Another look at business accession and separation rates in non-metropolitan areas.

Robinson, Sherry ; Janoski, Walter

ABSTRACT

Rural areas are generally considered to be challenging for entrepreneurs seeking to begin new businesses due to factors such as lower levels of economic development, scarcity of affordable professional services, and smaller markets. However, some studies have found that small business owners find their locations promote, rather than hinder, success. A previous study of Ohio counties determined that although business accession rates (the number of new businesses compared to the number of current businesses) were higher in metropolitan areas, separation rates (the number of business terminations compared to the number of current businesses) were equal to or even significantly lower in non-metropolitan counties. This study seeks to provide further insight into this issue by examining accession and separation rates in metropolitan and non-metropolitan counties of Mississippi. A greater understanding of these rates may be especially important to lenders or investors assessing the risk of failure of new businesses in rural areas as well as to advisors seeking to improve the economic health of non-metropolitan areas.

INTRODUCTION

Urban and rural areas can present very different business environments due to factors such as social networks and demographics as well as geography (Beggs, Haines & Hurlbert, 1996; Frazier & Niehm, 2004). Rural areas are generally considered to be challenging for entrepreneurs due to factors such as lower levels of economic development, scarcity of affordable professional services, and smaller markets (Chrisman, Gatewood, & Donlevy, 2002; Fendley & Christenson, 1989; Kale, 1989; Lin, Buss, & Popovich, 1990; Mueller, 1988; Osborne, 1987; Small Business Administration [SBA], 2001; Tigges & Green, 1994; Trucker and Lockhart, 1989). However, in some studies (Robinson, 2001; Sullivan, Scannell, Wang, & Halbrendt, 2000; Tosterod & Habbershon, 1992) small business owners found benefits to being located in a rural area.

This study further examines this issue by comparing the accession rates (new business births compared to the number of active businesses) and separation rates (business deaths compared to the number of active businesses) in metropolitan and non-metropolitan counties of Mississippi (Mississippi Employment Security Commission, 2005). These are then further analyzed by Ruralurban Continuum Codes (RUCC) determined by the Economics Research Service (ERS). The disadvantages common to non-metro areas may lead to lower accession rates and higher separation rates. However, if there is an advantage to operating a business in a non-metropolitan area, the opposite may be found.

The following section briefly reviews the factors that promote or discourage entrepreneurship in rural areas, leading to the study's examination of business accession and separation rates. As will be discussed in the methodology section, the terms rural and non-metropolitan are not technically synonymous under the specific definitions created by the U.S. Census Bureau (2002), but in this study these terms will be used interchangeably, as will urban and metropolitan.

CHALLENGES FOR RURAL BUSINESSES

Many factors would seem to discourage rural entrepreneurship and economic development. In fact, the SBA (1999) reports that between 1990 and 1995, all industries did better in urban than in rural areas. Non-metropolitan areas naturally have lower populations, leading to smaller markets. In addition to less aggregate buying power, rural residents also have lower levels of individual buying power (Barkley, 1993; Kean, Gaskill, Letstritz, & Jasper, 1998). Combining poorer markets with more expensive or more difficult to find resources would likely decrease the chance for a successful business start and stay in operation.

Location may influence business starts and success in that geographic region is one determinant of the availability of needed resources (Chrisman et al., 1992). Rural areas often offer fewer support services and less-developed transportation and electronic infrastructures which could hinder non-metropolitan businesses attempting internet-based businesses as well as brick and mortar operations as the cost and quality of telecommunications becomes increasingly important to businesses (Corman, Lussier, & Nolan, 1996; Freshwater, 1998; Mueller, 1988; SBA, 2001). Essential business services such as accounting, banking, advertising, and legal services may be both difficult to find and more expensive in rural areas (Corman et al., 1996; Fendley & Christenson, 1989; Frazier & Niehm, 2004; Freshwater, 1998; Mueller, 1988; Osborne, 1987; SBA, 2001; Trucker & Lockhart, 1989). In addition, the trend of small banks merging with larger ones less willing to makes loans to small businesses combined with biases against non-urban areas make it more difficult for small rural businesses to gain financing (Chrisman et al., 2002; Green & McNamara, 1987; SBA, 2001). This could logically lead to a lack of business starts or increased business deaths.

Several studies, however, have determined that rural businesses do not necessarily lag behind their metropolitan counterparts in terms of venture creation. Lin and associates (1990) found no significant differences between rural and urban areas when comparing the rates at which new firms and jobs were created. Taking population into consideration, Clark and James (1992) found the rate of business ownership to be higher in non-metropolitan areas. In a study examining accession and separation rates in Ohio, it was found that non-metropolitan businesses had significantly lower business accession rates, but also tended to have lower separation rates, suggesting that although rural residents were less likely to begin businesses, they were equally or even less likely to go out of business (Robinson, 2002).

Studying new business owners in South Dakota, Tosterud and Habbershon (1992) found that the majority of these people had started their businesses in order remain in their chosen location, which, in most cases, was less than 30 miles from where they had spent their entire lives. These business owners believed their chances of success were as great there as in any other location. Likewise, an Iowa study showed that rural business owners, 62% of whom were Iowa natives, viewed their location as advantageous (Tosterud & Habberson, 1992). Similarly, a study involving women micro-business owners in Pennsylvania found that the participants did not view their rural location as disadvantageous, but were instead were encouraged by the lower costs, established social networks and a decreased sense of risk (Robinson, 2001).

Social networks have been found to have a positive influence on business start-ups and business success in rural areas (Cooke & Morgan, 1998; Frazier & Niehm, 2004; Jenssen & Keonig, 2002; McQuaid, 1997; Sullivan et al., 2000). Effective networking can play an important part in business success, and this may be especially true in tightly-knit rural communities that are by nature different from urban settings. Given these findings, it can be inferred that business starts in rural areas are likely to be influenced by the potential business owners' ideas about their areas and nonfinancial objectives such as the desire to remain in a given region. Coupled with an already established network of acquaintances, potential business owners in rural areas may be encouraged to start businesses leading to higher business accession rates.

Traditionally, rural areas have been considered economically challenged due to a variety of problems associated with non-metro locations, but several recent studies have concluded differently. If rural residents view their location as providing lower risk of failure (Robinson, 2001) or start their own businesses in order to provide employment for themselves when suitable jobs are not available (Tosterud & Habbershon, 1992), accession rates may exceed those in metro counties. If there is indeed a lower risk of failure or non-metro business owners are more willing to endure hardships in order to remain in business, separation rates would be expected to be lower in non-metro counties. However, if the economic challenges of starting and succeeding in a rural business outweigh the benefits, business separations rates are likely to be higher. Considering that rural businesses may have a more difficult time acquiring financing (SBA, 2001) it is important to determine if there are differences between these rates. If non-metropolitan businesses are less likely to terminate, financial backers may find they are missing an important segment. In addition, obtaining a better understanding of business start and failure rates would be important to organizations that provide support to entrepreneurs and small business owners so they can provide appropriate aid.

METHODOLOGY, DEFINITIONS AND LIMITATIONS

The study of business failures is complicated by the lack of consistent nationwide data regarding business terminations. To be truly effective, a measure of business failure should be simple, objective, relevant and reliable (Watson & Everett, 1993). The lack of a reliable measure for determining business failure is a significant problem in understanding and preventing small business failure (Cochran, 1981). It is especially difficult to locate failure rate data that are broken down by an area's degree of rurality.

This study examines data provided by the Mississippi Employment Security Commission (2005). Coverage under this program is required of most employer businesses including all those employing any number of workers for 20 different weeks in a year or paying wages of $1,500 during one quarter and most non-profit organizations. A cross reference with U.S. Census (2005) data shows that almost all employer firms are included in the Mississippi Employment Security Commission program. Non-employers are also eligible for this system, and account for approximately 9% of total firms that are in this program (Mississippi Employment Security Commission). However, this accounts for only about 3% of all Mississippi non-employer companies (U. S. Census, 2005). Almost 87% of covered firms have 0-19 employees, and 97% have 0-99 employees, meaning the vast majority of businesses are quite small.

Under this system, a business birth is recorded when an employer establishes coverage for the first time or if an account is reopened. A business death occurs when a business discontinues insurance coverage and there is no successor. The data in this study are therefore limited in that they do not include all businesses (non-employers) within the state, and a business could exist without subscribing to coverage. However, given the lack of other appropriate data on business failures, they are useful for providing additional insight into business start and failure rates that might not otherwise be available.

The total number of businesses in a given year (e.g. 2000) was actually the number of active businesses in the program in the fourth quarter of the previous year (1999), but will be referred to as the total number of businesses for that year (2000). Business accession rates were calculated by dividing the number of new businesses (births) in a given year by the total number of active businesses (or more specifically, the number from the fourth quarter of the previous year). Business separation rates were calculated in similar fashion using business deaths. These rates made it possible to make a fair comparison between metropolitan and non-metropolitan areas despite the difference in the number of counties and businesses.

As stated previously, there are technical differences between the terms metropolitan and urban and between non-metropolitan and rural. Urban areas are not only those that the U. S. Census Bureau has designated as urban, but also those areas outside officially urbanized areas yet are home to 2,500 or more people. Territory not classified as urban is considered rural. Likewise, all areas outside metropolitan areas (minimum population of 50,000 or classified by the Census Bureau as an urbanized area) are designated as non-metropolitan. Because metro areas include surrounding counties with close social and economic ties to a central metro county, counties with relatively lower population densities may be designated as metropolitan if they are near metro centers. Given these definitions, both metro and non-metro counties generally include areas that are rural and urban (U.S. Census Bureau, 2002).

The Rural-urban Continuum Code, shown in Table 1, uses these definitions to classify each county with an ordinal rank from 1-9, with 1 being the most urban and 9 being the most rural (ERS, 2003). Counties from 1-3 are classified as metropolitan counties, while 4-9 are non-metropolitan. Under this system, 75 counties were classified as non-metropolitan while only 7 were designated metropolitan, but these metro counties had much higher average numbers of businesses. To make meaningful comparisons possible, this study primarily examines percentage data rather than the absolute number of businesses.

Because only one county each falls in two of the RUCC categories (RUCC 1 and 4), statistical analyses were also performed with collapsed categories that grouped together categories 1 and 2, 4 and 5, 6 and 7, and 8 and 9. However, these analyses provided no further insight into the relationships between a county's degree of rurality and business accession and separation rates. Therefore, only the results using the original RUCC designed by the ERS are reported here.

RESULTS AND ANALYSIS

The total number of businesses in metro and non-metro counties and in each RUCC category is shown in Table 2. Although there are more than ten times as many non-metro as metro counties, the latter account for approximately one-third of the businesses included in this study and have almost five times the mean number of businesses per county. This makes intuitive sense given higher populations in metro areas. Because accession and separation rates are based on comparisons with total businesses, the ratio of total businesses to population was also determined for each county. No significant differences were found between metro and non-metro counties or between RUCC groups.

Business accession and separation rates by metro/non-metro status and by RUCC are shown in Tables 3, 4, 5 and 6. The results of correlation analysis between these rates and metropolitan/nonmetropolitan status are shown in Table 7. Significant differences were found between the accession rates of metro and non-metro counties, with non-metro counties lagging behind their metro counterparts each year.

The gaps of 3.21%, 2.44% and 2.15% mean that rural businesses were started at a rate of only 71-78% of those in urban counties. Accession rates were correlated (Spearman's rho) at a significant level with metro/non-metro status and RUCC in all three years. The negative correlation with RUCC suggests there is an association between rurality and business births in that accession rates tend to decrease as counties become more rural (become higher in the RUCC order). Examining the counties in greater detail, the sole county in RUCC 1 (DeSoto County) has the highest accession and separation rates. Considering this, additional statistical tests were performed on filtered data that excluded this county, but these did not result in major changes.

In addition to lower accession rates, non-metro counties were also found to have significantly lower separation rates in 2001 and 2002. In 2002, separation rates were negatively correlated at a significant level, again suggesting that as the ordinal variable RUCC increases, the rates tend to decrease. Together, these results seem to indicate that businesses in non-metro counties were less likely to be started, but once companies were formed, they were more likely (or no less likely) to remain in business.

To gain a better understanding of failure rates, the percentage of business deaths that occurred less than one year after birth were compared (see Table 8). In 2000, non-metro businesses were more likely than metro business to survive the first year. The results of ANOVA testing for RUCC showed no statistical significant differences between groups despite the RUCC 8 counties'average rate of almost 7 percentage points lower than the next lowest county group. Within in the RUCC 8 counties, the less-than-one-year death rates ranged from 63 % to 93% that year. In 2002, these rates dropped dramatically and consistently across all county groups, suggesting either a change in the government tabulations or dramatic improvements in the economic climate for all of Mississippi. An explanation from the Mississippi Employment Safety Commission was not readily found.

One factor that makes interpretation of these results more difficult is the rather large range in accession and separation rates, especially for non-metro counties. As shown in Table 2, the standard deviations for both of these rates were usually larger in non-metro counties. This seems logical given that although the mean number of businesses is higher in the 7 metro counties of Mississippi, there are 75 individual counties contributing to the average rates of non-metro counties. Within the non-metro category, the total number of businesses range from very small (39-44) to well over 2,000. Considering that the minimum for metro counties is 762-774, there is some overlap that may lead particular non-metro counties to be more similar to metro counties than to other non-metro counties.

In looking at counties with different RUCC codes, it appears that the more rural counties tend to have broader ranges of means. For example, even though there are 30 RUCC 7 counties and only 19 RUCC 9 counties, the latter has a wider range for minimum and maximum accession and separation rates. Additional ANOVA tests were conducted on the non-metropolitan counties alone, but no significant differences were found.

CONCLUSIONS

Given the various reasons that potential rural business owners may be less likely to start operations, such as lower levels of economic development, less access to business services and capital, and higher costs, it is not surprising that there tend to be fewer starts in rural areas. However, it should be noted that the lower level of starts may not clearly reflect the success of rural businesses overall. It appears that once businesses are born they are no more likely, or even less likely, to fail. These results are limited by the nature of the data, which measured the number of businesses participating in the state workers compensation insurance program as required by law, but point to an important phenomenon that should be further studied. Considering the lack of readily available data on business failures, this may be a challenging task

Determining the explanation for these varying rates was beyond the scope of this project, but it can be speculated that the reasons people stay in businesses in rural areas may be related to the reasons business owners start them. For example, if people start businesses in order to remain in a given location, as in the study by Tosterud and Habbershon (1992), it seems likely that they would continue their enterprises as long as possible to achieve their overall goal, even if this is very challenging. They may be willing to settle for a lower level of economic success if other objectives are being met (Kuratko, Hornsby, & Naffziger, 1997). On the other hand, if the lower costs, established social networks, and decreased sense of risk experienced by the women in Robinson's (2001) study encouraged them to start businesses, these factors may also play a part in the continued existence and success of these businesses.

Overall, these findings are consistent with those in a study examining the accession and separation rates for businesses in metro and non-metro Ohio counties using a similar type of data (Robinson, 2002). This suggests these are not isolated results, but may be part of an overall phenomenon. Future research should continue to investigate this issue with the aim of determining if there is a reason for lower failure rates in rural areas and how rural residents can be assisted and encouraged to start businesses. Considering the importance of jobs in non-metro areas, the birth of small business employers would be very important to the residents of these areas. In addition, if there is lower risk of business failure in rural areas, lenders may find that these business owners are a better financial risk than those in more developed areas.

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Sherry Robinson, Penn State University

Walter Janoski, Penn State University

Table 1: Rural-urban Continuum Codes

N Code Description

 Metropolitan counties

1 1 counties in metro areas with a population of
 1 million or more

6 2 counties in metro areas with a population of
 250, 000--1 million

0 3 counties in metro areas with a population
 less than 250.000

 Non-metropolitan counties

1 4 with an urban population of 20, 000 or more,
 adjacent to a metro area

7 5 with an urban population of 20, 000 or more,
 non adjacent to a metro area

13 6 with an urban population of 2,500 to 19,999,
 adjacent to a metro area

30 7 with an urban population of 2, 500 to 19, 999,
 not adjacent to a metro area

5 8 completely rural or have an urban population of
 less than 2, 500, adjacent to a metro area

19 9 completely rural or have an urban population
 of less than 2,500

Source: ERS (2003)

Table 2: Total Businesses in Mississippi Counties by Metro/Non-metro
Status and RUCC

2000 Non- Metro 1 2 4
 metro

Total 38,932 20,445
Mean 519 2,921 1,727 3,120 1,234
Min 44 763 763
Max 2,266 6,903 6,903
Std dev 452 2,078 2,203

2001

Total 38,424 20,490
Mean 512 2,927 1,766 3,121 1,228
Min 41 774 774
Max 2,229 6,782 6,782
Std dev 444 2,024 2,146

2002

Total 37,559 20,183
Mean 501 2,883 1,775 3,068 1,191
Min 39 762 762
Max 2,169 6,559 6,559
Std dev 432 1,943 2,060

2000 5 6 7 8 9

Total
Mean 1,629 420 549 178 183
Min 860 264 202 91 44
Max 2,266 709 1,069 278 319
Std dev 452 113 239 72 65

2001

Total
Mean 1,595 417 544 177 179
Min 838 275 197 83 41
Max 2,229 720 1,043 287 314
Std dev 440 114 236 77 64

2002

Total
Mean 1,553 410 532 177 176
Min 807 258 181 89 39
Max 2,169 726 999 280 301
Std dev 433 118 231 72 62

Table 3: Mean Business Accession Rates in Metro/Non-metro Mississippi
Counties

 2000 Std dev 2001

-Non-metro Counties 7.87% 1.91 7.46%
Metro Counties 11.08% 2.31 9.90%
t -3.561 -3.696
Significance .010 * .007 *

 Std dev 2002 Std dev

-Non-metro Counties 1.91 7.55% 2.40
Metro Counties 1.64 9.70% 1.77
t -2.96
Significance .018 *

Table 4: Mean Business Accession Rates by RUCC

2000 1 2 4 5

Mean 15.75 10.3 7.94 7.79
Min -- 8.79 -- 6.14
Max -- 11.66 -- 8.78
Std dev -- 1.15 -- 0.90
F 4.674

Sig. .000 *

2001 1 2 4 5

Mean 12.23 9.52 8.47 6.95
Min -- 7.78 -- 5.61
Max -- 11.11 -- 8.34
Std dev -- 1.41 -- 0.94
F 2.764
Sig. .013 *

2002 1 2 4 5

Mean 11.32 9.43 6.38 7.51
Min -- 6.98 -- 5.86
Max -- 11.34 -- 8.91
Std dev -- 1.78 -- 1.07
F 2.499

Sig. .023 *

2000 6 7 8 9

Mean 8.88 7.88 6.83 7.49
Min 4.71 4.87 4.4 3.20
Max 11.75 10.20 10.07 11.45
Std dev 2.14 1.18 2.79 2.55
F

Sig.

2001 6 7 8 9

Mean 8.19 7.44 8.57 6.86
Min 4.19 4.84 6.02 2.44
Max 11.18 9.42 10.84 12.7
Std dev 1.78 1.28 2.01 2.79
F
Sig.

2002 6 7 8 9

Mean 8.75 7.48 9.32 6.47
Min 5.84 2.33 2.87 2.56
Max 12.56 12.15 12.5 12.35
Std dev 2.05 2.01 4.01 2.68
F

Sig.

Table 5: Business Separation Rates in Mississippi Counties

Mean 2000 Std dev 2001

-Non-metro Counties 8.88% 1.90 8.41%
-Metro Counties 9.53% 1.41 9.51%
 -1.124 -2.565
Significance .293 .023 *

Mean Std dev 2002 Std dev

-Non-metro Counties 2.20 7.55% 1.49
-Metro Counties 0.91 8.69% 1.18
 -2.386
Significance .044 *

Table 6: Business Separate Rates by RUCC

 2000 1 2 4 5

Mean 11.52 9.19 7.86 8.29
Min -- 7.95 -- 7.46
Max -- 11.14 -- 9.19
Std dev -- 1.21 -- 0.62
F 1.720

Sig. .117

 2001 1 2 4 5

Mean 11.10 9.25 9.28 8.39
Min -- 8.54 -- 7.66
Max -- 10.10 -- 9.26
Std dev -- 0.64 -- 0.54
F 1.183

Sig. .323

 2002 1 2 4 5

Mean 10.70 8.36 8.48 7.40
Min 6.98 5.86
Max 11.34 8.91
Std dev 0.85 0.58
F 2.686

Sig. .016 *

 2000 6 7 8 9

Mean 9.30 8.42 8.04 9.80
Min 6.28 5.00 4.44 6.11
Max 12.50 11.40 14.42 13.64
Std dev 1.73 1.46 3.96 1.99
F

Sig.

 2001 6 7 8 9

Mean 8.62 8.41 10.25 7.75
Min 5.87 4.67 6.21 2.44
Max 11.18 12.18 15.66 15.87
Std dev 1.59 1.63 3.72 3.05
F

Sig.

 2002 6 7 8 9

Mean 8.72 7.38 7.13 7.15
Min 5.84 2.33 2.87 9.56
Max 12.56 12.15 12.50 12.35
Std dev 1.59 1.05 1.83 1.86
F

Sig.

Table 7: Correlation of Accession and Separate Rates with Metro/
Non-metro Status and RUCC

 Metro/Non-metro RUCC

 Corr. Sig. Corr. Sig.

2000 Accession Rate -.373 .001 * -0.322 .003 *
2001 Accession Rate -.325 .003 * -.251 .023 *
2002 Accession Rate -.261 .018 * -.287 .009 *
2000 Separation Rate -.108 .335 .098 0.383
2001 Separation Rate -.189 .089 -.215 0.052
2002 Separation Rate -0.217 5.10% -0.25 .024 *

Table 8: Mean Percentage of Businesses Separated in Less Than One Year

Metro/Non-metro Status 2000 2001 2002

-Non-metro 90.60 92.28 60.15
-metro 93.95 93.72 61.20
t -2.914 -1.313 -0.394
sig. .010* .213 .702

RUCC

1 93.97 92.35 51.58
2 93.95 93.95 62.80
4 91.75 97.37 70.30
5 91.91 92.09 61.29
6 90.34 90.66 58.93
7 91.02 92.44 62.60
8 83.39 90.57 57.42
9 91.48 93.39 56.89
F 1.429 .601 .943
Sig. .207 .753 .479