Understanding Small Business Activity at the State-Level

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Research Summary

Office of Advocacy Small Business Research Summary

No. 392                              February 2012

Understanding Small Business Activity at the State Level

John Deskins, Creighton University; Tami Gurley-Calvez,
West Virginia University; Eric Thompson,
University of Nebraska–Lincoln. 36 pages.
Under contract number SBAHQ-10-M-0267.


The study examines the impact of small business
activity by industry on overall state economic
growth. A few studies have focused on the impact of
small business in general at the state level, but their
results make it clear that the differing industry mixes
among states have skewed the results.

Overall Findings

Neighboring states would benefit more by acting
like teams, rather than competitors. Small business
activity is found to have positive spillover effects
on neighboring states, not the siphoning effect that
many may presume. But if states focus on particular
industries, their state’s performance will depend on
how that industry does nationally and the results
change over time so there is not one industry that
they can focus on. Small business activity in various
industries led to stronger gross state product (GSP)
and employment growth during the 1988 to 1997
period but not the more recent 1998 to 2007 period.
So a state’s performance will depend on what industries
do well for specific time periods and its industry


• While one might think that a greater amount of
small business activity in neighboring states might
detract from a state’s own rate of economic growth,
the study found the opposite. In the large majority of
cases the results indicate that a neighboring state’s
small business activity has either a positive or statistically
insignificant effect on economic growth.

• Optimal industries to target across growth
measures change over time. Relationships that were
found in earlier years deteriorated in later years. If
developers try to pick and support industry winners
they are creating a boom / bust environment or they
can diversify their industry mix which could achieve
more economic stability but be bereft of growth.

• During the 1988 to 1997 period, small business
activity in three industries—manufacturing,
transportation/communications/utilities, and finance/
insurance/real estate industries—was associated with
faster state economic growth. This did not hold for
the 1998 to 2007 period. The results show that industries
to target for economic developers are those that
will do well in the future, not those that did well in
the past.

• From 1998 through 2007, small business
counts in the real estate and health care industries
were associated with strong state economic growth,
as were small business births in the transportation/
communications/utilities and the finance and insurance
industries. Small business activity in other
industries was not associated with economic growth.

• Most of the positive economic growth effects
of small business activity in the industries identified
are larger than the effects of various state policy
parameters. So having the right industry mix at the
right time period is more important than making the
correct policy decisions on such measures as taxation,
or expenditures.

• When economic growth is measured in per
capita terms, generally a smaller (in absolute terms)
relationship between small business activity and state
economic growth exists. This shows that the effect of
small business activity on state economic growth is
not simply related to population (or labor) change.

Scope and Methodology

The study consists of panel regressions of state
economic variables (GSP, employment, state personal
income, GSP per capita and employment-
population ratios) on measures of industry-specific
small business activities and other controls. Annual
state data for the contiguous United States for the
periods 1988–1997 and 1998–2007 were analyzed.
Independent variables were lagged by one year,
expressing economic activity each year as a function
of control variables (including small business
measures) from the previous year’s data. To capture
interstate spillovers, states sharing a geopolitical border
were identified and controlled for.

Model variables included an index of the price
of energy in the state, the average wage for manufacturing
workers in a state, a measure of the state’s
human capital stock (measured as the share of the
state’s population that has a bachelor’s degree or
higher), state unemployment rates, population density,
the age distribution of a state’s population, and
several measures of state tax structures.

This report was peer reviewed consistent with the
Office of Advocacy’s data quality guidelines. More
information on this process can be obtained by contacting
the director of economic research at advocacy@
or (202) 205-6533.

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This report was developed under a contract with the Small Business Administration,
Office of Advocacy, and contains information and analysis that was reviewed
and edited by officials of the Office of Advocacy. However, the final conclusions
of the report do not necessarily reflect the views of the Office of Advocacy.

Attachments: rs392tot.pdf rs392.pdf