Small Business and State Growth: 

An Econometric Investigation

Donald Bruce, John A. Deskins, Brian C. Hill, and Jonathan C. Rork

Maryville, TN 37803. 2007 [39 pages].

Under contract no. SBAHQ-05-M-0410.

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.

For several years, the U.S. Census Bureau has produced firm-size data for the Office of Advocacy 

through its Statistics of U.S. Business (SUSB); see 

www.sba.gov/advo/research/data.html. With data 

spanning 1988 to more recent years, researchers 

willing to investigate linkages between small firm 

establishment births and deaths by state now have 

a sufficient number of observations to conduct 

their analysis.

The authors of this study utilize SUSB data to 

examine the effects of small firm establishment 

births and deaths on state-level changes in gross 

state product (GSP), state personal income (SPI), 

and total state employment for the years of 1988 

to 2002.

Overall Findings

Small firm establishment births have a larger 

impact than any other factor examined on GSP, 

SPI, and total state employment. In fact, the 

authors find that small firm establishment birth 

rates and death rates have equal and opposite 

effects on state economic growth. This is a key 

finding, as it suggests that economic growth will 

be faster when the net small firm establishment 

birth rate is positive (i.e., when the birth rate 

exceeds the death rate).

The authors conclude that this general finding 

reveals that state efforts to promote small business 

formation will be more fruitful in terms of generating economic growth than virtually any other 

policy option in our models.

Highlights

• The authors find that increasing small business births by 5 percent would result in a 0.465 

percent increase in GSP growth.

• The number of small firm establishments and 

the dollar value of small business payroll in neighboring states both have positive but small effects 

on own-state GSP growth.

• States with lower manufacturing shares of 

their GSP and states with a smaller share of their 

population between the ages of 45 and 64 (relative 

to the reference percentage of below age 25) have 

higher GSP growth.

• Faster state employment growth is associated 

with more large-firm activity, lower population 

density, fewer highly educated residents, a younger 

population, and a lower share of GSP from manufacturing. States without state-level inheritance, 

estate, or gift taxes also tend to have higher rates 

of employment growth. Similar trends emerge 

when analyzing changes in state personal income.

• The authors reached the same conclusions 

whether they defined a “small business” as less 

than 500 employees or as less than 100 employees.

Scope and Methodology

In this analysis, the authors explore the intricate 

relationships between small business activities and 

economic activity at the U.S. state level, using a 

panel of state data spanning the years 1988 to 

2002. They examine a wide variety of indicators 

of state small business activity, including such 

things as simple counts of small business firms, 

establishments, employment, payroll, and the 

February 2007 No. 292
number of small firm establishment births and 

deaths. Small business data are drawn from the 

U.S. Census Bureau’s SUSB program, created 

from the annual County Business Patterns files 

with cooperation and partial funding from the 

Office of Advocacy.

To isolate the impact of small business activities 

on state economies, the authors control for other 

determinants of economic growth. The intent is to 

identify available policy instruments for state governments while controlling for as many possible 

determinants of economic growth as possible. A 

listing of data variables and sources can be found 

in Appendix Table 1 of the study.

This report was peer-reviewed consistent with 

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting the director of economic research at advocacy@sba.gov or at (202) 205-6533.

Ordering Information

The full text of this report and summaries of 

other studies performed under contract with the 

U.S. Small Business Administration’s Office of 

Advocacy are available on the Internet at www.sba.

gov/advo/research. Copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

(800) 553-6847 or (703)605-6000

TDD: (703) 487-4639

www.ntis.gov

Order number: PB2007-105141

For email delivery of Advocacy’s newsletter, press, 

regulatory news, and research, visit http://web.

sba.gov/list. For Really Simple Syndication (RSS) 

feeds, visit www.sba.gov/advo/rsslibrary.html.