Economic Recovery and Business Dynamism in Rural America

This issue brief contains a correction.

While the discourse on rural America following the Great Recession has revolved around the resulting lack of jobs and loss of services, the lack of startups and entrepreneurial activity in these communities should not be ignored. Firm growth¹ is a crucial part of economic development, and business creation has been critical in the aftermath of previous recessions. But policies geared toward encouraging startups have not been effective in rural areas, leading to a growing regional divide.² This lack of firm growth since the Great Recession should be a cause for concern for policymakers.

A study³ by the Economic Innovation Group (EIG) found that compared with previous recoveries from recessions, there was a significant falloff in the creation of business establishments after the Great Recession. It finds that in the four-year periods after the 1991 recession and 2001 recession, the number of total new business establishments nationwide averaged more than 400,000, while the four-year period after the Great Recession only saw around 166,000 total new establishments. The study finds that this number was primarily driven by just 20 counties. (see Figure 1 for a comparison of establishment growth in metropolitan counties and nonmetropolitan counties)⁴

Figure 1

The net change in the number of establishments in the years following the Great Recession is basically zero in nonmetropolitan communities, while there is growth in metropolitan communities. This meager business recovery is driven by firm growth in metropolitan counties, primarily the 20 largest metropolitan counties. Business growth is crucial for economic development, and this lack of business dynamism may be a factor in why nonmetropolitan counties have yet to recover from the Great Recession.

This issue brief looks at business dynamism since the Great Recession in terms of establishment growth in rural communities using the ACP classification. There are two main takeaways from this analysis:

1. Metropolitan counties have experienced positive firm growth since the Great Recession, especially large cities and urban suburbs that are densely populated and racially diverse.
2. Many rural communities are not experiencing establishment growth, though there are some pockets of rural America that are seeing growth in businesses. These communities are also experiencing growth in immigration.

While some rural communities are experiencing firm growth, there may be a role for the federal government to support local governments through expanding the capacity of community development corporations. The establishment and growth of new firms is critical to productivity growth,⁷ and productivity growth is at the heart of broader economic growth. Until policymakers consider business dynamism a critical issue in any effort to revitalize left-behind communities, these rural areas will continue to struggle in their recovery.

Business growth post-Great Recession has not been evenly distributed across regions

Figure 1 shows that metropolitan counties have driven most growth in business establishments since the Great Recession. However, that analysis does not reveal what is happening within metro and nonmetro counties. Using the ACP classification and establishment data from the Census Bureau’s Statistics of U.S. Businesses, the author was able to analyze which communities have been doing well and which communities are falling behind. Table 1 provides the average year-over-year net change in the number of establishments from 2010 to 2016, sorted by year 2016.

Table 1

Table 1 shows that most of the establishment growth is concentrated in Big Cities and Urban Suburbs. These communities experienced the largest losses right after the Great Recession, but unlike other communities, they recovered quickly. Nearly all rural communities, on the other hand, fall behind metro communities. In fact, many of these communities experienced negative establishment growth through 2014. Figure 2 shows the aggregate establishment growth in just the rural communities.

Figure 2

A consistent theme among analyses of economic conditions in the United States is that southern rural communities have struggled particularly hard since the Great Recession. According to Figure 2, rural communities in the African American South, Evangelical Hubs, and Working Class Country have experienced many firm deaths. A previous CAP brief⁸ showed that individuals who grow up in rural communities in the South tend to lack upward mobility and have lower educational attainment and lower rates of union membership than those who grow up in other areas. These factors are driven by structural racism, which erects economic barriers by limiting educational options and limiting worker power. While largely affecting African Americans, the adverse outcomes are not limited to this community; they broadly harm individuals throughout the rural South.

Small businesses, especially in the South as well as Rural Middle America, have been struggling to survive in the current economic environment, particularly due to the trends of consolidation and growing market concentration. This increasing concentration, especially in rural communities, has led to the rise of the modern company town, where a community is dominated by a single firm.⁹ In the agricultural sector, the number of federally inspected slaughterhouses declined 36 percent from 1990 to 2016.¹⁰ This rise in concentration has allowed these larger firms to exert market power on smaller firms and on their own employees—a trend that has been especially prevalent in the corn and soybean seed markets: The shares of the four largest firms in each of these two markets have risen to more than 85 percent and more than 76 percent, respectively.¹¹ This increased concentration in rural communities may be a factor in limiting startup activity.

The ACP classification system shows that not all rural communities have experienced negative firm growth: Graying America, Hispanic Centers, and Latter-day Saints Enclaves saw an increase in net establishment growth since the Great Recession, although this growth may not be evenly distributed within these communities. Figure 3 maps this trend to show which parts of the country are experiencing significant growth. It specifically maps establishment growth in the counties represented by Graying America, Hispanic Centers, and Latter-day Saints Enclaves.

Figure 3

The counties highlighted in dark blue areas show large establishment growth. Many of these communities, especially among Graying America, are recreation-dependent. Research by Meghan Lawson for Headwaters Economics found that recreation counties attract new residents and are experiencing earnings growth.¹² In the Hispanic Centers, on the other hand, several of the counties are mining-dependent, primarily in the oil and gas industry. Figure 3 illustrates that it is difficult to apply lessons learned and strategies used in the growing communities to other, more stagnant areas that are not rich in amenities or that lack abundant resources.

Immigration can help spur growth in rural areas

One lesson that may be applied to all rural communities is the importance of fostering population growth. Data from a 2019 CAP brief show that many nonmetro counties have been experiencing population loss,¹³ which an EIG report found has adverse impacts on housing markets, government finance, and business dynamism.¹⁴ On that last point, communities that are losing population see a decrease in the demand for goods and services and therefore experience greater firm deaths. Figure 4 shows that many of the nonmetro communities that have been experiencing population loss following the Great Recession are in the Southern and Midwestern regions.

Figure 4

Many communities have tried to reverse the trend of depopulation through welcoming immigrants, a strategy that can be successful.¹⁵ Figure 5 confirms a positive relationship between the net international migration rate and population change over the post-Great Recession period.

Figure 5

There are numerous examples of places throughout the country where immigrants have revitalized and benefited rural communities—not just in the agriculture sector but also in manufacturing, health care, tourism, and startups.¹⁶ Nebraska, for example, has seen a long influx of Mexican immigrants who are employed at Tyson meatpacking plant, thereby increasing the state’s population and in turn creating a demand for small businesses.¹⁷ Certain policies, such as the Heartland Visa, can encourage immigration targeted toward areas experiencing depopulation.¹⁸ Communities can also employ certain strategies to create social infrastructure to help immigrants thrive.¹⁹ For example, providing English as a second language (ESL) classes or other communication programs for migrants and their children to facilitate dialogue between new migrants and other community members is helpful.

Conclusion

Since the Great Recession, business growth nationwide has faltered relative to recoveries from previous recessions. Metropolitan counties have recovered in terms of establishment growth, but that recovery has been concentrated in the largest cities.²⁰ In rural communities, the counties that had positive establishment growth were confined to recreation-dependent counties located in Florida and Texas and in the Central Valley of California, as well as communities rich in certain resources.

Many rural communities are taking steps to support local businesses through community development corporations and cooperatives, but there may be a role at the federal level to expand the capacity of these organizations. Policymakers need to create a better climate for small businesses to thrive and grow. This is important for all regions but vital for rural communities, as they are also struggling with other problems—such as higher rates of opioid use,²¹ hospital closures,²² and job loss²³—that harm their viability. Until there are efforts at all levels of government to foster small-business growth and rural entrepreneurship, these communities will continue to fall behind the rest of the country.

Olugbenga Ajilore is a senior economist at the Center for American Progress.

The author would like to thank John Lettieri, Kenan Fikri, Clifford Deaton, and Dante Chinni for their helpful comments and edits.

Appendix

Figure A1