No. 248

February 2005

SMALL BUSINESS

RESEARCH

SUMMARY

Using Census BITS To Explore Entrepreneurship,

Geography, and Economic Growth

by Zoltan C. Acs and Catherine Armington; 

Acs & Associates [45] pages. Ruxton, Maryland 21204

under contract no. SBA-HQ-03-M0534

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

This paper discusses three related research projects

that used the Business Information Tracking Series

(BITS). This set of data was developed by the U.S.

Bureau of the Census with support from the U.S.

Small Business Administration Office of Advocacy.

The purpose of the report is to demonstrate the

importance and usability of large micro databases

such as the BITS that cover almost all U.S. private

sector businesses, and track their employment and

firm ownership annually from 1988 through 2001. It

represents all industries, distinguishes between establishments and firms, identifies start-ups of both new

firms and new secondary locations of old firms, and

specifies the location, industry, and changing

employment of each establishment through time.

Overall Findings

Empirical results using BITS data in three studies

bore out the authors’ contention that models of economic growth would be substantially improved by

greater incorporation of theories of entrepreneurial

activity. Variation in firm formation rates (defined as

the number of net new firm divided by 1,000 labor

force in a particular year) is substantially explained

by regional differences in industry specialization,

human capital, and local population and income

growth rates.

Highlights

• The underlying theoretical framework for the

empirical analysis includes three components: spatially constrained externalities, increasing returns in

the production of goods, and decreasing returns in

the production of knowledge.

• Using annual data on firm formation for 384

labor market areas, in six industry sectors between

1991-1998, the researchers found considerable variation in the new firm formation rate across regions,

but little variation over time.

• The results suggest that the regional differences

in service firm formation rates depend to a large

degree on the educational requirements and the market served by the newly formed firms. 

• From 1996-1999, new firm formation rate

increases are associated with higher employment rate

growth. This relationship holds for all periods examined and for all sectors of the economy, except for

manufacturing.

• An increase in the number of high school graduates tended to increase overall growth rates for the

period of 1996-1999. The research also find evidence

that raising the overall level of education (high

school graduation) has a greater impact on economic

growth than raising the proportion of the adult population with college degrees, if new firm formation

rates are held constant.
• Firm formation rates tend to be higher in regions

with higher business specialization rates. In addition,

it finds that greater physical density, defined as the

number of establishments per square mile, of businesses in a region is also associated with less, not

more, growth.

• Other longitudinal business microdata bases are

available, but none is as useful as the BITS for tracking firms, and their establishments and employment

dynamics. No other can detect new firm formations

properly, since the United States. lacks a national

system for public registration of businesses. In addition, more and more businesses are not bothering

with Yellow Page subscriptions or commercial credit

applications.

• The primary limitation of the BITS data is that

they are only available from 1988, with longitudinal

linkage from 1989. As with all large business databases, the BITS inevitably has some imperfections in

its tracking of establishments that are changing their

ownership or legal form over time, and of firms that

are creating, divesting, or closing secondary locations. Despite these weaknesses, the BITS provide

far more accurate and comprehensive data on U.S.

private sector businesses than any other source.

Data Sources and Methodology

The current Business Information Tracking Series

data for 1990 to 1999 have been used to estimate

regression models to test hypotheses from recent literature that are related to variables such as entrepreneurial activities, industrial specialization, human

capital, localities, and economic growth. The final

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 to the U.S. Small

Business Administration’s Office of Advocacy are

available at www.sba.gov/advo/research. Copies are

also available from:

National Technical Information Service

5285 Port Royal Road

Springfield, VA 22161

(703) 487-4650, (703) 487-4639 (TDD)

www.ntis.gov

NTIS order number: PB2005-102189

Pricing information: Pending

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