Start-Ups Key to States' Economic Success

New small businesses are the most important factor in driving personal income, employment, and other factors, research shows.

Start-ups are the single most important factor driving a state's economic success, according to a new study by the Small Business Administration's Office of Advocacy.

The study, which was released Monday and examined U.S. Census data on small-business start-ups by state between 1988 and 2002, found their success or failure rates had a profound impact on gross state product, state personal income levels, and total state employment.

For instance, raising the number of small-business start-ups in a given state by just 5 percent tended to boost gross state product -- the sum total of a state's economic output -- by 0.465 percent, the study found. By contrast, a higher number of small-business closures tended to impede state economic growth.

Similarly, a 5 percent hike in small-business start-ups increased a state's employment growth rate by 0.435 percent, while raising personal income by 0.405 percent, the study found.

The study defined small businesses as those with fewer than 100 employees. Based on the median number of small-business start-ups across all 50 states per year, a 5 percent increase was equal to roughly 445 new small businesses.

"Every one of our models indicates that states with more new small firm establishments grow at a higher rate over time, even after we control for the level of economic activity and a variety of other factors," researchers said.

"Now more than ever, state policymakers should be aware of how their decisions affect small business," Chad Moutray, the agency's chief economist, said in a statement.

"Creating an environment that values entrepreneurship and risk-taking is sure to increase economic growth, personal income, and employment," Moutray said.