Midsize and large firms boost small business growth in U.S. labor markets

A new study published in Economies has identified the structure of local business ecosystems, specifically the distribution of firm sizes and sectoral composition, as critical factors influencing the capacity for regional economic growth in the United States. The study titled “Unlocking Regional Economic Growth: How Industry Sector and Mesoeconomic Determinants Influence Small Firm Scaling” presents a comprehensive analysis of how mesoeconomic variables shape the expansion potential of small firms across 383 U.S. labor market areas.

Conducted by Omar S. López from Texas State University, the study moves beyond micro- and macroeconomic models by focusing on the mesoeconomic layer, defined as the interaction between local socio-economic infrastructure and business composition. Using 2022 cross-sectional data and a log-linear regression model, the study analyzes how the density of micro, midsize, and large firms correlates with the share of scaled firms (those employing 5–99 workers) in different industry sectors, while controlling for factors like education, wealth, unemployment, diversity, and metro classification.

How does the firm composition influence small business scaling?

The study highlights a concept called “scaled firms,” a category defined as small businesses that have successfully grown beyond the micro-enterprise stage but have not yet become large corporations. These scaled firms play a disproportionately large role in employment creation, innovation, and regional supply chain diversification.

The findings reveal that regions with a higher density of midsize and large firms tend to support greater prevalence of scaled small firms. The presence of larger enterprises appears to create synergistic environments that foster business-to-business opportunities, mentorship networks, and labor market fluidity, all of which are conducive to small business growth.

Importantly, the study also finds that a high concentration of micro firms without an accompanying presence of midsize or large firms correlates with lower rates of small firm scaling. This imbalance often results in stagnated local economies with limited upward mobility for businesses and workers. Therefore, a diversified firm size distribution emerges as a key structural determinant of regional growth potential.

The data support the idea that the firm size spectrum, rather than any single category, must be balanced to enable upward scaling within local business ecosystems. This insight calls for a shift in regional development policy from isolated small business support to more holistic approaches that encourage layered growth across sectors and firm sizes.

What socioeconomic factors affect scaling capacity?

In addition to firm composition, the study evaluates a series of socio-demographic and geographic indicators. High levels of educational attainment and household wealth were both positively correlated with the prevalence of scaled firms. These findings suggest that human capital and financial capital are critical enablers for growth-oriented small firms.

Moreover, regions with lower unemployment rates and higher ethnic diversity exhibited stronger scaling dynamics. The researcher interprets this as evidence that inclusive and vibrant labor markets facilitate small business growth by offering both demand-side and supply-side advantages. Workers with varied backgrounds contribute to broader skillsets and innovation, while lower unemployment boosts consumer demand and talent retention.

Interestingly, the metropolitan classification also had a significant influence. Micropolitan regions, which are less densely populated than major metropolitan areas but more economically complex than rural zones, were particularly conducive to scaling. This suggests that small and midsize cities may offer optimal conditions for business expansion, benefiting from localized networks and lower operating costs, without the oversaturation and competition found in megacities.

Taken together, these mesoeconomic conditions represent a nuanced landscape where economic potential is not merely a function of individual entrepreneurship or national policy but is also deeply embedded in local structures.

What should policymakers do to stimulate small firm scaling?

Based on the empirical evidence, the study offers clear policy recommendations. Foremost among them is the need to nurture diverse firm ecosystems that include not just start-ups and microenterprises but also midsize and anchor firms that serve as growth catalysts. Economic development programs should prioritize strategies that strengthen inter-firm linkages, particularly between large corporations and small suppliers.

Secondly, investments in human capital, through education, workforce training, and upskilling, are critical. These strategies enhance the adaptability and growth-readiness of small firms while also improving labor productivity. The research also recommends that local governments support inclusive economic planning that reflects regional demographic realities, tapping into the potential of historically underrepresented communities.

Another key recommendation involves revisiting how small business assistance is structured. Rather than focusing solely on initial start-up support, governments should establish programs targeting the transition phase from micro to scaled firm. This includes access to scale-up capital, expansion mentoring, and procurement preference policies that prioritize growing small businesses.

Finally, the study emphasizes the role of mesoeconomic diagnostics in regional planning. Policymakers are encouraged to adopt data-driven approaches that assess local firm structure, labor market composition, and infrastructure readiness. These diagnostics can guide customized development strategies tailored to the unique scaling barriers and opportunities in each labor market area.