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Rural entrepreneurship: a prelimary study.

National statistics are readily available regarding the economic contributions of small, new business ventures:

* About 1.3 million new enterprises were launched in the

U.S. in 1988 compared to fewer than 100,000 in 1950. It

has been estimated that by the year 2000 there will be 30

million firms in the U.S., up from the 18 million in 1988.

* Virtually all of the net new jobs created in this country

come from these new and expanding firms - not large

established companies. From 1984 to 1987, the top 10%

of all new companies created 96% of all new jobs.

* From 1980 to 1987, the Fortune 500 firms eliminated a

net 3.1 million people from their payrolls. At the same

time, the non-Fortune 500 firms - predominantly new

and smaller firms - created 17 million new jobs.

And it is not only in urban America where the entrepreneurial spirit is creating new and small business, but also in the rural environment. A 1987 Iowa case study (Popovich and Buss, "Rural Enterprise Development: An Iowa Case Study") found that 20,000 new enterprises created 108,000 new jobs since 1980, with one-half of those jobs located in Iowa non-metro areas. A recent national report concluded that 88% of the net new job growth in the rural U.S. came from new businesses.

While little is known at this stage regarding the net contribution of small, new businesses to South Dakota's economy, data does reveal the intuitively obvious: South Dakota is a small business state. According to the 1989 Census of County Business Patterns, there were roughly 20,000 business establishments in South Dakota with employees, 60% of which had fewer than five employees and 90% twenty or less. In addition, one can only guess that there would be multiple-thousands of South Dakota sole-proprietor businesses with no employees. The 1989 census further showed that there were fewer than 700 businesses in the state which employed more than 50 people.

When businesses are delineated by gross sales, a look at the business license data show that 94% of South Dakota businesses had gross sales under $1 million in 1989. It is also instructive to note that 31% (17% farm and 14% non-farm) of total South Dakota earnings come from business proprietors income. Nationally, only 12% of total earnings can be traced to business proprietor income (2% farm and 10% non-farm).

Entrepreneurship, including not only its role in new business creation, but also its impact on business expansion and strengthening, needs to be a key strategic element in rural development planning. Clearly the first step is to better understand this complex and dynamic economic force.

SURVEY FINDINGS

In the Fall of 1991 a telephone survey was conducted of twenty South Dakota firms which were identified as "new business start-ups". This sample was taken from the Small Business Development Center (SBDC) database of consultations and represents 25 percent of their new business consultations. The SBDC is a statewide network of geographically based offices situated to service small businesses by giving information and guidance in the areas of accounting, market analysis, management, legal issues, and other technical assistance. A 40 question survey instrument was designed to test a variety of assertions or generalizations regarding the rural entrepreneur and their characteristics, their role in new ventures and economic contributions.

The best that can be provided at this juncture of the study is the identification of some noticeable tends arising from the phone survey and a comparison of these trends to findings of other comparable studies. Little of a definitive nature can be concluded relative to the South Dakota entrepreneur. The purpose of this phase of the research is merely to discover positive, generalized trends which could be tested in future phases.

NOTICEABLE TRENDS

* Retail and service businesses were the most common start-up.

Eighteen of the twenty business start-ups were either retail or service businesses. An Iowa study found that two-thirds of all business start-ups were retail or service and that more than two-thirds of new employment came from those sectors. A Minnesota study found that while retail and service ventures have easier entry than say construction or manufacturing endeavors, retail and service businesses have twice as high a fatality rate.

* Businesses employed under ten full-time employees.

Only one of the twenty businesses surveyed reported that they had more than ten full-time employees. In fact, only three felt that they would have over ten employees during the next five years. An Iowa study found similar results with the average business employing 3.7 workers with more than one-half having two of fewer employees.

* Annual sales volume was generally under $100,000.

Six of twenty reported sales volume over $100,000, although a majority projected that sales would exceed $100,000 within five years. Almost 80% of all U.S. businesses have sale receipts of less than $100,000.

* The businesses targeted local and regional markets.

Only one of the businesses surveyed targeted the national market. This would be expected given the retail and service domination of the sample. This is also consistent with the Iowa study which found that 84% of the new businesses they surveyed sold their goods or services within a 50 mile radius of the location of the business.

* Businesses generally had low financial start-up requirements.

Seventeen of the twenty businesses required start-up capital. These financial requirements ranged from $8,000 to $300,000 with an average of $73,000 per new business. As a group these businesses had a debt-to-equity ratio of 3 to 1. This debt was generally borrowed from local banks with many of them reporting use of SBA guaranteed loans. It was further established that several of the firms felt underfinanced in the startup stage, that there was a general shortage of startup capital available, and that the SBA was not always an accessible source, particularly for the very small new business.

* There was a diversity in age, education and family background.

Neither age, education nor family background were found to be determining factors in new business startups. One comparable study found that of 165 midwestern firms surveyed, they were well represented among the various age groups and they were not generally highly educated. While the Iowa study confirmed this diversity of age and family background, it did conclude that the new business ventures were generally started by people with at least a high school education.

* Most businesses were started by those from the local area.

Owners of twelve of the twenty surveyed firms were born and raised in South Dakota. An additional three, while not born here, were raised in South Dakota. The majority of them had lived their entire lives within a 30 mile radius of their present business. This was also a finding of the Iowa study which found that 62% of new business owners were both born and raised in that state.

* Those starting the business were in their first start-up.

Only three of the twenty reported any previous new business venture experience; an additional three said they had minimal experience and training in some aspect of starting a business. The Iowa study found that three out of four of their surveyed firms had owners with no previous experience in starting a business.

* Most businesses were started for the purpose of gaining independence.

This surveyed confirmed that independence is a strong driving force for starting one's own business. All but three of those surveyed gave "independence" as their primary reason for the new business start-up. In a study of Virginia small businesses - a relatively rural state - independence rated as the most important life-style factor. The South Dakota survey also found that 65% of these new entrepreneurs said their goal for the business was to provide themselves with a sufficient income, and 60% said they planned to stay in the business indefinitely, as opposed to eventually selling it for equity profits.

* Most saw the need for state laws and regulations which would encourage new businesses.

About one-half of those interviewed felt that state laws and regulations complicated or hindered new business; all but four said that they would like to see the state more actively encourage new venture opportunities. Many of these focused on the need for money availability, but equally important was their emphasis on a supportive and encouraging business environment. A study designed to make business public policy recommendations came to similar conclusions. The authors of this study were of the opinion that because government financing programs are not directly meant to encourage new venture formation, it seems that the perception of sparseness somehow frustrated potential entrepreneurs. They recommended that public policy should thus aim at creating favorable perceptions and preconditions. Assisting a new entrepreneur might well mean to create a supportive environment rather than merely provide financial aid. The authors called for carefully tailored policies and "incentive packages" at the local level with a great deal of attention being paid to the characteristics of that local environment.

* A pattern concerning "risk, fear and confidence" was noticed.

A series of questions designed to measure sense of risk, fear of failure and degree of confidence in the venture, revealed an interesting pattern. A large majority expressed a great sense of risk while at the same time had little fear of failure. A large majority expressed a great deal of confidence in their product or service and felt it represented a good opportunity.

* Most felt the opportunity was good and they would do it again.

All but two of the respondents said, that all things equal, they would start their business all over again. One of the two negative responses was on the brink of failure; the other one was on the verge of success but thought the cost might have been to great.

* Those starting businesses generally felt they were entrepreneurs.

The large majority of those surveyed believed that they were at least "somewhat" of an entrepreneur and several were of the opinion that they were "very much" an entrepreneur. They expressed various reasons for such a belief including: risk manager, courage to do it, creative, independent, control my own destiny, don't have to answer to anyone else, and desire to meet perceived needs.

* Those starting businesses enjoyed living and doing business in South Dakota.

Nineteen out of twenty gave the highest response when they were asked whether they enjoyed doing business in South Dakota; the other one said "somewhat". Many added superlatives to their answers, with some saying they started their business because they wanted to stay in the state. Correspondingly, most of them did not feel they would have had greater success in a non-rural state. The Iowa study found that rural entrepreneurs were certain of the advantages of their location.

* Most felt the consultation with the SBDC was very helpful.

Eighteen of the twenty gave favorable opinions regarding the help they received from the Small Business Development Center with most of these stating that the Center was very helpful.

CONCLUSION

Overall, the trends in the preliminary sampling did reveal a number of significantly consistent findings which should provide excellent opportunities for future testing. In many instances they followed the findings of other comparative studies, such as the Buss and Popovich Iowa study, and thus add confidence to the direction of this research. In subsequent research it will be interesting to assess if there are differences between South Dakota and other rural state entrepreneurs and new ventures.

Certain trends also consistently conformed to the literature describing life-style firms or "mom & pop" businesses, which would be the classification of most businesses in this sampling. An essential area for future comparison and contribution will be the identification and delineation of characteristics and attributes of rural entrepreneurs and urban entrepreneurs. Understanding the role of life-style/"mom and pop" firms in the rural environment and their contribution to economic development, versus their largely urban counterparts, high growth and foundation firms, will be a primary focus of future research. In general, there were very few significantly surprises - that is not to say that the information gained in the preliminary sampling was not enlightening, educational and beneficial for continued movement toward the ultimate goal of understanding rural entrepreneurs and their contribution to the rural economy. Indeed the trends to date provide an excellent foundation for continued study.

Robert J. Tosterud, Ph.D., is holder of the Freeman Chair in Entrepreneurial Studies and Professor of Economics at the School of Business, University of South Dakota. Timothy G. Habbershon is Research Associate to the Freeman Chair and graduate student at the School of Business, University of South Dakota, Vermillion, SD.
COPYRIGHT 1992 The Business Research Bureau
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

Article Details
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Author:Tosterud, Robert J.; Habbershon, Timothy G.
Publication:South Dakota Business Review
Article Type:Industry Overview
Date:Mar 1, 1992
Words:2097
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