Regional Update (July-September 1996)

Index The state of the states Southeastern manufacturing survey Views from the region Southeastern economic indicators

Cover Story - Full Speed Ahead for the Southeast's Maritime Industry

Have Taxes Contributed to the South's Economic Rise?

The Southeast's Economy Claims Its Olympic Prize

The Growing Symbiosis in Southeastern Business

The growing symbiosis in
southeastern business

The roles small and large firms play in the regional economy are changing. Today, small businesses in the Southeast are increasingly focusing on providing specialized services to large corporations, writes David Avery, economic analyst at the Federal Reserve Bank of Atlanta.

he hoopla generated by the likes of Mercedes Benz and BMW locating in the Southeast, coupled with mergers of some of the region's leading corporations (such as Lockheed Martin), paint a rosy picture of big business in the region. But big business is not the only story. Small business, it seems, is playing an increasingly important role in the southeast's economy. This success appears at least partly based on the "symbiosis" occurring among the region's small and large firms.

Large producers increasingly team with small firms

One of the factors contributing to this symbiosis is the changing nature of large firms. The result: many small companies are now providing essential services for producers of all sizes that were tasks formerly completed by in-house staff. In essence, small business appears to be refocusing and reaping (through specialization) the benefits of corporate "downsizing" and other efficiency measures taken by larger firms.

The range of services offered by small firms mirrors these developments. Administration of employee benefit plans, engineering, design, computer programming, equipment rental and leasing, advertising, and employee relocation are service sectors in which around 80 percent of the firms can be categorized as small businesses employing less than 500 workers. And unsurprisingly, business service employment in these small firms is growing rapidly—up by approximately 85 percent between 1985 and 1995, compared with 18 percent growth for nonfarm employment excluding business services, according to the U.S. Bureau of Labor Statistics.

National reflection in the Southeast

The Small Business Administration calculates that in 1990, 57 percent of national employment was attributed to firms with fewer than 500 employees. The Southeast virtually mirrored the nation with 56 percent. Also, each of the individual states in the Southeast had more than 50 percent employment in firms with fewer than 500 employees.

Small businesses dominate several industrial sectors in the Southeast. For example, in construction, over 90 percent of regional firms employ fewer than 500 employees. More than 85 percent of agricultural workers, and about 57 percent of both trade and service workers, are employed by firms in the region with less than 500 workers, according to the Federal Reserve Bank of Atlanta computations from Small Business Administration data.

In 1990, the top three states—in terms of small business as a share of total employment—were Louisiana, Florida, and Mississippi. Each state recorded approximately 60 percent employment in small firms, with comparatively low shares in manufacturing and high shares in the service sector, according to the Small Business Administration.

The latest U.S. Department of Commerce County Business Patterns data show that business service employment in the Southeast surged between 1980 to 1993, up 145 percent, compared with 95 percent for the nation as a whole. Available Bureau of Labor Statistics data show that regional business service employment has expanded further since 1993, up by 33 percent in Florida, 29 percent in Georgia, 15 percent in Louisiana, and 18 percent in Tennessee as of 1995. Business services now account for 24 percent of the Southeast's service industries employment, while service industries employ 28 percent of the region's work force.

Table - Small Business and Employment Concentration by State and Region Even though overall growth in manufacturing employment in the Southeast has been sluggish (up 8 percent between 1980 and 1995 according to data from the U.S. Bureau of Labor Statistics), anecdotal evidence suggests that in some cases some small business suppliers took up the slack. The automotive industry in the Southeast offers a good example of this trend. Small suppliers to the industry (one of the most visible and capital intensive in large-scale manufacturing) continue to locate in the region and expand in number.

The automotive industry drives small business development

Today 80 manufacturers of original automobile components, employing a total of about 16,500 people, are located in Georgia. Tellingly, almost all are small businesses—only eight employ more than 500 workers and only a few are subsidiaries of larger producers. Georgia Department of Industry, Trade, and Tourism data also shows that the state has 62 automobile aftermarket parts manufacturers, mostly relatively small firms employing around 6,800 workers in total.

But Georgia is only part of the story. A significant number of small suppliers are building facilities in Alabama to meet the requirements of Mercedes' "just-in-time" and "sequenced" manufacturing processes. Small suppliers to the Saturn and Nissan plants in Tennessee are also boosting the small business community there. The state is now home to over 480 components suppliers, spurred on by Tennessee's 1993 third-place ranking behind Michigan and Ohio in automobile manufacturing (Tennessee, 514,192 autos; Michigan, 1,937,430 autos; Ohio, 954,298 autos, according to Tennessee's Department of Economic and Community Development).

Small business set to broaden role

Small business has important implications for employment. Outsourcing by businesses of all sizes has generated important job growth in the business services sector. However, large firms should remain an integral part of the Southeast's economy and will, in all likelihood, continue to develop and expand their symbiotic relationship with small business.