An Empirical Approach to Characterize Rural Small Business in Kentucky, Maine, Nebraska, Nevada, North Carolina, and Utah

Executive Summary

The mid to late 1990s were a period of economic expansion in the United States.

Followed by an economic recession beginning in 2000, these different economic conditions had
a profound impact on the number and relative profitability of U.S. businesses, including large
and small businesses, as well as those located in both urban and rural environments.

Throughout
the expansion and recession, several notable trends can be observed concerning rural small
businesses. First, rural America is undergoing several notable demographic shifts, with certain
rural areas experiencing a decline in population. Second, rural areas tend to have significantly
higher unemployment than urban counterparts. Finally, the difference between average wages
and per capita income in rural and urban areas continues to grow, as rural areas fall further
behind.

Although rural small businesses tend to be largely outnumbered by their urban
counterparts, their contribution is vital for the economic success, or failure, of local and state
economies. Federal agencies, including the Small Business Administration (SBA), state
agencies and local rural development councils have all expressed interest in analyzing the impact
macro- and microeconomic factors have on the growth and profitability of small, rural-based

In this report, Innovation & Information Consultants, Inc. (IIC, Inc.) focuses on
econometric and case study analyses investigating the ways in which different economic and
demographic factors influence rural small business growth and profitability. The research
methodology we have employed in this study included a review of the relevant literature on
issues facing rural small businesses, which provided us a broader understanding of the specific
factors and analyses previously performed to address rural small business growth, profitability,
and policy initiatives. We subsequently developed and modified empirical models in light of the
findings of the literature review.

The objective of our econometric modeling was to determine
which factors most influence the quantification of observed changes in rural small business
growth and profitability. We collected and analyzed data compiled from various federal and
state agencies, including specialized data provided by the Office of Advocacy of the SBA. The
national econometric models used multivariate regression analysis using time-series, crosssectional,
panel data.

We extended our national analysis of rural small business growth and profitability to a
state level by performing six state case studies. Each case study included an investigation into
demographic, economic, and small business trends, extension of national-level econometric
modeling to the state level, and analysis of different policy initiatives and programs enacted to
assist rural small businesses.

We selected Kentucky, Maine, Nebraska, Nevada, North Carolina,
and Utah for our state case studies.

Finally, we conducted a limited number of interviews to
illuminate and expand upon some of the findings from the data analysis and literature review.
Based on our literature review, national and state econometric modeling, state policy
analysis and interviews, we generated several conclusions including the following:

• A positive relationship exists between rural population growth and change in the
number of rural small businesses. As population increases, we expect an increase
in the number of rural small businesses. One of the key issues facing rural communities is how to retain the younger, more educated population.
Employment trends are important in establishing rural small businesses. We
extend the term “employment” to include an educated labor force. Rural areas
typically experience a “brain drain,” where they lose the educated population to
urban areas.

• The growth rate in the number of rural small businesses is influenced by different
factors during periods of different economic conditions. Between 1997 and 1999,
we observed significant growth in the number of rural small businesses,
influenced by demographic (population, education), economic (wages,
employment), and quality (natural amenities) variables. During a recessionary
period (2000 through 2002) we observed lower growth, and greater explanatory
power was derived from economic variables as opposed to demographic
variables.

• Rural policy initiatives are primarily geared toward specific topics or regions.
Programs were focused on improving regions that were generally struggling in
certain socioeconomic areas, such as high levels of unemployment and poverty.

• Rural areas have difficulty attracting profitable, high-tech businesses, primarily
because of a lack of an educated labor force and a lack of infrastructure.

• The current focus in rural small business development involves helping the rural
entrepreneur. Future research on rural entrepreneurship is warranted to assess the
best ways rural entrepreneurship policy can be implemented to assist rural small
businesses.

• Rural development centers and non-profit organizations are vital components in
rural small business development.

• The impact of urban changes on the rural small business environment was mixed.
Several regression models indicated positive relationships between the change in
urban small businesses and rural small businesses, although other regression
results displayed a negative relationship. On an aggregate basis, we were unable
to definitively explain these apparent trends, and the urban-rural relationship was
indeterminate based on our results.

By Innovation & Information Consultants, Inc.

Full Report: http://www.sba.gov/advo/research/rs271tot.pdf