Small Business Dynamics in Rural

1
Small Business Dynamics in Rural Urban America

• Dr. Chad Moutray
• Chief Economist Director, Economic Research
• Office of Advocacy
• U.S. Small Business Administration

2
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 SBAs Office of Size Standards for a complete
  list.
• There are nearly 24 million small businesses in
  the United States.

3
Regulation Small Business
4
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

5
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.

6
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, Missouris
  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.

7
The Importance of Small Businesses to the U.S.
Economy
8
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

9
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.

10
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.

11
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.

12
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.

13
The Importance of Rural Cooperatives to the
Economy

• The USDAs 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.

14
Analysis of Employment Dynamics MSA vs. Non-MSA
15
Percentage Change in MSA Non-MSA
Self-Employment, 1999- 2003
16
Employment Facts for MSAs Non-MSAs, 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.

17
Net Employment Changes, 2000 to 2001
Employment Size of Firm Employment Size of Firm Employment Size of Firm Employment Size of Firm Employment Size of Firm Employment Size of Firm Employment Size of Firm Employment Size of Firm
Location Total 1-4 5-9 10-19 20-99 100-499 lt500 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
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.

18
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)

19
Net Employment Changes for Selected Industries,
2000 to 2001
NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes 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.
20
Net Employment Changes for Selected Industries,
2000 to 2001
NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes NAICS Codes 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.
21
Net Employment Changes for Selected Industries,
2000 to 2001

• Overall Comments
• Manufacturing employment has fallen dramatically
  down 2.68 in MSAs and down 4.92 in non-MSAs
• 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. Wyomings manufacturing net
  job losses were made up by other stronger sectors
  in its economy.

22
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

23
Employment Outlook 2002-2012
24
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
25
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
26
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
27
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
28
Encouraging Rural Entrepreneurship and Economic
Development
29
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 1970s, 1980s, and
  1990s.
• 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)
30
Innovative Entrants Play a Major Role in Our
Dynamic Economy

• Creative Destruction
• Unlike the traditional view of where economies of
  scale dominate, todays 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.

31
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.

32
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 (RD) tend to see a
  greater number of firm formations in the areas
  that surround them

33
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

34
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.

35
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.

36
Entrepreneurs Face Many Obstacles

• Health Insurance
• Regulations
• Tax Burden
• Cost of Litigation
• Global Competition

37
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.

38
Concluding Remarks
39
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.

40
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.

41
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.

42
Questions?

• Feel free to e-mail me at chad.moutray_at_sba.gov
• To sign up for our e-mail listserv
  http//web.sba.gov/list