Business turnover—the rate at which new firms enter, and old firms exit, the economy—is an important indicator of a number of things: productivity, innovation, and economic growth, to name just a few. Higher turnover rates tend to produce greater productivity, more innovation, and more economic growth. Lower turnover rates result in less of these three factors. U.S. business turnover has been declining for at least the last 40 years, says Jason P. Brown, in his article “” (Federal Reserve Bank of Kansas City Economic Review, third quarter 2018), but more in small urban areas than in large ones. Worse, since the Great Recession, the gap between the two types of areas has been widening, so much so that the economic future of the smaller urban areas is in doubt.
Besides producing these two broad results, Brown’s analysis turns up a couple of narrower, but no less important, findings. First, over all urban areas, business turnover declined more in service-providing industry sectors than in goods-producing sectors. However, the gap in turnover between large and small urban areas widened more in the goods-producing sectors than in the service-providing sectors. Second, dividing urban areas into four size classes—large, medium-sized, small metropolitan, and micropolitan, in order of size—Brown finds that large and medium-sized urban areas had a significantly higher level of business turnover than small metropolitan and micropolitan urban areas.
These findings are, of course, interesting in themselves, but what may be more interesting is what they might hold for the future. As Brown puts it, “The implications for future growth in small and large urban areas are striking.” He points to several independent studies that touch on the economic effects of the declining overall U.S. business turnover rates and the ever-growing gap in business turnover between large and small urban areas that his own research has uncovered: