Small Business Dynamics in Rural & Urban America Dr. Chad Moutray Chief Economist & Director, Economic Research Office of Advocacy U.S. Small Business Administration

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.

Regulation & Small Business

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

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.

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.

The Importance of Small Businesses to the U.S. Economy

72 percent of all businesses have NO EMPLOYEES 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

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.

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 would-be entrepreneurs expect to create 1 to 20 jobs, and 21 percent expect to create at least 20 jobs in their new ventures.

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.

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.

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.

Analysis of Employment Dynamics: MSA vs. Non-MSA

Percentage Change in MSA & Non-MSA Self-Employment, 1999- 2003

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 Employment Size of Firm Location Total 1-4 5-9 10-19 20-99 100-499 <500 500+ 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 Non-MSA -80,349 147,795 3,462 -19,609 -55,619 -44,871 31,158 -111,507 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.

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)

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 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.

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.

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

Employment Outlook: 2002-2012

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

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

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

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

Encouraging Rural Entrepreneurship and Economic Development

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)

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.

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.

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

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 well-established 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

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.

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.

Entrepreneurs Face Many Obstacles Health Insurance Regulations Tax Burden Cost of Litigation Global Competition

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.

Concluding Remarks

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.”

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.

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.

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