Why Do Rural Firms Live Longer?

Abstract

Rural firms have a higher survival rate than urban firms. Over the first 13 years after firm entry, the hazard rate for firm exits is persistently higher for urban firms. While differences in firm attributes explain some of the rural-urban gap in firm survival, rural firms retain a survival advantage 18.5% greater than observationally equivalent urban firms. We argue that in competitive markets, the remaining survival advantage for rural firms must be attributable to unobserved factors that must be known at the time of entry. A plausible candidate for such a factor is thinner markets for the capital of failed rural firms. The implied lower salvage value of rural firms suggests that firms sorting into rural markets must have a higher probability of success in order to leave their expected profits equal to what they could earn in an urban market. JEL: O18, L21, D92

Manufacturing Plant Survival in a Period of Decline

“…Single‐unit plants in metropolitan counties were 41 percent more likely to fail, even while controlling for county population, than those in remote rural counties (Table ). This result is in line with other studies examining survival and urban influence (Huiban ; Yu et al ). Yu et al find the hazard rate for urban firms was 18 percent higher than for rural firms in Iowa and 58 percent higher in Kansas.…”

“…Buss and Linn () point out that early work on survival rates in rural and urban areas suggests a rural disadvantage, but a growing body of evidence suggests the rural disadvantage has been over‐stated (Christie and Sjoquist ; Huiban ; Yu, Orazem, and Jolly ).…”

Improving rural business development, one firm at a time: A look at the effects of the USDA's Value-Added Producer Grant on firm survival

“…Stearns, Carter, Reynolds and Williams (1995) on the other hand find that rural firms have increased survival rates relative to urban firms. Similar results have been echoed by Yu, Orazem, and Jolly (2009) who found that rural firms have a 25 percent advantage for survival over their urban peers.…”

“…Metropolitan regions naturally appear to be the more ideal location for start-up firms given the proximity to essential resources (Renski H. , 2008).One of the biggest challenges that rural start-ups face is access to capital, leaving them worse off relative to their urban peers who can more readily access and utilize capital to develop and grow their firms (Renski & Wallace, 2013). Rural firms also face the issue of asset fixity which requires a firm to have a higher probability of survival before entering a market given that the assets are less likely to be transferred to another firm and therefore, will have a lower salvage value or increased losses from failure relative to urban peers (Yu, Orazem, & Jolly, 2009). These issues dampen rural business development.…”

“…These issues dampen rural business development. However, there is evidence that rural firms survive longer than firms in urban regions (Stearns, Carter, Reynolds, & Williams, 1995;Yu, Orazem, & Jolly, 2009). Reducing the barriers to entry for rural start-ups can boost local economies for many years as the firm becomes more stable over time.…”