An Empirical Approach to Characterize Rural Small Business Growth and Profitability

The statements, findings, conclusions, and recommendations found in this study are those of the authors and do not necessarily reflect the views of the Office of Advocacy, the United States Small Business Administration, or the United States Government. This report was developed under a contract with the Small Business Administration, Office of Advocacy, and contains information and analysis that was reviewed and edited by officials of the Office of Advocacy. However, the final conclusions of the report do not necessarily reflect the views of the Office of Advocacy. Purpose Changes in the business cycle have had mixed effects on the rural economy. For example, Drabenstott (2000) suggests that the most recent economic expansion has had a twofold effect on the rural economy. Some parts have fed off the expansion, while others, such as more remote rural areas, and farm-dependent communities, are struggling to keep up. With this in mind, the Office of Advocacy sought to study the factors which lead to small business growth in rural areas. Why do certain rural regions expand more than others? Past studies suggest that possible explanatory factors might include population trends, educational attainment, economic conditions at the federal and local level, access to business capital and infrastructure, the availability of technology, and various quality of life measures. This study explores each of these factors, supplementing the examination with case study analysis from six states: Areas that experience greater population growth also have increased changes in the number of small business. The growth rates of rural small businesses are influenced by different factors during periods of varying economic conditions. Between 1997 and 1999, significant growth in the number of rural small businesses was influenced by demographic, economic , and quality of life variables. During the period that included the recession, 2000 to 2002, economic variables were more significant. Highlights • Education was a significant explanatory variable in assessing the growth of rural small businesses. The number of high school graduates increases the number of rural small businesses. Moreover, one of the challenges facing rural communities is how to retain a younger, more educated population. • The amount of " natural amenities " available in an area can impact rural small business growth. This is defined as the attractiveness of a place to live, based on factors such as climate, topography, and proximity to surface water. • Rural areas have difficulty attracting profitable, high-tech businesses, primarily …