The Economic Role of Small Businesses using Large Data Sets: 

An Analysis of the Contributions of Small Firms to Urban Growth

By Steven G. Craig and Janet E. Kohlhase, 2006. [40] pages Houston, Texas 77005

under contract no. SBAHQ-04-Q-0023

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

In the past, large cities were primarily characterized by downtown centers of employment. Recent 

decades, however, have seen a proliferation of 

employment subcenters in areas outside of downtown. The rise of urban employment subcenters also 

coincides with a revitalization of major cities in the 

U.S. Thus, the role of small businesses in the formation, maintenance, and growth of employment subcenters provides an excellent window for observing 

the relative role of small and large firms in economic 

development.

The research described in this project contributes important new understanding of the role of 

small businesses in economic growth. It looks at 

the economic development of different parts of one 

large city (Houston, Texas) and seeks to determine 

whether large firms are a significant cause of urban 

economic growth, or alternatively, whether small 

firms perform a key role. This is a difficult question 

because if small firms are successful, they become 

large. Specifically, the authors examine the current 

level of employment decentralization in Houston as 

firms balance agglomeration economies with congestion costs. The authors look at the various employment centers in Houston and their differing levels 

of development in an attempt to infer how the role 

of small business changes between the older and 

well-established centers compared to the newer and 

emerging subcenters of employment. 

Overall Findings

Small firms play a vital role in maintaining economic growth in urban areas. The authors find that 

small businesses compete effectively with large firms 

for land near the employment centers. While large 

firms are more likely to be in employment centers 

in the central business district and more established 

subcenters surrounding downtown, firm size is less 

important for newer and emerging subcenters that 

are farther from downtown. 

Highlights

• Recent research has identified six to eight 

employment centers in the Houston metropolitan 

region. In addition to the central business district 

(CBD) downtown, the subcenters are: the Galleria, 

Carillon, Greenspoint, Clear Lake, Baytown, 

LaPorte, and Pasadena.

• Large firms, which are defined in this analysis as being firms more than 45 employees, are 

significantly more likely to locate in the CBD than 

elsewhere. Over 84 percent of the employees in the 

CBD work for large firms.

• In terms of location within the subcenters, large 

firms are more likely to locate within the Galleria 

area (sometimes referred to as “Uptown”), which 

has the largest employment of the subcenters, but 

small and large firms are equally likely to be within 

a three-mile radius of an employment center. In addition, there is little evidence that large firms are more 

likely than small firms to locate actually within the 

emerging subcenters in Houston.

• Agriculture, mining (which in Houston includes 

the petrochemical industry), and wholesale trade are 

the only industries that are less likely to concentrate 

in a subcenter.

• While not decisive, the results are consistent 

with the view that small firms may be centrally 

important for urban development. As a subcenter 

December 2006 No. 287

*68 Federal Register 24372-24382 (May 7, 2003)
gains momentum and success, small firms might 

grow relatively quickly. While larger firms are more 

likely to be within the actual employment center, it 

is entirely plausible that these large firms were once 

small entities that grew due to their success.

Scope and Methodology

In this analysis, a small firm is defined as one 

with 45 employees or less. The authors attempted 

varying definitions, including cut-offs at 25 and 60 

employees. The empirical results were virtually 

similar.

The authors use data from Dun & Bradstreet 

(D&B), which contains information on 123,313 

individual business establishments in the Houston 

metropolitan area. The D&B data is from 1990 and 

is matched to census information from the same 

year. The authors use Geographic Information 

System (GIS) address matching to successfully 

locate 101,600 of the firms and determine whether 

they are within one of the employment subcenters. 

Firms for which D&B reports unknown employment at a specific location are omitted, resulting in a 

data set with 63,134 individual firms. This process 

removes all zero-employee firms from the sample. 

The empirical results are essentially the same with 

zero-employee firms and without them. Hence, 

this study reports only the findings for the smaller, 

higher-quality data sample.

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 (202) 205-6533.

Ordering Information

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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. 

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