The Economic Role of Small Businesses Using Large Data Sets: An Analysis of the Contribution of Small Firms to Urban Growth

The research in this paper empirically explores the importance of small businesses in fostering economic growth. We develop a unique data set for Houston, Texas that contains observations of over 63,000 individual firms and that has employee counts as well as location information matched to census data. The paper estimates two core urban models, bifurcated by large and small firms, examining how firms locate within and near not only the main central business district (CBD), but also the employment subcenters located around the Houston area. Our method is to compare how the relative location of large and small firms varies between the older and established centers of employment to the newly emerging employment subcenters by using the newer areas as proxies for the older areas prior to their development. The results of the paper show a clear distinction between the dominance of large firms in the CBD, and the oldest employment subcenter, the Galleria, compared to the newer areas. Further, we find that large firms are more likely to be found only in the CBD. Conversely, small firms are equally as likely as large firms to be found in the neighboring areas of the other subcenters. The results are mixed for the distribution of firm size within the subcenters themselves. Our other methodology, however, is informative in this regard. We find that a poly-centric density function, capturing the simultaneous influence of each of the employment subcenters on employment throughout the county, shows that small and large firms have equal effects on employment. We thus interpret this evidence to strongly suggest that small firms are a crucial element in urban economic development as their success is likely to lead to economic growth not only for the firm itself, but for the entire local economy.