grow to 7 if, as expected, Missouri’s governor signs a new
bill later this month
– 3 states have passed executive orders
• See http://www.sba.gov/advo/laws/law_modeleg.html for
more information.
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The Importance of Small
Businesses to the U.S. Economy
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Quick Factoids
Small Businesses …
• Represent more than 99.7 percent of all employer
firms.
• Employ half of all private sector employees.
• Generate 60 to 80 percent of net new jobs
annually.
• Account for about half of nonfarm private gross
domestic product (GDP).
72 percent of all businesses have NO EMPLOYEES
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Start-Ups
• According to a working paper from the Census
Bureau, start-ups in the first two years of
operation accounted for virtually all of the net new
jobs in the economy.
• Start-ups are more successful than conventional
wisdom would suggest. Two-thirds of new
employer firms survive at least two years, and
about one half survive at least four years.
• According to a new SIFE survey, two-thirds of
college students intend to be entrepreneurs at
some point in their career.
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Link between Entrepreneurship &
Economic Activity
• There is a strong correlation between national
economic growth and the level of national
entrepreneurial activity in prior years, according
to the Global Entrepreneurship Monitor (GEM), a
project funded by the Ewing Marion Kauffman
Foundation.
• In GEM countries, 71 percent of nascent or wouldbe entrepreneurs expect to create 1 to 20 jobs, and
21 percent expect to create at least 20 jobs in their
new ventures.
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Link Between Entrepreneurship
and the Local Community
• The earnings of self-employed
entrepreneurs are almost one-third higher
than the earnings of wage and salaried
workers, with incorporated business
owners’ earnings even higher. (Devine 1994)
• Local entrepreneurs are also more likely to
reinvest their wealth locally and to
contribute to become more involved in their
communities.
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The Importance of Rural
Cooperatives to the Economy
• According to Rural Cooperatives magazine, “more than 120
million people are members of 48,000 cooperatives in the
United States.” Note, though, that not all of these
members live in rural areas, and members might belong to
more than one cooperative.
• These cooperatives and the other businesses run by their
owner-members (farmers) operate in a market-driven
economy just like any other firm.
• Through membership in cooperatives, they are able to
achieve economies of scale in the marketplace and other
benefits.
• Moreover, they collectively have a significant impact to the
local, state, and national economies.
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The Importance of Rural
Cooperatives to the Economy
• The USDA’s Rural Business-Cooperative Service
has completed a number of studies over the past
few years on the economic impact of cooperatives
in Minnesota, North Dakota, and Wisconsin.
• Each of these reports show that cooperatives have
a large direct and indirect impact on overall
economic output, employment, and tax revenues.
• In addition, states realize the importance of
cooperatives and rural economic development.
• In my home state, for instance, the Illinois
Cooperative Center based at SIUC provides
technical and business assistance to agricultural
enterprises throughout the state.
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Analysis of Employment
Dynamics: MSA vs. Non-MSA
Percentage Change in MSA & NonMSA Self-Employment, 1999- 2003
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35
30
25
Incorporated SelfEmployed, MSA
Incorporated SelfEmployed, Non-MSA
Unincorporated SelfEmployed, MSA
Unincorporated SelfEmployed, Non-MSA
20
15
10
5
0
-5
-10
1999
2000
2001
2002
2003
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Employment Facts for MSA’s &
Non-MSA’s, 2001
• Total employment: 115.0 million (MSA: 98.2
million or 85.4%, Non-MSA: 16.8 million or
14.6%).
• States with the greatest percentage of rural
employment: Wyoming (67.99%), Vermont
(62.28%), Mississippi (56.97%), Montana
(56.57%), and Maine (53.05%).
• Small businesses employ 49.4% of
Americans in urban areas versus 57.8% in
rural ones.
Net Employment Changes,
2000 to 2001
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Employment Size of Firm
Location
Total
1-4
5-9
10-19
20-99
100-499
<500
500+
Total
999,970
849,194
199,736
62,253
42,121
-2,429
1,150,875
-150,905
MSA
1,080,319
701,399
196,274
81,862
97,740
42,442
1,119,717
-39,398
-80,349
147,795
3,462
-19,609
-55,619
-44,871
31,158
-111,507
Non-MSA
• All of the net new jobs between 2000 & 2001 were
from small businesses, with the bulk of those coming
from firms with less than 100 employees.
• In rural areas, firms with less than 10 employees were
the only ones with positive net employment changes.
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Employment Facts for Selected
Industries, 2001
• Largest sectors of employment (in Millions)
– MSA: Retail Trade (12.3), Manufacturing
(12.2), Health Care & Social Services (12.1),
Accommodation & Food Services (8.3),
Administrative & Waste Services (7.9)
– Non-MSA: Manufacturing (3.7), Retail Trade
(2.6), Health Care & Social Services (2.4),
Accommodation & Food Services (1.6),
Administrative & Waste Services (1.0)
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Net Employment Changes for
Selected Industries, 2000 to 2001
NAICS Codes
Location
31-33
42
44-45
48-49
51
52
53
54
56
62
71
72
Total *
-529,205
28,057
39,819
-44,893
185,610
290,382
25,826
383,078
-200,675
389,096
33,485
69,768
MSA *
-337,729
34,663
55,526
-40,066
174,448
275,136
22,684
347,271
-215,722
334,931
30,482
74,625
Non-MSA *
-191,476
-6,606
-15,707
-4,827
11,162
15,246
3,142
35,807
15,047
54,165
3,003
-4,857
• 31-33 Manufacturing
• 42 Wholesale Trade
• 44-45 Retail Trade
• 48-49 Transportation & Warehousing
• 51 Information
• 52 Fire & Insurance
• 53 Real Estate & Rental & Leasing
• 54 Professional, Scientific & Technical
Services
• 56 Administrative & Waste Services
• 62 Health Care & Social Assistance
• 71 Arts, Entertainment, & Recreation
• 72 Accommodation & Food Services
* National totals do not include
states with suppressed data.
Net Employment Changes for
Selected Industries, 2000 to 2001
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NAICS Codes
Location
31-33
42
44-45
48-49
51
52
53
54
56
62
71
72
Total *
-3.21%
0.46%
0.27%
-1.19%
5.25%
4.87%
3.37%
5.62%
-2.20%
2.76%
1.93%
0.71%
MSA *
-2.68%
0.63%
0.45%
-1.20%
5.36%
5.06%
3.50%
5.43%
-2.65%
2.84%
2.03%
0.90%
Non-MSA *
-4.92%
-1.04%
-0.60%
-1.11%
3.95%
2.92%
2.17%
8.37%
1.49%
2.33%
1.28%
-0.30%
• 31-33 Manufacturing
• 42 Wholesale Trade
• 44-45 Retail Trade
• 48-49 Transportation & Warehousing
• 51 Information
• 52 Fire & Insurance
• 53 Real Estate & Rental & Leasing
• 54 Professional, Scientific & Technical
Services
• 56 Administrative & Waste Services
• 62 Health Care & Social Assistance
• 71 Arts, Entertainment, & Recreation
• 72 Accommodation & Food Services
* National totals do not include
states with suppressed data.
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Net Employment Changes for
Selected Industries, 2000 to 2001
• Overall Comments:
– Manufacturing employment has fallen dramatically –
down 2.68% in MSA’s and down 4.92% in non-MSA’s
– States with the highest percentage changes in rural
manufacturing employment: Mississippi (-9.47%),
North Carolina (-9.17%), Alabama (-9.06%), Wyoming
(-7.29%), Missouri (-7.24%)
– In these states (except for Wyoming), manufacturing
declines accounted for a substantial portion of the
overall net employment losses in the state. Wyoming’s
manufacturing net job losses were made up by other
stronger sectors in its economy.
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Net Employment Changes for
Selected Industries, 2000 to 2001
• Overall comments (continued):
– Sectors that are doing well in both urban and rural areas:
Fire & Insurance; Health Care & Social Assistance;
Information; Professional, Scientific, & Technical
Services; Real Estate, Rental & Leasing; and Arts,
Entertainment & Recreation
– In states with positive net employment changes, these
sectors were able to counterbalance the negatives of
manufacturing and other sectors.
– Sectors (other than manufacturing) that are hurting:
Transportation & Warehousing; Administrative & Waste
Services; and in rural areas only – Retail & Wholesale
Trade
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Employment Outlook: 2002-2012
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Top Ten Industries with Fastest Wage
& Salary Growth, 2002-12
• Software Publishers (68% increase)
• Management, Scientific, & Technical Consulting Services
(55%)
• Community Care Facilities for the Elderly (55%)
• Computer Systems Design & Related Services (55%)
• Employment Services (54%)
• Vocational Rehabilitation Services (47%)
• Ambulatory Health Care Services (46%)
• Water, Sewage, and Other Systems (46%)
• Internet Services & Data Processing Services (46%)
• Child Day Care Services (43%)
Source: BLS
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Top Ten Fastest-Growing Detailed
Industries by Most New Jobs, 2002-12
Retail Trade (2.1 Million)
Employment Services (1.8)
State & Local Government Education (1.7)
Food Services & Drinking Places (1.3)
Office of Health Practitioners (1.2)
Construction (1.0)
Educational Services (0.8)
Ambulatory Health Care Services (0.7)
State & Local General Government (0.7)
Wholesale Trade (0.6)
Source: BLS
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Despite Manufacturing Declines Overall,
Some Areas Are Expected to Thrive, 2002-12
Plastics Product Manufacturing (128 K)
Animal Slaughtering & Processing (80)
Architectural & Structural Metal Manufacturing (77)
Pharmaceutical & Medicine Manufacturing (68)
Other Wood Product Manufacturing (67)
Other General Purpose Machinery Manufacturing
(51)
Cement & Concrete Product Manufacturing (48)
Metalworking Machinery Manufacturing (34)
Veneer, Plywood Manufacturing (34)
Forging & Stamping (18)
Source: BLS
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Top Ten Fastest Growing
Occupations, 2002-2012
Medical Assistants (59%)
Network Systems & Data Communications Analysts (57%)
Physician Assistants (49%)
Social & Human Services Assistants (49%)
Home Health Aides (48%)
Medical Records & Health Information Technicians (47%)
Physical Therapist Aides (46%)
Computer Software Engineers, Applications (46%)
Computer Software Engineers, Systems Software (45%)
Physical Therapist Assistants (45%)
Source: BLS
Economic Research
Encouraging Rural
Entrepreneurship and Economic
Development
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Challenges in Promoting Rural
Entrepreneurship
• Smallness and remoteness of rural areas
– Businesses in or close to an urban area have seen faster
growth over the 1970’s, 1980’s, and 1990’s.
– Lack of infrastructure can be a concern
• Accessing venture or equity capital
– Incubators or venture capital forums can counteract
this.
• Accessing technology (e.g., broadband)
• Fewer educational opportunities
– Some solutions: community colleges or extension
programs offering technical skills, Small Business
Development Centers, the Internet
Source: Henderson (2002)
Economic Research
Innovative Entrants Play a Major
Role in Our Dynamic Economy
• “Creative Destruction”
– Unlike the traditional view of where economies of scale
dominate, today’s growth comes from newer, more
innovative firms.
– Each year, about a half million firms are both created
and close.
– Competition provides incentives for new firms to
innovate, and newer small firms are often the “agents of
change” needed to spur older firms to become more
efficient.
– The result of this “survival of the fittest” competitive
process is that firms that survive are more efficient,
create new jobs, and are best able to handle the current
marketplace demands.
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Innovative Entrants Play a Major
Role in Our Dynamic Economy
• Rural economies are looking the “next big thing”
to propel their tax base.
• Industry clusters allow for knowledge to be highly
concentrated in a specific technology (e.g.,
semiconductors) or region (e.g., Silicon Valley).
• One of the key advantages of “clustering” is the
ability to utilize informal social networks with
other peer industries and academia. Such ties also
breed “serial entrepreneurs,” who will reinvest
their profits in new enterprises that are also
connected to the local area.
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Innovative Entrants Play a Major
Role in Our Dynamic Economy
• Recent Advocacy Research:
– Small patenting firms are more likely to
generate “scientifically important” innovations
and have produced 13 to 14 times more patents
per employee.
– Colleges and universities who devote more
dollars to research and development (R&D)
tend to see a greater number of firm formations
in the areas that surround them
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Innovative Entrants Play a Major
Role in Our Dynamic Economy
• “Importance of Networking”
– Businesses must build bridges across regions to fill key
knowledge gaps in the process.
– Formal networking structures allow for more shared
information and other resources. Firms in wellestablished networks tend to be more innovative;
although, the overall structure, governance, and size
can influence the level of innovation within the network.
– While large firms tend to serve as “hubs” in the
network, small firms can clearly benefit by
membership.
– Other possible networks for rural entrepreneurs:
incubator programs, angel investor networks
Economic Research
The Changing Small Business
Financial Landscape
• “Credit Scoring & Securitization”
– Technology is changing the lending practices of
many banks.
– Small businesses are increasingly receiving
loans using credit scoring versus the traditional
lending practice of “building a relationship”
with a banker.
– With more information available to creditors,
the overall credit market should expand.
– Advocacy will explore this topic further with
new research.
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The Changing Small Business
Financial Landscape
• “Bank Consolidation”
– In 1980, there were 14,434 banks, of which 33.4
percent of the assets were in community banks.
By 2001, that number halved, and there were
7,631 banks, of which 16.0 percent were in
community banks.
– Small business lending has traditionally been
more the domain of smaller banks; thus, more
consolidation has raised questions about the
impact for small firms.
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Entrepreneurs Face Many
Obstacles
Health Insurance
Regulations
Tax Burden
Cost of Litigation
Global Competition
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Informed Public Policy Starts with
Quality Data and Research
• One of the main complaints of regional
entrepreneurship advocates, according to our
focus groups, is the lack of current, localized data
to guide public policy and/or to assist with
preparing business plans.
• The Ewing Marion Kauffman Foundation is
underwriting a two-year research project with the
Committee on National Statistics to review and
assess federal business statistics. They have also
spearheaded other data development efforts.
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Concluding Remarks
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Conclusions
• Small businesses and rural cooperatives
play a major role in the U.S., state, and local
economies by providing new jobs, output,
and a tax base.
• The rural economy, much like the rest of the
nation, is undergoing major structural
shifts. As we become more of a service
economy, rural economic development will
continue to look for the “next big thing.”
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Conclusions
• Public officials are increasingly looking toward
industry clusters, based around partnerships with
businesses and universities, to drive future
economic growth.
• The churning of new and closing businesses will
continue to be a source of new innovations and
new jobs.
• Networking is becoming more and more
important, especially in rural areas where they
must overcome a series of challenges.
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Conclusions
• Technology and bank consolidation are
impacting lending markets.
• Cooperatives, like all small businesses, must
deal with a number of concerns: high health
care premiums, taxes, regulations, the cost
of litigation, and global competition.
• Government programs, both federal and
state, can assist cooperatives with starting
up, financing, and technical assistance.
Economic Research
Questions?
• Feel free to e-mail me at:
chad.moutray@sba.gov
• To sign up for our e-mail listserv:
http://web.sba.gov/list