Office of Economic

Research

Research Publications

2005

January 2006
Created by Congress in 1976, the Office of Advocacy of the U.S. Small Business

Administration (SBA) is an independent voice for small business within the federal government. Appointed by the President and confirmed by the U.S. Senate,

the Chief Counsel for Advocacy directs the office. The Chief Counsel advances

the views, concerns, and interests of small business before Congress, the White

House, federal agencies, federal courts, and state policy makers. Economic

research, policy analyses, and small business outreach help identify issues of

concern. Regional Advocates and an office in Washington, DC, support the Chief

Counsel’s efforts.

For more information on the Office of Advocacy, visit http://www.sba.gov/advo,

or call (202) 205-6533. Receive email notices of new Office of Advocacy information by signing up on Advocacy’s Listservs at http://web.sba.gov/list

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Office of Advocacy

U.S. Small Business Administration

Washington, D.C.

January 2006

Office of Economic

Research

Research Publications

2005
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Advocacy’s Internet site at http://www.sba.gov/advo/.

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Foreword

The U.S. Small Business Administration’s Office of Advocacy is the federal government’s

primary source for research on the importance of small businesses in the economy and for

studies of policy issues relevant to small firms. This report summarizes the publications

produced by the Office of Advocacy’s Office of Economic Research in 2005.

Advocacy research is regularly used in magazine articles, speeches, and academic

research. The Frequently Asked Questions document, for example, is often cited, and

many take advantage of the timely information in our Quarterly Indicators. The office

this year added value to The Small Business Economy by including more chapters from

outside contributors in addition to the annual data for which it has become a reference.

Highlights of the past year included two research conferences, “Putting it Together:

The Role of Entrepreneurship in Economic Development” in March that examined

state-level best practices, and Global Perspective on Entrepreneurship Policy held in

June in conjunction with the International Council for Small Business annual meeting.

The proceedings publications documenting these conferences have been well received.

Other studies garnered significant attention in 2005. W. Mark Crain updated earlier

groundbreaking research on the cost to small businesses of complying with federal regulations, finding that the cost per employee for small firms is $7,647. Joel Popkin studied the cost of employee benefits by firm size. Karlyn Mitchell and Douglas Pearce

used the Survey of Small Business Finances to examine the availability of financing to

small firms. The Klemm Analysis Group looked at the small business cost of litigation.

And S. Michael Camp studied the role of entrepreneurship and innovation in creating

an environment where local economic growth can thrive.

All of our research and data can be found online at http://www.sba.gov/advo/research.

For regular updates on our research as it is released, please join Advocacy’s research

listserv, which can be found at http://web.sba.gov/list. We appreciate your ongoing

interest in small business.

Chad Moutray, Ph.D.

Chief Economist and Director

Office of Economic Research
Contents

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .iii

Office of Economic Research Research Publications 2004 . . . . . . . . . . . . . . . . . . . . . 1

Banking/Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

General Small Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

Innovation and Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

International Issues and Small Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Labor and Employment Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Legal Issues and Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Owner Demographics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Regional Economic Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Office of Economic Research

Research Publications 2005

Small Business and Micro Business Lending in the United States for Data Years

2002-2003

Charles Ou and Victoria Williams 

Data years 2002-2003, released March 2005

Data years 2003-2004, released November 2005

http://www.sba.gov/advo/research/lending.html

The Office of Advocacy prepares an annual study of bank lending to small firms, using

the most recent data available on small and micro business loans to small firms and on

the banks that serve them. This study provides a brief review of the banks’ lending

activities based on two types of data reported by banks to their regulating agencies—

call reports and reports required by the Community Reinvestment Act (CRA). Because

data are available only by the size of the loan, small business loans are defined as business loans under $1 million and micro business loans are those under $100,000. 

Banking Consolidation and Small Business Lending: A Review of Recent Research

Charles Ou, Working Paper, released March 2005

http://www.sba.gov/advo/research/wkp05ou.pdf

Banking consolidation has continued to accelerate over the past several years, assisted

by technological innovations in information management and statistical modeling, and

by the large merger and acquisition (M&A) deals of the late 1990s. Total domestic

assets held by the 50 largest bank holding companies (BHC) rose from about 52 percent in June 1997 to nearly 70 percent in June 2002, and the number of small banks

with assets under $500 million declined from 8,647 in June 1997 to 7,208 in June

2002. The perennial question about the impact of banking consolidation on the availability of financing to small business remains a major concern to small business

researchers and policymakers. This paper provides a review of recent major studies

conducted over the past several years.

Banking/Finance

Access these reports online at www.sba.gov/advo Research Publications 2005 1
Banking/Finance

2 Office of Economic Research

The Effects of Mergers and Acquisitions on Small Business Lending by Large Banks

Diana Hancock, Joe Peek, and James A. Wilcox (KeyPoint Consulting LLC), released

March 2005

http://www.sba.gov/advo/research/rs254tot.pdf

The study documents recent trends in small business lending at the largest bank holding companies (BHCs). It then provides an analysis of the effects of the recent consolidation in the banking industry on small business lending. The analysis makes key distinctions that are generally missing from the literature and estimates of small business

lending. First, it distinguishes between (1) originations and purchases of small business loans and (2) the more typically used stocks of small business loans held on bank

balance sheets. It then looks to see whether views about the credit available to small

businesses might be influenced by the choice of the measure of lending. Second, it distinguishes between acquisitions of banks (and BHCs) and mergers of banks (and

BHCs). To date, little is known about the effects on small business lending of consolidation within a BHC (the combining of bank charters through mergers), as opposed to

the effects of consolidation into a BHC (the change of ownership through acquisition).

By distinguishing mergers within BHC banks from bank acquisitions by a BHC, the

report estimates whether small business lending is affected differently by shifts in the

organizational structure of BHCs than by changes in the ownership of banks. Third, it

distinguishes between the effects of internal and external growth of the largest BHCs.

Finance Companies and Small Business Borrowers: Evidence from the 1993 and

1998 Surveys of Small Business Finances

George W. Haynes, released April 2005

http://www.sba.gov/advo/research/rs255tot.pdf

Finance companies play an important role in providing short- and medium-term financial

capital to small business borrowers. They are the most important institutional providers

of capital to small businesses after banks. This study examines whether finance companies’ importance in providing financial capital to small business borrowers changed during the 1990s. This is interesting because the 1990s were a decade of rapid growth in

financial markets, including expansion in interstate banking and lending by both finance

companies and commercial banks. This study uses the most recent data on small business finances to evaluate the importance of finance companies to small business borrowers in 1993 and 1998; to assess what types of borrowers were attracted to finance companies; and to determine if these finance company borrowers paid higher loan prices.

Access these reports online at www.sba.gov/advo
Availability of Financing to Small Firms using the Survey of Small Business Finances Banking/Finance

Karlyn Mitchell and Douglas K. Pearce, released May 2005

http://www.sba.gov/advo/research/rs257tot.pdf 

This study investigates possible restricted access to credit for minority- and womenowned businesses by focusing on two types of credit—“relationship loans” (lines of

credit) and “transaction loans” (commercial mortgages, motor vehicle loans, equipment

loans, capital leases, and other loans)—from two types of creditors: commercial banks

and nonbank lenders. The disaggregated approach is feasible because of a rich new data

set, the 1998 Survey of Small Business Finances. The results imply that minority small

business owners face some restrictions in access to credit. These restrictions do not

appear to be uniform across loan or lender type. This study breaks new ground by suggesting that preferential lending practices characterize the granting of transaction loans

to a significantly greater degree than the granting of relationship loans.

A Spatial Model of the Impact of State Bankruptcy Exemptions on Entrepreneurship 

Aparna Mathur, released July 2005

http://www.sba.gov/advo/research/rs261tot.pdf 

The focus of this paper is on the U.S. personal bankruptcy law, and in particular, the

effect that state bankruptcy exemptions have on entrepreneurship. The homestead

exemption is an exemption for equity in owner-occupied housing. This varies widely

among the states, with some states having no exemption and others having unlimited

exemptions. Most states also have exemptions for household belongings, equity in

vehicles, retirement accounts, and a wildcard category that can be applied to any type

of asset. These exemption levels have changed over time in many states. Given these

differences in state bankruptcy exemptions, businesses might opt for a business location based on the conditions in surrounding states. This study finds that entrepreneurs

choose the location of their businesses in response to competing business conditions in

and outside the state, making state bankruptcy laws a significant determinant of entry

and exit decisions by small firms.

Access these reports online at www.sba.gov/advo Research Publications 2005 3
Banking/Finance The Effect of Changes in Monetary Policy on the Expectations, Spending, and

Hiring Decisions of Small Business Owners

William C. Dunkelberg and Jonathan A. Scott, released November 2005

http://www.sba.gov/advo/research/rs267tot.pdf

The transmission channels through which changes in monetary policy affect private

sector spending and hiring are incompletely understood, especially in the small business sector. This study documents how small firms react to unexpected changes in

monetary policy. Monthly survey data obtained from the National Federation of

Independent Business illustrate how owner expectations are affected by these changes,

with corresponding adjustments to spending and hiring plans, and ultimately changes

in actual spending and hiring. Thus, the results provide some new micro level insight

into how quickly changes in monetary policy work through the small business sector

and ultimately the aggregate real economy. The findings indicate that the small business sector responds immediately to announced changes in monetary policy and that

these changes have significant impacts on employment and prices, the two major concerns of monetary policy.

Agency Costs and Ownership Structure: Evidence from the Small Business

Finance Survey Data Base

Jacky Yuk-Chow So, released December 2005

http://www.sba.gov/advo/research/rs268tot.pdf

Agency problems arise when a corporate organization (the principal) employs a professional manager (the agent) and thereby separates the business owner(s) from control of

the business. Most previous studies of such agency problems used data from publicly

traded companies. Applying these study results to small owner-controlled business

reveals two limitations. First, in most publicly traded companies, the largest shareholders seldom own more than 50 percent; therefore, the results may not be applicable to

problems faced by smaller, family/owner-managed firms. Second, since control is not

separate from ownership, these small firms should, by definition, have no agency problem. Family shareholders usually are less likely to expropriate bondholder wealth than

other shareholders; family firms may also have incentive structures that result in fewer

agency conflicts between equity and debt claimants. The author hypothesizes that

agency problems suffered by larger firms are not statistically significant for smaller

owner-manager or family-owned firms. The Federal Reserve Board’s 1993 National

Survey of Small Business Finances (NSSBF) database was used to test the hypotheses.

4 Office of Economic Research Access these reports online at www.sba.gov/advo
Firm Size Dynamics of Industries: Stochastic Growth Processes, Large

Fluctuations, and the Population of Firms as a Complex System

Daniel Teitelbaum and Robert Axtell (NuTech Solutions, Inc.), released January 2005

http://www.sba.gov/advo/research/rs247tot.pdf

With the emergence of various longitudinal data sources for firms, studies on business

size distributions, business turnover, and business growth/decline have had a resurgence

among the academic community. This study was conducted to better understand the

dynamic nature of the growth and decline of firms in various size classes and industries. It finds that firm growth rates do not fit the often assumed normal distribution. As

a result, there are more slow-growing firms, more fast-growing firms, and fewer medium-growing firms than are generally modeled by economists. This finding held for all

industries analyzed and growth rates were unrelated to establishment size.

Entrepreneurial Risk and Market Entry

Brian Wu and Anne Marie Knott, Working Paper released January 2005

(Recipient of the Advocacy Best Doctoral Student Paper Award at the United States

Association for Small Business and Entrepreneurship annual meetings.)

http://www.sba.gov/advo/research/wkpbw249.pdf

Entrepreneurs, by their nature, are risk takers. The authors of this study suggest that

there are two forms of uncertainty in entrepreneurial ventures: (1) uncertainty regarding market demand, and (2) uncertainty regarding one’s own entrepreneurial ability.

They further propose that entrepreneurs display risk aversion with respect to demand

uncertainty, but exhibit overconfidence or “risk seeking” with respect to ability uncertainty. To examine this view, the authors model the entrepreneur’s entry decision; and

the research shows that entrepreneurs, while risk-averse in their role as risk bearers,

are willing to bear economic risk when overconfidence compensates for their aversion

Quarterly Indicators: The Economy and Small Business

Chad Moutray

Fourth Quarter 2004, released February 2005

http://www.sba.gov/advo/research/sbqei0404.pdf

First Quarter 2005, released May 2005

http://www.sba.gov/advo/research/sbqei0501.pdf 

General Small

Business and

Entrepreneurship

Access these reports online at www.sba.gov/advo Research Publications 2005 5
Second Quarter 2005, released August 2005 

http://www.sba.gov/advo/research/sbqei0502.pdf

Third Quarter 2005, released November 2005

http://www.sba.gov/advo/research/sbqei0503.pdf 

This regular publication pulls together data from a variety of sources to highlight quarterly economic trends relevant to small businesses.

Business Estimates from the Office of Advocacy: A Discussion of Methodology

Brian Headd, Working Paper, released June 2005

http://www.sba.gov/advo/research/rs258tot.pdf

Although many measures of the number of firms are available, adding employers and

nonemployers from U.S. Department of Commerce, Bureau of the Census data sources

is the best and most complete. However, this number is only available with a lag time

of about two and a half years. The Office of Advocacy estimates more current figures

and offers this paper to make the methodology transparent and to generate discussion.

Small Business Profiles for the States and Territories

Victoria Williams, released August 2005

http://www.sba.gov/advo/research/profiles/

The economic condition of small businesses in the United States, overall and in each of the

50 states, the District of Columbia, and the U.S. territories is illustrated. Each state profile

contains sections on the following topics: the number of firms, industry composition, small

business income, banking, women’s and minority business ownership, and employment.

Frequently Asked Questions

Chad Moutray, released October 2005

http://www.sba.gov/advo/stats/sbfaq.pdf

This document serves as a summary of other research materials and provides a series

of quick, easy-to-recite facts for an external audience to recognize the importance of

small business in the economy. As such, it is an excellent “introductory” publication

for individuals to acquaint themselves with Advocacy research and data.

6 Office of Economic Research Access these reports online at www.sba.gov/advo

General Small

Business and

Entrepreneurship
General Small

Business and

Entrepreneurship

Research Resources (an update to the Academic Frequently Asked Questions)

Chad Moutray, released November 2005

http://www.sba.gov/advo/research/rrsb.pdf

This document addresses a number of questions about small business research and data

from the perspective of a faculty member, student, or researcher. It includes a brief

listing of journals and recommended readings, links to data and other web-based

sources, and information about research funding. 

The Small Business Economy: A Report to the President, 2005 Edition

Kathryn Tobias, ed., various contributors, released December 2005

http://www.sba.gov/research/sb_econ2005.pdf

In this fourth edition of The Small Business Economy, the Office of Advocacy reviews

the economic environment for small businesses in the year 2004, as well as the financial and federal procurement marketplaces. 

Chapter 1: “The Small Business Economy” by Brian Headd 

Chapter 2: “Small Business Financing in 2004” by Charles Ou

Chapter 3: “Federal Procurement from Small Firms” by Major Clark III

Chapter 4: “Minority Entrepreneurship” by Robert Fairlie

Chapter 5: “Entrepreneurship and Business Ownership in the Veteran and Service

Disabled Veteran Community” by Waldman Associates and REDA International

with review by Joseph Sobota

Chapter 6: “A Discourse on Tax Complexity and Uncertainty and their Effects on

Small Business” by Radwan Saade and Joseph Johnson

Chapter 7: “The Regulatory Flexibility Act: History and Current Status of RFA

Implementation” by Carrol Barnes with contributions by Claudia Rodgers and 

Sarah Wickham 

Chapter 8: “Small Firms: Why Market-Driven Innovation Can’t Get Along Without

Them” by William J. Baumol

Appendix Data Tables by Brian Headd and Victoria Williams

Access these reports online at www.sba.gov/advo Research Publications 2005 7
Innovation and

Technology

8 Office of Economic Research

The Innovation-Entrepreneurship NEXUS: A National Assessment of

Entrepreneurship and Regional Economic Growth and Development

S. Michael Camp (Advanced Research Technologies, LLC), released April 2005

(This project was co-funded by the Edward Lowe Foundation of Cassopolis, Michigan.)

http://www.sba.gov/advo/research/rs256tot.pdf

The connection between innovation and entrepreneurship as drivers of local economic

development is often discussed but not often studied. This research addresses the needs

of local policymakers to understand the role of entrepreneurship and innovation in creating an environment where local economic growth can thrive. Both entrepreneurship

(new firms and growing firms) and innovation (patents, R&D, and hi-tech industries)

are drivers in the growth of regional economies. This study finds that innovative

regions need entrepreneurship to more fully develop local economies. Entrepreneurial

regions are likely to be associated with higher levels of technology.

Technology and Entrepreneurship: A Cross-Industry Analysis of Access to

Computers and Self-Employment

Robert Fairlie, released June 2005

http://www.sba.gov/advo/research/rs259tot.pdf

Numerous studies have focused on the relationship between information technology

investment and productivity, but little has been done to learn more about the role of

personal computers in business creation. This report examines whether computer ownership in the home influences self-employment or entrepreneurship or the types of

businesses created by entrepreneurs. Trends over the past two decades provide evidence of a positive relationship between home computers and entrepreneurship. Male

and female computer owners were more likely to become entrepreneurs than non-computer owners, and the study indicates that entrepreneurs with prior access to home

computers are starting many different types of businesses.

Broadband Use by Rural Small Businesses

Telenomic Research, released December 2005

http://www.sba.gov/advo/research/rs269tot.pdf 

This research explores two popular beliefs pertaining to the deployment and use of

broadband service: first, that these services provide tangible benefit to the overall

Access these reports online at www.sba.gov/advo
Innovation and

Technology

economy, and second, that rural deployment lags urban deployment. It has often been

suggested that the universal provision of broadband services in rural areas is cost prohibitive, leading to the urban-rural digital divide. This study investigates and verifies

these assertions, specifically, as they apply to rural small businesses. It relies primarily

on data from the Federal Communications Commission (FCC) and survey data from

previous Advocacy-funded research. The study finds that an urban-rural digital divide

does exist in the provision and adoption of broadband services. This difference in

broadband use is statistically significant. A major concern is that many benefits have

been associated with the availability and adoption of broadband services, and rural

small businesses are not obtaining them.

Global Perspectives on Entrepreneurship Policy

Rebecca Krafft, ed., Conference Proceedings, released October 2005

Conference Agenda: http://www.sba.gov/advo/research/conf_summary05.pdf

Proceedings Part I: http://www.sba.gov/advo/research/proceedings_a05.pdf 

Proceedings Part II: http://www.sba.gov/advo/research/proceedings_b05.pdf 

Proceedings Part III: http://www.sba.gov/advo/research/proceedings_c05.pdf 

On June 15, 2005, the Office of Advocacy, the National Federation of Independent

Business, and the United States Association for Small Business and Entrepreneurship

organized a pre-conference session at the International Council for Small Business

annual meetings in Washington, DC. The panel discussions focused on public policy

issues as they pertain to entrepreneurs around the world. In the sessions, participants

learned about the costs of entry for a new firm, work force challenges, regulatory burdens, the importance of technology transfer and innovation, and small business financing issues from a wide variety of global experts.

Cost of Employee Benefits in Small and Large Businesses

Joel Popkin and Company, released August 2005

http://www.sba.gov/advo/research/rs262tot.pdf

This study examines the cost of the benefits that employers provide to their workers and

how these costs vary with company size. It focuses on benefits that employers voluntarily provide: health insurance, private pension plans, paid vacation, and sick leave. Overall,

the authors find that employees of small businesses have access to fewer benefits than do

Access these reports online at www.sba.gov/advo Research Publications 2005 9

Labor and

Employment

Benefits

International Issues

and Small

Businesses
10 Office of Economic Research Access these reports online at www.sba.gov/advo

the employees of large businesses. Small and large businesses continue to provide benefits to their employees, but at a declining rate. Companies of all sizes have reduced the

availability of health insurance to their employees because of the increasing cost associated with benefits in recent years. Access to retirement benefits is more prevalent among

large firms than among small firms.

Impact of Litigation on Small Business

Klemm Analysis Group, released October 2005

http://www.sba.gov/advo/research/rs265tot.pdf

Litigation costs, unlike other costs of doing business, are seldom estimated on an

annual basis. This research attempts to shed light on how small business fares under

the constraint of litigation and calculates annual litigation costs. It finds that the impact

of litigation on businesses goes well beyond the purely financial impact of legal fees

and damages. Most small business owners are invested personally in their businesses;

litigation causes not just financial loss, but also substantial emotional hardship, and

often changes the tone of the business. Moreover, many of the small businesses surveyed tried to settle their cases prior to trial, but with mixed results. Those surveyed

explained that the main reason settlement failed was that the opposing party refused to

meet and negotiate, preferring to go to court. Small business owners indicated they

would go to great lengths to stay out of court, which was their major motivation for

settlement; an indication that there is a hidden cost to the threat of litigation.

Dynamics of Minority-Owned Employer Establishments, 1997-2001

Ying Lowrey, Working Paper, released February 2005

http://www.sba.gov/advo/research/rs251tot.pdf

This report tracks the dynamics of minority-owned employer establishments that were

in operation in 1997 over the period 1997-2001. The data used here track business closure, expansion, and contraction by the business owners’ race or ethnicity and by their

state and industry. To provide context for the discussion of business dynamics, the

report also gives a summary of minority population and business growth between 1982

and 2002. It finds that minority-owned employer establishments had lower survival

rates than nonminority-owned employer establishments. At the same time, minorityowned establishments had higher expansion rates and lower contraction rates than nonminority-owned establishments.

Owner

Demographics

Legal Issues and

Litigation

Labor and

Employment

Benefits
While there was an overall loss of employment due to business closures and contraction among employer establishments that were in operation in 1997, employer establishments owned by Hispanics and by American Indians and Alaska Natives contributed significantly to an increase in new jobs during the 1997-2001 period.

U.S. Sole Proprietorships: A Gender Comparison, 1985-2000

Ying Lowrey, Working Paper, released September 2005

http://www.sba.gov/advo/research/rs263tot.pdf 

(A shorter version of this paper was published in the Spring 2005 issue of SOI

Bulletin, which can be found online at http://www.irs.gov/pub/irs-soi/00solprop.pdf.)

Using the 1985-2000 U.S. sole proprietorship database, tabulated by the Statistics of

Income (SOI) Division of the Internal Revenue Service, this study attempts to answer

several research question. What are the growth patterns of male and female sole proprietorships? Is there any earning differential along gender lines? Is there any industrial gender segregation among business owners? The dataset provides unique information about U.S. sole proprietorships in terms of business size and owner’s marital status within 10 industrial classifications, six broad industry categories, and the 10 most

populous states. Overall, this research finds that between 1985 and 2000, femaleowned sole proprietorships grew at a faster rate than those owned by men. Business

earnings and activities are different among male and female business owners.

Using Census BITS to Explore Entrepreneurship, Geography, and Economic Growth

Zoltan Acs and Catherine Armington, released February 2005

http://www.sba.gov/advo/research/rs248tot.pdf

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. 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 firms per 1,000 in the labor force in a particular

Access these reports online at www.sba.gov/advo Research Publications 2005 11

Regional Economic

Development

Owner

Demographics
12 Office of Economic Research

year) is substantially explained by regional differences in industry specialization,

human capital, and local population and income growth rates.

The Innovation-Entrepreneurship NEXUS: A National Assessment of

Entrepreneurship and Regional Economic Growth and Development

S. Michael Camp (Advanced Research Technologies, LLC), released April 2005

(This project was co-funded by the Edward Lowe Foundation of Cassopolis, Michigan.)

http://www.sba.gov/advo/research/rs256tot.pdf

See the description of this study in the “Innovation and Technology” section.

Putting It Together: The Role of Entrepreneurship in Economic Development

Kathryn Tobias, ed., Conference Proceedings, released June 2005

Conference Agenda: http://www.sba.gov/advo/research/conf_summary.pdf 

Proceedings Part I: http://www.sba.gov/advo/research/entrep_proc.pdf 

Proceedings Part II: http://www.sba.gov/advo/research/appendix_a.pdf

Proceedings Part III: http://www.sba.gov/advo/research/appendix_b.pdf 

On March 7, 2005, the Office of Advocacy and the Ewing Marion Kauffman

Foundation, with support from the Council of State Governments and the National

Lieutenant Governors Association, convened the conference, “Putting It Together: The

Role of Entrepreneurship in Economic Development,” in Washington, DC. This conference examined the “best practices” of various states to promote entrepreneurship as

a means of growing their economies and featured a variety of panels to outline these

initiatives. Four programs were awarded “best practices.”

State of the Inner City Economies: Small Businesses in the Inner City

Initiative for a Competitive Inner City (ICIC), released October 2005

(This paper is the result of a larger project undertaken by ICIC. Other funders for this project include the U.S. Economic Development Administration, the John D. and Catherine T.

MacArthur Foundation, and the Greater Kansas City Community Foundation.)

http://www.sba.gov/advo/research/rs260tot.pdf

Access these reports online at www.sba.gov/advo

Regional Economic

Development
Inner city neighborhoods are often found in the economic heart of metropolitan areas.

Despite their central location, they are rarely considered competitive locations for

developing unique markets and creating high-wage jobs. Outdated perceptions continue to obscure their positive realities. Inner city economies are larger and more active

than is generally understood, especially among the small businesses that employ the

vast majority of inner city workers. The State of the Inner City Economies (SOICE)

project seeks to document the impact that small establishments have in the inner city.

The goal of this analysis is to present the business potential of inner cities. Inner city

businesses are similar to businesses located in the rest of the metropolitan statistical

area (MSA), exhibiting similar startup and bankruptcy rates. Small businesses are the

greatest source of net new employment in inner cities—comprising more than 99 percent of establishments and 80 percent of total employment.

The Impact of Regulatory Costs on Small Firms

W. Mark Crain, released September 2005

http://www.sba.gov/advo/research/rs264tot.pdf

This research updates and further delineates the disproportionality of the burden

imposed by federal regulations on small business. Previous research by the Office of

Advocacy, Hopkins (1995) and Crain and Hopkins (2001) established that regulatory

and paperwork costs were more onerous on small firms than on larger firms. In the

face of higher costs of federal regulations, the research shows that small businesses

continue to bear a disproportionate share of the federal regulatory burden. The findings

are consistent with those in the earlier studies. It also finds that the cost of federal regulations totals $1.1 trillion; the cost per employee for firms with fewer than 20

employees is $7,647. This report details the distribution of regulatory costs for five

major sectors of the U.S. economy: manufacturing, trade (wholesale and retail), services, health care, and other (a residual category containing all enterprises not included in

the other four). The sector-specific findings reveal that the disproportionate cost burden on small firms is particularly stark for the manufacturing sector. 

Access these reports online at www.sba.gov/advo Research Publications 2005 13

Regulation

Regional Economic

Development
14 Office of Economic Research

Taxes and Entrepreneurial Activity: An Empirical Investigation Using

Longitudinal Tax Return Data

Donald Bruce and Tami Gurley, released March 2005

http://www.sba.gov/advo/research/rs252tot.pdf

The report uses longitudinal tax return data to measure the responsiveness of individual tax filers to changes in marginal income tax rates with respect to their choices to

engage in entrepreneurial activity. Individual choices to engage in wage-and-salary

employment, entrepreneurial activity, or a mixture of both, are taken as given by the

existence of each type of income as reported in individual income tax filings. This

study finds that marginal tax rates have significant effects on entrepreneurial entry and

exit, suggesting that the formation and closure of small enterprises are in part determined by the handling of income from these activities in the tax code. The findings

show that the level of entrepreneurial entry, exit, and duration react differently to

changes in marginal rates on wage-and-salary and entrepreneurial income. Specifically,

lower marginal rates on entrepreneurial income encourage more entrepreneurial entry

and lower rates of exit, and lengthen the duration of spells of activity. Similarly, higher

marginal rates on wage-and-salary income also increase entrepreneurial activity as

more workers switch from wage-and-salary work to starting their own businesses.

Importantly, however, the magnitude of the entry, exit, and duration effect is larger for

marginal tax rates on entrepreneurial income than on wage-and-salary income.

Access these reports online at www.sba.gov/advo

Tax
Access these reports online at www.sba.gov/advo Research Publications 2005 15

Acs, Zoltan, 

Advanced Research Technologies, LLC, 8

Advocacy, Office of, and regulatory costs, 13

agency costs, 4

American-Indian-owned businesses, 11

Armington, Catherine, 11

Axtell, Robert, 5

banking, 1, 2

bankruptcy rates, 3

in cities, 13

Barnes, Carrol, 7

Baumol, William, 7

broadband services, 8

Bruce, Donald, 14

Business Information Tracking Series, 11

businesses, number of, 6

Camp, S. Michael, 8

cities and small businesses, 12

Clark, Major, 7

Community Reinvestment Act, 1

complexity of tax law, 7

consolidation, 1

Crain, W. Mark, 13

Dunkelburg, William C., 4

economic development, 11-13

economic indicators, 5, 6, 7

employee benefits, 9

entrepreneurship

and bankruptcy, 3

and economic development, 12

global policy concerning, 9

and innovation,. 8

by minorities, 7

by region, 11

and risk taking, 5

and taxation, 14

and technology, 8

by veterans, 7

see also small business 

Ewing Marion Kauffman Foundation, 12

Fairlie, Robert, 7, 8

Federal Communications Commission, 9

Federal Reserve Board, 4

finance companies, 2

financing, 1-4, 7

frequently asked questions, 6, 7

global perspectives on entepreneurship, 9

growth of businesses, 5

Gurley, Tami, 14

Hancock, Diane, 2

Haynes, George, 2

Headd, Brian, 6, 7

health insurance, 9

hiring and monetary policy, 4

Hispanic-owned businesses, 11

homestead exemption, 3

Hopkins, Anthony, 13

information technology, 8

Initiative for a Competitive Inner City, 12

innovation, 7, 8

Johnson, Joseph, 7

KeyPoint Consulting, 2

Klemm Analysis Group, 10

Knott, Anne Marie, 5

Krafft, Rebecca, 9

lending, 1, 2

litigation and small business, 10

Lowrey, Ying, 10, 11

Mathur, Aparna, 3

mergers and acquisitions, 1

Index
metropolitan statistical areas, 13

minority-owned business, 3, 7, 10, 11

Mitchell, Karlyn, 3

monetary policy, 4

Moutray, Chad, 5, 6, 7

National Federation of Independent Business, 4, 9

National Lieutenant Governors Association, 12

NuTech Solutions, Inc., 5

Ou, Charles, 1, 7

Pearce, Douglas, 3

Peek, Joe, 2

pension plans, 9

policy concerning entrepreneurship, 9

Popkin, Joel and Company, 9

procurement, 7

proprietorships, minority-owned, 11

quarterly indicators, 5

regions and small businesses, 11-13

regulatory costs, 13

Regulatory Flexibility Act, 7

relationship lending, 3

retirement benefits, 9

risks of entrepreneurship, 5

Rodgers, Claudia, 7

rural small businesses, and broadband use, 8

Saade, Radwan, 7

Scott, Jonathan, 4

size of businesses, 5

small business economic indicators, 5, 6, 7

So, Jacky Yuk-Chow, 4

Sobota, Joseph, 7

spending and monetary policy, 4

startup rates in cities, 13

states

and bankruptcy law, 3

and regulatory flexibility, 7

small businesses in, 6

Statistics of Income, 11

Survey of Small Business Finances, 2, 3, 4

taxation, 7, 14

technology, 8

Teitelbaum, Daniel, 5

Telenomic Research, 8

Tobias, Kathryn, 7, 12

uncertainty

and entrepreneurship, 5

and taxes, 7

United States Association for Small Business and 

Entrepreneurship, 9

veterans and small business, 7

Wickham, Sarah, 7

Wilcox, James A., 2

Williams, Victoria, 1, 6, 7

women-owned businesses, 11 

Wu, Brian, 5

16 Office of Economic Research Access these reports online at www.sba.gov/advo