Which Small Towns Attract Start-Ups and Why? Twenty Years of Evidence from Iowa

Georgeanne M. Artz, Younjun Kim, Peter F. Orazem, Peter J. Han 2021.
American Journal of Agricultural Economics 103(2):703-720.

Georgeanne M. Artz (1974–2019) was an associate professor of economics at Iowa State University when this project began, and this is the last research project she initiated. She passed away before the final version was completed. Her work was partially funded by USDA‐NIFA grant 2018‐68006‐27639. Younjun Kim is an associate professor of economics at Southern Connecticut State University. Peter F. Orazem is University professor of economics and director, Program for the Study of Midwest Markets and Entrepreneurship at Iowa State University. Peter J. Han is social science analyst at U.S. Department of Housing and Urban Development. We thank two anonymous reviewers and the editor for helpful comments and Timothy Parker for research assistance.

The analysis shows that there are significant differences in the probability that firms will enter a small town, with the most important factors being local availability of human capital and agglomeration as indicated by the presence of upstream suppliers, downstream customers, and a diversified economy. The effects of government tax and spending policies are too small to counteract the locational disadvantages from insufficient endowment of human capital and agglomeration.

This was a featured article by the journal, with the press release here.

Abstract

Using data on a sample of small Iowa towns consistently collected over two decades, we investigate how agglomeration economies, social capital, human capital, local fiscal policy, and natural amenities affect new firm entry. We find that human capital and agglomeration are more conducive to new firm entry than are natural amenities, local fiscal policy, or social capital. 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.