The article addresses a negative trend North Dakota was facing in its’ farming and energy sectors. The importance for the state to develop new policies and programs to encourage economic growth, new enterprises and industries. The need to producers create more products to export were cited as being important for the creation of employment opportunities was stressed

Ekstrom, B.L.

Leistritz, F.L.

The article addresses a negative trend North Dakota was facing in its? farming and energy sectors. The importance for the state to develop new policies and programs to encourage economic growth, new enterprises and industries. The need to producers create more products to export were cited as being important for the creation of employment opportunities was stressed

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Building the Economic Base: ASurvey of New and Expanding Firms F. Larry Leistritz and Brenda L. Ekstrom Expanding and diversifying the economic base , long a priority for local and state leaders, has become more impor­tant in North Dakota in recent years as unfavorable trends in the agriculture and energy sectors have precipitated a state­wide economic slump (Coon and Leistritz 1989). Central to the formulation of effective policies and programs to achieve economic growth and diversification is an understanding of the potential of different industries and enterprise types to expand the state's economic base and of the factors impor­tant to firms' location , relocation, and expansion decisions (Ekstrom and Leistritz 1988, Pulver 1988). OBJECTIVES and PROCEDURES The purpose of this study was to identify the types of new export-oriented businesses and industries in the Upper Great Plains states of North Dakota, South Dakota, and Nebraska and to determine both their economic contribution and factors critical to their location decisions . Only fi rms that (1) sell more than 10 percent of their product or service to out-of-state markets and (2) either began operations since 1977 or expanded their work force by 10 percent or more since that time were included in the analysis. A total of 314 firms met these requirements and consti tute the data base of this study . A mailed questionnaire was used to obtain infor­mation about each firm's current operations, its history, and the factors that were important in location , relocation , or ex­pansion decisions . RESULTS Key findings from the survey are presented for all firms and in many cases , by major firm types by relocation status of the facility, or by whether the facility is a branch or an in­dependent entity . (For a more detailed discussion of the results , see Leistritz and Ekstrom 1990) . General Characteristics The respondent facilities were relatively evenly distributed among the three states (Table 1). Manufacturing firms made up more than 78 percent of the qualifying respondents. Total annual sales averaged about $8 .5 million for all firms , $7 mill ion for durable manufacturers , and $6 .1 mill ion for nondurable manufacturers. Median values , which may be more representative of the typical firm , were considerably smaller and ranged from $1.5 to $1 .9 million for these three groups . About 65 percent of sales for all firms were made to out-of-state markets . Most of the respondents (56 percent) perceived no barriers to expanding out-of-state sales . Others Leistritz is professor and Ekstrom is former research associate, Department of Agricultural EconomIcs . 18 stated that the expense of marketing and the diffi cu lty of raising capital for expansion barred them from marketing more of their product out of state . Table 1. Selected characteristics of respondent facilit ies, 1989. Item Value Total Annual Sales: Mean $8,539,000 Median $1 ,750,000 Percent State where facility is located: Nebraska 30.9 North Dakota 39.8 South Dakota 29.3 Primary product or service: Min i ng/constructiona 2.3 Agri-products/sales b 8.3 Manufacturing, nondurablec 28.6 Manufacturing, durabled 50.3 Miscellaneous salese 3.2 Miscellaneous services! 5.7 Distribution: $100,000 or less 5.7 $100,001 to 500,000 20.1 $500,001 to 1,000,000 13.3 $1,000,001 to 5,000,000 30.8 $5,000,001 to 10,000,000 11.8 $10,000,001 to 50,000,000 5.1 $50,000,001 or more 3.2 Percentage of expenditures to labor: Mean . 27.8 Median 25.0 Percentage of remaining expenditures made in state: Mean 38.2 Median 30.0 aGold processing, construction/repairs. bHand ling sales, grain/pellets. animal supplies, live animals, plants, food sales, grain dealers. cFood processing, clothing products, wood products, furniture products, paper products, printing, film developing. dChemical products, rubber/plastic, concrete/stone, steel/metal, products, farm equipment parts, electrical products, transport equipment, precision instruments, sporting equipment, tools­hydraulic, miscellaneous parts. eSales, hardware, auto supply, clothing, sporting. fVehicle repair, miscellaneous repairs, telemarketing, weld/machine service, miscellaneous service, truck services. higher percentage of operators and fabricators . Survey respondents were a lso asked about their mini­mum requirements and recruiting efforts for new employ­ees . Some postsecondary education was typically required for executive and professional positions, but a high school diploma was often deemed sufficient for clerical workers and operators or fabricators. Prior work experience was most 19 frequent origin of relocating firms, and South Dakota the most frequent destination (Figure 2). Operators and fabricators were the largest occupational category followed by laborers and precision production crafts. Women made up 31 percent of the work force. Location of Business When the work force composition of branch plants was Of the firms included in the study, about 25 percent had compared to that for other facilities branches were found to relocated to their present site. About 68 percent of these have substantially smaller percentages of executive and had moved from an out -of-state location, and 59 percent managerial personnel and sales representatives but a much had relocated the entire company. Minnesota was the most The average firm reported annual expenditures within the state of $3 .8 million or 55 percent of its total outlays . Branch plants had a lower percentage of in -state purchases than other facilities (50 percent vs. 57 percent) , but their total in­state expenditures per plant were much greater ($5.3 mil­lion vs. $3.4 million). When expenditure patterns are compared by the firm's age and location status, new fi rms (i.e., those that had begun operations since 1977) were foun d to have the high­est percentage of in-state purchases (58 percent of their total sales) followed cl~sely by existing fi rms that had expanded (57 percent) . ,/ Comparison of in-state expenditures between the durable and nondurable man ufacturing fi rms revealed that nondur­able manufacturers (such as agricultural processing plants) made a much higher percentage of their expenditures within the state (63 percent vs . 50 percent) . Employment The average firm reported 57 full -time employees (Table 2) . A few firms with large work forces affected the average substantially, however; the median value was 17 .5 . The firms surveyed had experienced substantial employment growth over the past few years. The average firm reported an 80 percent increase in full-time employees in the last five years and a 246 percent increase in the last 10 years. Part­time employment also increased , on average, during this period with the percentage changes being similar to those for full-time empioyment . Table 2. Previous and current workforce characteristics of respondent facilities, Upper Midwest states, 1989. Item Value Item Value Number currently employed fu ll-t ime: Mean Median (no.) 57.3 17.5 Percent change In full-time employed in last 5 years.a Mean Median (%) + 79.7 + 50.0 Number currently employed part-t ime: Percent change in fu ll- time em ployed in last 10 years .a Mean Median 5.3 1.0 Mean Median +245.5 + 115.5 aApplies only to those firms that were in business fi ve or ten years ago, respectively. often required for sales representatives , operators or fabrica­tors, and executives . The respondents believed it was most difficult to locally recruit qualified employees for profession­al, executive, and sales positions. About half the respon ­dents reported it was also difficult to attract executive and professional candidates to their geographical area . A major current issue in rural development policy con­cerns the role of different types of firms in generating new jobs. The firms included in the survey had created a total of 11,133 jobs in the last 10 years, an average of 39 per firm. Of this total, expansion of existing firms accounted for 45 percent of the jobs, firms that re located or opened new branches were responsible for about 33 percent , and new firms were credited with almost 23 percent (Figure 1). As a group, branch plants (including some that had been operat­ing for more than 10 years) accounted for 38 percent of the "total employment growth in the last 10 years . Among exist­ing firms that had expanded, those with fewer than 20 em­ployees 10 years ago accounted for only 26 percent of the total jobs created by this group. Figure 1. Contributions to net employment change over the last 10 years, by firm type. Relocating firms of branches 33% New, start-up firms 23% Expansion of existing firms 45% Figure 2. Origin and destination states of relocating firms. The ratings of different factors that might be important in making location decisions were generally similar among all types of firms. Work attitudes and labor productivity , the absence of a union, and existence of right to work laws gen­era lly were rated higher than wage levels. Labor availability was viewed as a very important factor by about one-third of the firms, and executive and professional personnel were often reported to be both hard to find locally and difficult to attract to the area. Motor freight service was substantially the most important transportation dimension. Proximity to customers was viewed by expanding firms as more impor­tant than close proximity to suppliers or to others in the in­dustry, whereas new and re locating firms rated proximity to suppliers and raw materials as most important. About half of both groups of firms viewed the availability and cost of elec­tricity as very important or critical to location decisions . Other utilities were less important. State and local taxes were of concern to many of the respondents. Of the new or relocating firms, 67 percent viewed the overall tax burden as a very important or critical factor , while 60 percent of the expanding firms held this view. Worker's compensation and unemployment insur­anc~ were both regarded as very important by both groups of firms . Local property taxes and state personal income taxes were also viewed as important, but particularly by new or relocating firms. Incentives and assistance programs, available land and buildings , and state business and regulatory climate also in ­fl uenced location decisions . Within this general category of factors , survey respondents gave the highest rating to the overall community attitude toward business development. The cost of property, the availability of local financing , and development incentives were identified as very important or critical factors by about half of the firms . Availability of suitable buildings was a very important or critical factor for the new and relocating firms . State incentives and the state regulatory climate also were important to many firms. When asked whether they would choose this community again, almost 78 percent responded affirmatively . Reasons most freq uently cited among those who would choose the com­munity again were favorable economic conditions and prox­imity to markets (Figure 3). For those who would not choose their community again, reasons most frequently mentioned were the community's negative attitude and be­ing located too far from markets . 20 Figure 3. Reasons for and against selecting the same com· munity for thei r business, respondent facili ties in Upper Midwest States, 1989. Would respondent select this community again? YES REASONS* Favorable economic conditions __•••••••••23.0% Close to markets 17.3% Business is doing well __••• Availabili ty of labor __••••• Community supports business ~~~~~~~~ ___ NO REASONS* Community negative attitudes -J•••••••• 29.3% Too far from markets __•••••19.0% Decl ining popU lation , ••• in area/town 1 15.5% Lack of resources -II••• ~-------------'Includes only responses mentioned by 10 percent or more of respondents . Start-up Capital Many recent state and local development in itiatives have focused on making capital more accessible to rura l entrepre­neurs . Of the firms represented in this survey I 144 had begun operations since 1977 and provided information about their initial financing. These firms reported an average of $1.6 million in total start-up capital ; th e median value was $140,000 . More than 84 percent reported that their start- up capital was $1 million or less ; nearly 30 percent stated it was less than $50,000. Personal funds and commercial loans were the sources of financing reported most freq uently (Table 3) . More than 72 percent of the respondents reported using personal funds as a source of finanCing, and about 30 percent of their total funding came from this source. Co mmercial loans were re­ceived by 55 percent of the respondents, a nd only 6 .0 per­cent of the respondents reported that they had applied for a co mmercial loan but had not received one . Small Business Administratio n loans and fina ncing from a variety of govern­ment programs each were reported by about 19 percent of the respo ndents, respectively , while personal loans from fam ily and friends were used by 18.1 percent. Credit from suppliers and sale of corporate stock were other sources reported. Personal funds and personal loans generally became less important as sales increased , while government programs , commercial investors, and sales of stock became more important. Outlook The firms surveyed expected substa ntial fu ture growth in sales and employment. The typica l (median) fi rm expected a 35 percent increase in sales over the next fi ve years and 70 percent in 10 years . The median fi rm also expected its employment to grow by 23 percent in five years and 38 per­cent in 10 years . About 11 percent of the firms planned to relocate within the next five years (46 percent of these would relocate out-of-state), while more than 57 percent plan to expand their physical facilities . Economic Development Policy Survey respondents were asked to ra te the supportive­ness of state and local government with respect to their busi­ness needs. Most respondents rated both state and local governments as neutral ; about 15 percent rated state and local governments as somewhat unsupportive o r unsuppor­tive . When as~ed how the situation cou ld be improved , respondents irrdicated a need for greater awareness of the needs of existing businesses and for fairness in the use of financia l incentives. REFERENCES Coon , Randa l C. , a nd F . Larry Leistri tz . 1989. The North Dakota Economy in 1988: Historic Economic B ase , Rece nt Cha nges , an d Projected Future Trends . Agricu ltural Eco nomics S ta tistical Series No . 45, Fargo : North Dakota Agricu ltural Experiment Station . Ekstrom , Brenda , and F. Larry Leistritz . 1988. R ural Commu nity Decline and Reuitalization : An Annotated Bibliography . New York: G arland Publishing , Inc . Leistritz, F . Larry, and Brenda L. Ekstrom . 1990 . C haracteristics of New or Expanding Export-Oriented Firms in the Upper G reat Plains . Agricultura l Economics Re port No . 256. Fargo : North Da kota Agricultural Experime nt Station . When asked about the top strengths of their state from a business perspecti ve, the respondents most ofte n noted rea­sonable taxes an d quality work fo rce . In identifying short­comings , they most frequently cited the need for more cooperation between business and government and for lower taxes . Table 3. Sources of start·up capital for businesses that began operations after 1977. Percent of respondents who Percent received funds of total Sources from this source funding Personal funds 71.5 30.2 Personal loans from fami Iy and and friends 18.1 4.7 Commercia l loans (commercial banks, S & Ls, cred it un ions, finance companies) 54.8 29.7 Small Business Admin. loan 19.4 9.1 Commercial investors (venture capital firms, insurance compan ies) 2.1 0.7 Supplier or dealer credit 11.8 2.3 Government programs (Industrial Revenue Bonds, Urban Devel­opment Action Grant, Economic Developmen t Admin istration, s tate and city loans.) Sale of corporate stock 11.1 4.6 Other sourcesa 11.3 8.4 alncludes loans from the previous owner and mon ies from the parent company. Pulver , G le n C . 1988 . "The Changing Economic Scene in Rural America ." In Proceedings of Conference o n Se tting a Ne w Eco­no mic Agenda for the States. Lexington : Council of State Gov­ernments . 21 

Building the Economic Base: A Survey of New and Expanding Firms

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