AMES, Iowa – A new Iowa State University (ISU) study takes a look at which factors encourage or discourage new business start-ups in small rural towns, and suggests policy implications for addressing economic distress in these towns, using Iowa as an example.

The study’s researchers examined data consistently collected over two decades on a sample of 98 typical small Iowa towns that don’t share a border with a metropolitan city.

“Since 2000, the only areas that consistently added new firms and increased employment were metropolitan areas,” said Peter Orazem, ISU professor of economics, who led the study.

“In contrast, the communities losing the most employees and entrepreneurs were towns under 10,000 population,” he added. “But some of these small towns bucked the trend and were able to continue to attract new firm entry and employment.”

According to the study, small rural towns often face economic distress. Along with losses of established businesses, rates of self-employment have also fallen in rural towns of all sizes. “Towns with a population of 10,000 or less had the largest decline and an even greater decline in employment rates,” the study said.

The research is reported in a recent article in the American Journal of Agricultural Economics, titled, “Which small towns attract start-ups and why? Twenty years of evidence from Iowa.”

Orazem’s co-authors were the late Georgeanne Artz, ISU associate professor of economics; Peter Han, social science analyst with the U.S. Department of Housing and Urban Development; and Younjun Kim, Southern Connecticut State University associate professor of economics.

According to the authors, the small towns that attract new firms are characterized by having atypically large numbers of nearby companies, services and industries (and benefit from the cost reductions and gains in efficiency that result from them); and a larger proportion of college-educated workers in the local labor supply.

“For example, in Iowa, the town of Carroll has a population of 10,000,” Orazem said. “It has held onto its employment base in part because it has a few large employers that have allowed it to have the infrastructure necessary to attract and hold onto firms. On average, similar sized or smaller communities have lost 4 percent of their employment since 2000.”

Using new firm location decision data from the National Establishment Time Series (NETS), the study looked at all firms entering any of the 98 towns surveyed in 1995, 2005, or 2014.

Orazem said the survey responses were then used to look at firm entry.

“The sample was restricted to firms with a clear profit motive, and excluded government agencies, nonprofit organizations, public service firms such as historical sites or museums, and those in agriculture and mining,” the study said. 

“The sample was restricted to firms with a clear profit motive, and excluded government agencies, nonprofit organizations, public service firms such as historical sites or museums, and those in agriculture and mining,” the study said. “Each town was surveyed in 1995, and then re-surveyed in 2005 and 2014.”

The survey results showed higher concentrations of educated people and higher median household income attracted firm entry.

“Higher education levels also lead to greater disposable income, which improves the local customer base,” the study said. “Localities that have greater endowments of natural amenities also attract new firms, and county seats are more attractive than other small towns. However, distance to a metro market does not significantly affect firm entry.”

The study’s researchers said the impact of local fiscal policy is too small to overcome the locational disadvantages from insufficient endowment of human capital and agglomeration.

“A rural development approach that encourages firm entry in rural towns with the largest endowments of human capital and market agglomeration would be more successful than trying to raise firm entry in every town,” the researchers concluded.

Johnathan Hladik, J.D., policy director at the Center for Rural Affairs in Lyons, Neb., said, “Unfortunately, too many rural communities end up bidding against themselves when fighting to offer the biggest tax breaks, or most attractive financing packages to attract a new firm. As this report shows, communities should instead focus on becoming an inviting place to live. Strong public services, adequate housing and reliable access to broadband are all worthy investments.”