Study: Trends in Rural Businesses

The number of businesses in counties outside metropolitan areas is generally in decline. But assets such as rural gathering places, natural amenities and strategic use of broadband could help change that trend.

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Rural business establishment trends are worrisome, but potential solutions are available.

Make no mistake. The backbone of the U.S. economy includes entrepreneurs, micro businesses (1-4 employees), and small businesses (5-19 employees). Studies have found that if entrepreneurship – and subsequently micro and small businesses – shrink, job creation and productivity are affected in a negative way.

What are the trends regarding micro businesses and small businesses in urban and rural counties? Is the number of micro businesses and small businesses increasing? Is it declining?

Read a summary of this jobs study in the Daily Yonder.

To take a closer look at how business establishments are doing across different types of counties, we used two datasets. Data about the number of establishments was obtained from the US Census County Business Patterns (CBP) while the USDA Rural-Urban Continuum Code (RUCC) typology was used to group counties into different categories.

A huge advantage of the RUCC is that not only can counties be grouped into the typical metropolitan, micropolitan and “noncore” categories, but each one of these can be further categorized into three additional categories. These nine categories in total provide a more detailed understanding of the dynamics taking place.

To isolate the economic impact of a nearby metropolitan areas and see what was happening in counties least likely to be affected by metropolitan counties, we adjusted the typical grouping of the RUCC counties. We grouped types 4, 6, and 8 (which are nonmetropolitan counties adjacent to a metropolitan areas) and called these “suburban.” And we  grouped county types 5,7 and 9 (which are nonmetropolitan counties that are not adjacent to a metropolitan area) and called these “rural” for the purposes of this study.

Figure 1 at the top of the page does not paint a hopeful picture for nonmetropolitan counties regarding micro businesses, small businesses, and the total number of business establishments (which also includes business establishments with more than 20 employees). Two of the three “rural” categories (on the right side of the chart) posted declines in micro business (blue bar), small business (red bar), and total (green bar) establishments between 2000 and 2013, as did all three of the “suburban” categories (the center bars in the chart). However, counties with an urban population of 20,000 or more not adjacent to metro areas experienced increases.

A clear relationship is shown in Figure 2 below: The smaller the county's population, the greater the number of micro businesses as a percentage of of total establishments. However, this is not good news, since the trends show micro businesses declining in "suburban" and almost all rural counties. In fact, micro businesses make up to two-thirds of all business establishments in the most rural counties. 

Source: US Census Bureau – County Business Patterns; USDA RUCC
Figure 2. Percent Micro Businesses of Total Establishments, 2000 & 2013

With small businesses (which have 5 to 19 employees), the relationship is backwards for nonmetropolitan counties. The larger a nonmetropolitan county’s population, the higher the share of small businesses as seen in Figure 3 above. This can be partially explained by availability of workforce and size of business markets. And contrary to trends seen with micro businesses, the share of small businesses increased across all nine county types.

Source: US Census Bureau – County Business Patterns; USDA RUCC
Figure 3. Percent Small Businesses of Total Establishment, 2000 & 2013

The fact that all business types included in this analysis declined in five out of the six "suburban" and rural county types between 2000 and 2013 is worrisome (Figure 1 at the top of this article). More worrisome, however, is that the decline of micro businesses, which comprise a larger share of rural economies, was higher. In other words, the lifeblood of rural economies is drying up faster.

The question becomes, why are micro businesses declining in rural areas?

Though specific studies looking at rural areas are hard to find, overall arguments have surfaced regarding why entrepreneurs and subsequently micro businesses are disappearing. Some of these include, in no particular order: (1) larger businesses displacing mom and pop shops, especially in retail; (2) regulations that larger more established businesses have the experience and resources to deal with while entrepreneurs and smaller businesses do not; (3) K-12 schools not graduating enough skilled workers; and (4) scarcity of investment capital.

But not all is bad news. Certain characteristics of rural areas coupled with broadband adoption can help address some of the reasons listed above.

Studies (here and here) have found that civic engagement measured in part by “third-place” establishments has a positive impact on median income and decrease poverty in rural counties. “Third-place” establishments are gathering spots such as churches, restaurants, food stores, barber shops, etc. These third-place establishments, the argument goes, generate strong horizontal linkages in a community leading to positive economic results.

Figure 4 below shows third-place establishments per 1,000 residents by county type. The more rural the county, the higher the rate of third-place establishments or gathering places. In other words, venues that strengthen social capital are more common per capita in rural areas compared to metro areas, considering that rural communities usually have fewer people, institutions, etc. The most rural of counties had 4.11 third-place establishments per 1,000 residents in 2013 compared to 4.07 in metro areas with one million or more. Without a doubt, this is a tremendous asset intrinsic to rural counties.

Source: US Census Bureau – County Business Patterns; USDA RUCC
Figure 4. Third Place Establishment per 1,000 Residents by County Types, 2000 & 2013

Another potential asset of rural areas are natural amenities. The U.S. Department of Agriculture Economic Research Service developed a natural amenities scale that measures the physical characteristics of a county (data is only available for the continental U.S.). Scale ranges from 1 (low amenities) to 7 (high amenities) and considers mean temperature, hours of sunlight, humidity, and percent water area, among other things.

Though the average natural amenities scale does not increase as the county type becomes more rural, rural counties with population 20,000 or more not adjacent to metro areas did have the highest average, followed by two metro county types (see Figure 5 below). Comparing "suburban" counties with rural counties, rural performs better regarding natural amenities. More importantly, studies (here and here) have found a relationship between natural amenities and economic growth. Rural counties need to maximize this asset as well. 

Source: US Census Bureau – County Business Patterns; USDA RUCC
Figure 5. Natural Amenities Scale, Average by County Type

Finally, broadband adoption in rural areas (assuming it is available and affordable) can help address three main disadvantages compared to metro areas: availability of skilled workforce, larger business markets, and investment capital. In other words, the density advantage of urban areas over rural areas can somewhat be mitigated using information technology.

For example, encouraging telecommuting policies where applicable and helping micro businesses to implement them can help with scarcity of skilled workforce; educating and coaching micro businesses to implement online presence strategies can help identify and expand their market niches; and increasing awareness of crowdfunding among rural micro businesses can help raising capital. Granted, broadband is no silver-bullet but it can definitely help level the playing field between urban and rural.

Rural business establishment trends are worrisome, but potential strategies to reverse these trends are available. Trends can change. Will rural communities achieve this?

Dr. Roberto Gallardo is the leader of the Mississippi State University Extension Service Intelligent Community Institute that helps rural communities transition to, plan for, and prosper in the digital age. He is also a faculty member of the Extension Center for Technology Outreach.

 

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