Predicting firm creation in rural Texas: A multi-model machine learning approach to a complex policy problem

Abstract

Rural and urban America have becoming increasingly divided, both politically and economically. Entrepreneurship can help rural communities catch back up by jumpstarting economic growth, creating jobs, and building resilience to economic shocks. However, less is known about firm creation in rural areas compared to urban areas. To that end, in this paper we ask: What factors predict firm creation in rural America? Our analysis, based on a comparative framework involving multiple machine learning modeling techniques, helps addresses three gaps in academic literature on rural firm creation. First, entrepreneurship research stretches across disciplines, often using econometric methods to identify the effect of a specific variable, rather than comparing the predictive importance of multiple variables. Second, research on firm creation centers on high-tech, urban firms. Third, modern machine learning techniques have not yet been applied in an integrated way to address rural entrepreneurship, a complex economic and policy problem that defies simple, monocausal claims. In this paper, we apply four machine learning methods (subset selection, lasso, random forest, and extreme gradient boosting) to a novel dataset to examine what social and economic factors are predictive of firm growth in rural Texas counties from 2008–2018. Our results suggest that some factors commonly discussed as promoting entrepreneurship (e.g., access to broadband and patents) may not be as predictive as socioeconomic ones (age distribution, ethnic diversity, social capital, and immigration). We also find that the strength of specific industries (oil, wind, healthcare, and elder/childcare) predicts firm growth, as does the number of local banks. Most factors predictive of firm growth in rural counties are distinct from those in urban counties, supporting the argument that rural entrepreneurship is a distinct phenomenon worthy of distinct focus. More broadly, this multi-model approach can offer initial, focusing guidance to policymakers seeking to address similarly complex policy problems.