The Role of Small Business in Economic

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THE ROLE OF SMALL BUSINESS IN ECONOMIC
GROWTH AND POVERTY ALLEVIATION IN WEST
VIRGINIA: AN EMPIRICAL ANALYSIS
By
Gebremeskel H. Gebremariam1
Tesfa G. Gebremedhin, and
Randall W. Jackson
RESEARCH PAPER 2004-10
ABSTRACT: The main objective of the study is to empirically evaluate the critical roles of small businesses in economic growth and poverty alleviation in West Virginia. In OLS and 2SLS regression analysis a positive relationship exists between small business and economic growth. A strong inverse relationship also exists between the incidence of poverty and small business and economic growth. Thus, the empirical result establishes the linkage between small business, economic growth and the incidence of poverty. KEY WORDS: Small Businesses, economic growth, Incidence of Poverty 1 Graduate Research Assistant and Professor, Division of Resource Management, Davis College of Agriculture, Forestry & Consumer Sciences and Professor/Director, Regional Research Institute, West Virginia University.

Selected Paper presented at the American Agricultural Economics Association Annual Meeting, Denver, Colorado, August 1-4, 2004.
This research was supported by Hatch funds appropriated to the Agricultural and Forestry Experiment Station and funds appropriated to Regional Research Institute, West Virginia University. 1
THE ROLE OF SMALL BUSINESS IN ECONOMIC GROWTH AND POVERTY
ALLEVIATION IN WEST VIRGINIA: AN EMPIRICAL ANALYSIS
INTRODUCTION
Urban and rural economic structure in the United States has changed significantly over the past two decades (Dissart and Deller, 2000). After a decade of unprecedented expansion of the economy of the United States, many regions in West Virginia are still suffering from high unemployment, shrinking economic base, deeply rooted poverty, low human capital formation, and out migration (Deavers and Hope, 1992). West Virginia ranks second to last in per capita income and lags the nation and the rest of the Appalachian region in almost any other indicators measuring income, wealth, and health, making a classic example of persistent poverty (Dilger and Witt, 1994; Haynes, 1997; Maggar, 1990).

West Virginia is one of the nation’s most rural states and economic restructuring across the nation has affected it in ways that are significantly different from the experience of urbanized regions. For example, while the decline of employment opportunities in extractive industries has had little direct impact in urban areas, West Virginia has lost direct mining jobs, even while production remained high. The slow growth of income and employment in the state, out-migration and the disappearance of rural households are both causes and effects of persistent high rates of poverty. This lagging economic development negatively affect the economic and social well-being of West Virginia’s rural population, the health of its local businesses, and the ability of its local government to provide basic human services (Cushing and Rogers, 1996). 2

Widely dispersed small communities with relatively small local and regional markets dominate West Virginia. The businesses that serve these markets also tend to be small. Thus, considering one-by-one count, it is therefore tempting to dismiss small businesses as unimportant. Collectively, however, they make a large contribution to the economic diversity of small communities. In fact, small business is a big business in West Virginia. Through their capital investments they create jobs and new opportunities to promote community-building and social activities. They also contribute to the development of a diversified economy by absorbing surplus labor resulting from economic restructuring.

Improving the state’s economic basis requires an economic environment where business can prosper. West Virginia, however, despite efforts of multilateral, national and local policy programs to induce economic prosperity and ameliorate poverty, has many economically depressed areas and regions....
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