Recent Research: SBA: New Businesses Have Greatest Impact on Economic Growth

A recent study completed for the Small Business Administration (SBA) concludes that small business establishment births are the single-largest determinant of the growth rate of gross state product (GSP), state personal income, and total state employment using data from the years 1988-2002. The authors contend state efforts to promote the creation of small businesses will generate more economic growth then any other policy option included in their models. They calculated that increasing small business births by 5 percent increased the growth of the gross state product by 0.47 percent. These same conclusions would have been reached if small businesses were defined as having less than 500 employees or less than 100 employees, the study indicates.

 

The authors believe that while a large amount of research has been performed relating small businesses to economic growth at a national or international level, little is known when the state is the unit of analysis. Combining information from the U.S. Census Bureau’s Statistics of U.S. Businesses with data from the Center for Business and Economic Research at the University of Tennessee, panel data was created for all 50 states over a period of 15 years.

 

In the desire to isolate the impact of small business data such as the number of small business firms within the state, the number of physical locations with less than 500 employees, small firm employment and payroll levels, and small firm establishment births and deaths, other variables were attempted to be used as control variables. Among others, these included: percentage of population with at least a bachelor’s degree; index of energy prices; wage rates; unemployment rates; age distribution of the population; share of manufacturing within the state’s economy; the state’s sales tax rates; corporate tax rates; and, the number of tax and non-tax incentive programs for economic development.

 

One of the relationships found in the model was that the number of small firm establishments and the value of small business payroll in adjacent states both have positive but small effects on in-state GSP growth. Perhaps, “a rising tide of small business growth lifts all boats,” as opposed to the thought that small business activity is a zero-sum game and adjacent states need to compete against each other in acquiring them.

 

The study, Small Business and State Growth: An Econometric Investigation, is available at http://www.sba.gov/advo/research/rs292tot.pdf.



Links to this report and more than 4,500 additional TBED-related research reports, strategic plans and other papers can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.