An Empirical Approach to Characterize Rural Small Business 

Growth and Profitability

By Innovation & Information Consultants, Inc.

Concord, MA 2006. 100 pp., under contract no. SBAHQ-04-M-0526

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.

Purpose

Changes in the business cycle have had mixed effects 

on the rural economy. For example, Drabenstott 

(2000) suggests that the most recent economic expansion has had a two-fold effect on the rural economy. 

Some parts have fed off the expansion, while others, 

such as more remote rural areas, and farm-dependent 

communities, are struggling to keep up. 

With this in mind, the Office of Advocacy sought to 

study the factors which lead to small business growth 

in rural areas. Why do certain rural regions expand 

more than others? Past studies suggest that possible 

explanatory factors might include population trends, 

educational attainment, economic conditions at the 

federal and local level, access to business capital and 

infrastructure, the availability of technology, and various quality of life measures. This study explores each 

of these factors, supplementing the examination with 

case study analysis from six states: Kentucky, Maine, 

Nebraska, Nevada, North Carolina, and Utah.

Overall Findings

Areas that experience greater population growth 

also have increased changes in the number of small 

business. The growth rates of rural small businesses 

are influenced by different factors during periods 

of varying economic conditions. Between 1997 and 

1999, significant growth in the number of rural small 

businesses was influenced by demographic, economic, and quality of life variables. During the period 

that included the recession, 2000 to 2002, economic 

variables were more significant.

Highlights

• Education was a significant explanatory variable 

in assessing the growth of rural small businesses. 

The number of high school graduates increases the 

number of rural small businesses. Moreover, one of 

the challenges facing rural communities is how to 

retain a younger, more educated population.

• The amount of “natural amenities” available in 

an area can impact rural small business growth. This 

is defined as the attractiveness of a place to live, 

based on factors such as climate, topography, and 

proximity to surface water. 

• Rural areas have difficulty attracting profitable, 

high-tech businesses, primarily because of a lack of 

both an educated labor force and necessary infrastructure. 

• Rural policy initiatives are geared primarily 

toward specific topics or regions, which often proves 

effective when there are sufficient resources to help 

rural small businesses. According to individuals 

interviewed on the topic, rural development centers 

and non-profit organizations are vital components for 

economic development.

• Some explanatory variables were specific to particular states. These range from the number of rural 

primary care physicians per capita in North Carolina 

to immigration growth in Maine.

Scope and Methodology

The authors developed and modified empirical models to determine which factors were most influential 

in quantifying observed changes in rural small business growth and profitability. Time-series, cross-sectional, and longitudinal (panel) data analyses were all 

tested and included a wide variety of dependent and 

explanatory variables.

A national econometric analysis was first examined using panel data from 1997 to 2002. The 

authors contrasted the model findings by dividing the 

panel into two distinct time frames: 1997 to 1999, 

when the economy was growing, and 2000 to 2002, 

when it was in a downturn. 

February 2006 No. 271
The authors supplemented their national findings with six state case studies. This included an 

investigation into demographic, economic and small 

business trends, an extension of the national-level 

econometric modeling to the state level, and different 

policy initiatives and programs enacted to assist rural 

small businesses. 

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@sba.gov or (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: PB2006-104805

Pricing information:

 Paper copy A06 ($34.00)

 Microfiche A02 ($20.00)

 CD-ROM, A00 ($26.00)

 Download, A00 ($ 8.95)

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