Fueling Local Economies: How Business Formation Drives Growth in North Carolina
Framing the Issue: New Business Starts as a Leading Indicator
In an era where economic decisions depend on timely data, North Carolina is leveraging a unique economic asset: business formation data from the North Carolina Secretary of State’s Office. Traditional indicators such as GDP or employment lag by months or even longer; county-level GDP data often lags by nearly two years. This limits their usefulness for real-time policymaking and resource allocation. Business-starts data, however, offers a near real-time pulse on local economic dynamism.
The Secretary of State’s data is not only more current but also spans a much longer period, starting in 1960, compared with 2005 for federal data. That combination of immediacy and depth makes it especially valuable for tracking trends in rural or smaller counties, where timely economic signals are often harder to capture.
Recent research from the Kenan Institute of Private Enterprise, in collaboration with the North Carolina Collaboratory and the Secretary of State, shows how new business applications serve as leading indicators for short-term changes in GDP and employment at the county level. The study provides a roadmap for how policymakers, businesses and economic developers can better anticipate and support regional economic growth.
The Link Between Business Starts and Economic Growth
Bigger Counties, Bigger Impact
The research demonstrates a statistically significant relationship between business formation and GDP growth, especially in North Carolina’s more populous counties (population ≥ 52,000). In these areas, a 10-percentage point increase in the growth rate of new businesses correlates with a 0.11 percentage point increase in GDP growth in the same year. For a county expecting 2% growth, this represents a 5.5% increase in the growth rate—a meaningful impact.
In smaller counties, the relationship is more complex. In those with populations under 52,000, a 10 percentage point increase in both state and local business-start growth leads to a combined 0.07 percentage point net increase in GDP growth, a less dramatic but still meaningful boost.
Why the Difference?
Larger counties typically enjoy more stable growth and benefit from more diverse industries, making them more responsive to local entrepreneurial activity. Smaller counties often experience more volatility and structural constraints, making their growth more dependent on statewide economic dynamics.
Employment Gains: Timing and Sector Matter
Steady Gains in Goods-Producing Jobs
The research finds that it takes about nine months – or three quarters – for new business activity to significantly influence employment, with a 10 percentage point increase in business starts leading to a 0.02 percentage point rise in job growth in this sector. While the employment impact takes longer to appear compared with service sectors, it reflects a steady response to new business formation.
Faster Effects in Services
In the service sector (which includes industries such as information technology, healthcare, etc.) the link between new business formation and job growth is both quicker and slightly stronger than in goods-producing sectors. The study finds that when business starts grow by 10 percentage points, service-sector employment increases by 0.03 percentage points by the next quarter.
Real-World Implications and Policy Recommendations
Understanding the link between business formation and economic outcomes has practical implications:
- Policymakers can potentially stimulate local GDP and employment by promoting entrepreneurship, particularly through reducing barriers to entry and supporting new businesses in underperforming regions.
- Economic developers can use business-starts data as a real-time economic indicator to guide strategic investments and interventions.
- Researchers and analysts can improve accuracy and responsiveness by incorporating business-starts metrics into forecasting models.
Conclusion: Looking Ahead
New businesses are more than just startups – they are indicators and engines of economic health. This research reinforces the idea that business formation is a leading indicator of short-term GDP and employment trends: Its effects are immediate, measurable and actionable.
This analysis supports the development of a North Carolina economic forecasting center, which aims to deliver real-time, county-level forecasts using localized data inputs. This research builds upon the modeling frameworks developed by the Kenan Institute’s American Growth Project, which analyzes economic growth and its key drivers across the 150 largest Extended Metropolitan Areas in the US. In this study, the American Growth Project’s economic analysis is adapted to focus specifically on county-level data in North Carolina.
