Non-employer establishments and economic development in counties: evidence from cross-border neighbor county-pairs in the US

The relationship between entrepreneurship and economic development is studied widely in academic research and is of interest to policymakers. A majority of past studies have focused on the association between country-level entrepreneurship and gross domestic product (GDP), though more recently, studies have also focused on associations between state-, region-, and city-level entrepreneurship and economic development. Complementing prior studies at these different geographic levels, in this study, we use 774 neighbor county pairs across state borders and the recently released data on county GDP from 2001 to 2017 (18,652 country-year observations) in the US. We find the lag of log of non-employer establishments in the county Granger-cause log of real county GDP. Our results, controlling for neighbor-county-pair time-trends, show that for a 1% increase in non-employer establishments, there is a small but positive effect on GDP (0.049%). Estimates across subsamples of major industry sectors further support the positive association, especially in construction, transportation and warehousing, and most service sectors. Robustness checks using vector autoregression (three lags), distributed lag models (up to five lags), and macroeconomic cyclical patterns under bivariate panel correlations for non-employer establishments were consistent with the main results. For a 1% increase in small firms with 1–4 employees, the increase in GDP is 0.13%. The county-level inferences add further to the growing body of studies focused on the within-country entrepreneurship and economic development.