Impact of Manufacturing Firms on Rural Development

Transcription

1 Utah State University Economic Research Institute Study Papers Economics and Finance Impact of Manufacturing Firms on Rural Development Rondo A. Christensen Utah State University Kimball R. Humphrey Utah State University Lynn H. Davis Utah State University Follow this and additional works at: Recommended Citation Christensen, Rondo A.; Humphrey, Kimball R.; and Davis, Lynn H., "Impact of Manufacturing Firms on Rural Development" (1978). Economic Research Institute Study Papers. Paper This Article is brought to you for free and open access by the Economics and Finance at It has been accepted for inclusion in Economic Research Institute Study Papers by an authorized administrator of For more information, please contact

2 September 1978 Study Paper 78-8 IMPACT OF MANUFACTURING FIRMS ON RURAL DEVELOPMENT by Rondo A. Christensen Kimball R. Humphrey Lynn H. Davis

3 ~ SUMMARY This publication surrmarizes the results of a study whic h was made to assess trends among manufacturing firms operating in rural Utah and the economic impact that different types of manufacturing f i rms have on rural economies. This information may provide rural development corrmittees and planning groups with additional information to use in their decision making and efforts to encourage new manufacturing firms to locate in their area. The impact of a manufacturing firm can be measured in two ways. One is the propensity to consume locally. A firm that purchases materials and hires labor locally has a greater impact on the l ocal economy than one which imports materials and capital items from outside the local area. The other measure has to do with the proportion of total sales that are made outside the local economy and is referred to as the propensity to sell outside the local area. The greater a firm ' s sales outside the local area, the more new dollars it brings in and the greater purchasing power it gives the local economy. The number of manufacturing firms operating in rural Uta h increased from 320 in 1959 to 392 in 1973, or 23 percent. The greatest increase was in number of textile firms. There were also increases in the number of food, rock, sand and gravel, printing and publishing, transportat ion equipment, machinery, and chemical and petroleum manufactu r ing firms. The number of wood manufacturing firms decreased. Rural manufacturing firms in Utah were effective in bringing outside money into the local as well as the state economy, selling 71 percent of

4 2 their products out of state, and only 11 percent locally and 18 percent in other areas of the state. The propensity to sell outside the local area varied s ~ gnificant1y by type of manufacturing firm. Firms having the greatest propensity to sell outside the local area manufactured machinery, chemicals and petroleum, and textile and wood products and were largest in terms of total sales volume. Firms manufacturing textile products, ~ood, transportation equipment, mahcinery, and chemicals and petroleum all sold more than 95 percent in other areas of the state and out of state, and less than 5 percent locally. Other manufacturing groups in order of per'cent of sales made outside the local economy included l other",92 percent, food,82 percent, rock, sand, and gravel, 74 percent, and printing and publishing, 45 percent. Only printing and publishing firms sold more than half of their products locally. Rural manufacturing firms spent many dollars outside the local area for materials, supplies, and services not locally available. As a group, firms included in the study spent 45 percent of their total outlay for materials, labor, supplies, services, and capital expenditures locally, 24 percent in other parts of the state, and 31 percent out of state. The propensity to spend locally varied significantly by type of manufacturing firm. Firms having the greatest propensity to spend locally were those which bought few semi-finished materials, were labor intensive, and manufactured wood or food products. A majority of the labor and raw materials used by manufacturing firms in rural Utah came from the local area, while semi-finished materials came from urban Utah or out of state. Firms manufacturing wood products spent 55 percent of total expenditures locally, and firms manufacturing food product~ 52 percent. Other

5 3 manufacturing groups in order of their propensity to spend locally included rock, sand and gravel,47 percent, printing and publ ishing, 47 percent, "other",39 percent, textile products, 38 percent, chemicals and petrol eum, 32 percent, machiner~ 28 percent, and transportation equipmen4 19 percent. Rural manufacturing firms made significant contributions to their local economies through their sales and expenditure patterns. The 88 firms in the study took $39 million out of their local economies through local sales. They injected into their local economies through local purchases $148 million, thus returning $4.00 for every $1.00 taken out. Of every $4.00 spent locally, $3.00 were new dollars brought in from outside the area.

6 IMPACT OF MANUFACTURING FIRMS ON RURAL DEVELOPMENT by Rondo A. Christensen,l Kimball R. HumPhrey,2 and Lynn H. Davis l Introduction There exists throughout much of the country, development committees, boards, and commissions at both state and local levels. The primary purpose of these groups is to improve income and employment within their geographic areas. New manufacturing is often thought of as the basic foundation of increased development in a rural area. Attracting new manufacturing firms is one of the main goals and activities of developmental organizations. New firms benefit local economies by spending money for labor, goods, and services. Not all expenditures are made locally, however. Buying activities may occur inside or outside the local area. Purchases from outside the local economy result in imports. When eva l uating the potential impact of alternative firms on a local economy, a primary concern is the propensity of each firm to consume (spend) locally. Obviously, the higher the propensity to consume locally, the greater the local economic activity generated by a firm's expenditures. Utah. 1 Professors, Utah State University, Department of Economics, Logan, 2Former Research Graduate Assistant, Utah State University, Department of Economics, Logan, Utah.

7 2 Expenditures in a local economy by a new manufacturing firm a)~e revenue to the individuals and firms which receive them. A portion of revenues is in turn spent by the individuals and firms in the local economy for goods and services. This cycling effect contin es round after round, diminishing each time by the proportion of expenditur es made outside of the local economy, until the original expenditures dre completely lost to the outside economy. The greater the amount of money flow generated by an initial expenditure after many rounds of spending and respending, the greater the "multiplier" effect and the greater the impact of the initial expenditure. Another important consideration in evaluating the potential impact of alternative firms on a local economy is the source of the dollars they will spend. In some respects, a local economy, like a household, cannot get richer by simply "taking in its own washing" but must sell something to others to get more income. The growth of a local economy is related to the goods and services it produces locally for export. Sales outside the local area represent exports. The payments received constitute potential injections of dollars into the local income stream from outside the area, providing the local economy with additional purchasing power. The greater the propensity for manufacturing firms to sell outside the local area, the greater the contribution they make to the growth and development of the local economy by bringing in new dollars. This study was made to 1) analyze changes in number and types of manufacturing firms operating in rural Utah and 2) analyze their financial impact on Utah's rural economies....;.. m...---

8 3 Only primary monetary impacts were cons idered in t his study. No attempt was made to determine how many times initial expenditures are recycled through the local economy. I.'

9 4 Methodology and Procedures Information concerning number of firms, name, type, and location of all manufacturing firms located in Utah was gathered for the years 1959, 1964, 1968, 1972, and This information was taken mostly from annual issues of the Directory of Utah Manufacturers, published by the Utah Department of Employment Security. There were 392 manufacturing firms operating in rural ~tah in Rural Utah was defined as all counties in the state except Cavis, Salt Lake, Utah, and Weber. Of the 392 firms, personal interviews were conducted with plant managers, accountants, and personnel directors of 196 firms willing to cooperate in the study. Usable questionnaires were completed for 88 firms. The firms responding were quite evenly spaced over the range of different types of manufacturing firms operating in rural Utah. They were grouped into nine categories for purposes of analysis (Table 1). An effort was made to include in the sample all of the larger firms in each group. Thiokol Chemical Corporation's Box Elder County operation was excluded from the study, however, on the basis that it was so large that it was not typical of other firms i n its group. Information was obtained from cooperating firms on sales, operating expenses, and capital expenditures and the percent of each made locally in the state and out of the state. The local area and local economy were usually defined as the county in which the firm was located; in some areas, it also included portions of surrounding counties or states when they were an integral part of the local trading area.

10 5 Table 1. Total number of manufacturing firms, number surveyed" and number of usable responses ~ by tyr>e of firm, rural Utah ~ 19?3. Type of firm Total number of firms Number of firms selected for survey rj umber of usable responses Food products Textile products \4ood products Rock) sand, & gravel products Printing & publishing Transportation equipment t1ac h i nery Chemicals & petroleum Other manufacturing A 11 fi rms

11 6 Trends in Number of Manufacturing Firms Operating in Rural Utah The number of manufacturing firms operating i n rural Utah increased from 320 in 1959 to 392 in 1973, or 22 percent (Table 2). An increase in the number of manufacturing firms doing business within their boundaries has occurred in most rural Utah counties. Between 1959 and 1973, the number of firms increased in 15 counties, decreased in 8, and remained the same in 2. Cache County showed the largest advance in number of firms with an increase of 18 businesses. Washington County also had a significant increase with 17 additional firms. Of nine major types of manufacturing in rural Utah, the number of firms increased in eight between 1959 and 1973 (Table 3). The types of manufacturing increasing the most were those in textile products, rock, sand and gravel, transportation equipment, and printing and publishing. Smaller increases were experienced in chemicals and petroleum, machinery, and food products. The only decrease was in the number of manufacturing firms working with wood products. Their numbers decreased from 106 in 1959 to 68 in Considerable turnover occurs among manufacturing firms operating in rural Utah. An average of 5.6 percent of all firms went out of business each year, and new business starts between 1959 and 1973 amounted to 7.2 percent (Table 4). The types of manufacturing having the highest exit rates included wood products, 10.6 percent, machinery, 10.3 percent, and transportation

12 7 Table 2. Change in number of manufacturi ng firms in rural Uta h, by county, 1959 to County Number of fi rms Change, 1959 to 1973 Number Number Number Beaver Box Elder Cache <3 Carbon Daggett 4 () - 4 Duchesne Emery Garfield Grand I ron Juab I\- Kane r 1i 11 a rd Morgan Piute 2 2 () Rich 3-2 San Juan Sanpete Sevier J Surlmi t Tooele Uintah Wasatch t'jashi ngton ~ 'Jayne All rural counties

13 8 Table 3. Change in number of manufacturing firms in rural Utah, by type of firm, 1959 to Type of firm rjumber of firms Change, 1959 to 1973 Number Number Number Food products Textile products ~Jood products Rock, sand, and gravel products Printing and publishing Transportation equipment '7 t'1achi nery Chemicals and petroleum Other manufacturing All fi rms

14 9 Table 4. Rate of turnover among manufacturing firms in rural Utah, by type of fir8, Type of firm Food products New firms starting business liumber 60 Firms going out of business.average Change per year Entry* Exit# Percent Percent Textile products 35 1 ~ ~~ood products , (). 6 Rock, sand, and gravel products Printing and publishing () 'J Transportation equipment r1a ch i nery Chemicals and petroleum Other manufacturing All firms *Number of new firms starting business between 1959 and 1973 divided by the average number of firms operating in 1959, 1964, 1963, and 1973, X 100. #N umber of firms going out of business between 1959 and 1973 div ided by the average number of firms operating in 1959, 1964, 1968, and 1973, X 100.

15 10 equipmen~ 8.8 percent per year. Manufacturing groups with the highest entry rates included transportation equipmen~ 21.2 percent, machinery, 13.9 percent, and textile products, 12.7 percent per year. The combined entry-exit rate of turnover among rural Utah manufacturing firms was greatest among those manufacturing transportation equipment and machinery. The most stable were printing and publishing firms and those processing food products.

16 11 Propensity to Consume Locally The expenditures a manufacturing firm makes in the local area depends on 1) the total number of dol "lars it spends and 2) the propensity to spend these dollars locally. Expenditures are made for operating costs (raw materials, semi-finished goods, wages, salaries, and other operating expenses) and for land, capital improvements, and equipment. total expenditures during 1973 by the 88 rural manufacturin~1 Average firms included in the study were $3.7 million (Table 5). Of this amount, $0.8 million was for raw materials, $1.5 million for semi-finished goods, $0.5 million for wages and salaries, $0.6 million for other cash operating expenses, and $0.3 million for land and capital items. Food manufacturing firms spent $15.0 million per firm, while printing and publishing firms spent only $0.4 million per firm. Average expenditures by the other types of manufacturing businesses ranged from one to four million dollars. The proportion of total expenditures made up by raw materials, semifinished materials, wages and salaries, other operating expenses, and capital outlays, varied substantially by manufacturing group. Food firms spent a majority of their total dollar outlay for raw materials. For textile, transportation equipment, and machinery manufacturing firms, outlays for semi-processed materials made up about half or more of total expenditures. Wages and salaries as a percent of total expenditures were hig hest for textile and printing and publishing firms who spent about one-third of their total dollar outlay for wages and salaries. 1l0ther" operating

17 12 Table 5. Average operating and capital expenditures, by type of firm, 88 manufacturing firms, rural Utah, OQerating Costs Total Semi- Other Capital operating Raw finished Wages cash Total expend- and cap i tal Type of firm materials materials salaries expenses oj tures expenditures Thousands of do 11 a rs Food 10,540 1, 124 1,205 1,849 14, ,022 Textile , ,268 Wood , ,646 Rock, sand, g ra ve , ,615 Printing, publishing Transportation equipment 0 2, , ,31 7 Machinery 20 1, , ,331 Chemicals, petroleum ,031 2,494 1 ) 093 3,587 Other , All firms 807 1, , ,715 Note: The levels of spending for raw material~ semi-finished materials, wages and salaries, other operating expenses and capital expenditures among the nine manufacturing groups were significantly different at the.01, or higher level. u

18 13 expenses were highest as a percent of total expenditures for rock, sand and gravel, chemical and petroleum, and wood manufacturing firms. Capital outlays as a percent of total expenditures were most important for chemical and petroleum firms--about 30 percent. Wood, rock, sand and gravel, and machinery manufacturing firms spent about one-fifth or l ess on capital outlays. Purchases of materials, labor, suppl ies, and services locally in the county where they were situated, in other parts of the state and out of state, during 1973 by rural Utah manufacturing firms were used as an indication of their propensity to consume (spend) in each of the three areas. These propensities to consume locally, in state (not includ "ng locally), and out of state are shown in Table 6. Together, the 88 firms in the study spent 45.2 percent of total operating and capital expenditures locally, percent in other parts of the state, and 30.9 percent out of state. About 90 percent of wages and salaries were paid locally, 40 percent of expenditures for materials, 36 percent for other operating expenses, and 27 percent for capital expenditures. There was considerable variation in the propensity to consume locally among the different types of manufacturing firms. Some spent a majority of their total outlay for operating expenses and capital pur'chases locally. Others, even though they were situated in rural Utah, spent most of their money elsewhere, mainly urban Utah or out of state. The manufacturing groups, ranked according to the percent of their total expenditures made locally, are as follows: wood, 55 percent; food, 52 percent; rock, sand and gravel, 47 percent; printing and publishing, 47 percent ~ other, 39

19 14 Table 6. Percent of total dollar outlay spent locally, in state, and out-of state, by tyre of firm, 88 manufacturing firms, rural Utah, Type of firm and expenditure Food products s t-.1aterials Wages and salaries Other operating expenses Capital expenditures Total Textile products t1a teri a 1 s l~ages and sa 1 a ri es Other operating expenses Capital expenditures Total Hood products r 1a teri a 1 s Uages and salaries Other operating expenses Capital expenditures Total Rock, sand, and gravel products t1aterials Hages and salaries Other operating expenses Capital expenditures Total Printing and publishing t 1ateri a 1 s Wages and salaries Other operating expenses Capital expenditures Total Transportation equipment t1a teri a 1 s ~.J age san d sal a r i e s Other operating expenses Capital expenditures Total Local Other in state Out of state Percent o ~ ~ o ? ().9 2G () T a 2~ fT

20 15 Table 6. Continued. Type of firn and expenditure Local Other in state Out of state Percent---, r1achi nery ~1a ter i a 1 s Wages and salaries Other operating expenses Capital expend; tures Total '? :1 r17. 0 Chemicals and petroleum Materials Wages and salaries ,0 Other operating expenses Capital expenditures Total g Other r~aterials Hages and salaries 91. () Other operating expenses Capita'! expenditures _ Total /\11 firms ~1a te ri a 1 s Wages and salaries Other operating expenses Capital expenditures Total rjote: The differences in the percent of total operatinq and capital expenditures spent locally,in state and out of state by the nine manu facturing groups were significant at.001 level of confidence. j. 14. Ai

21 16 percent; textile, 38 percent, chemicals and petrol eum, 32 percent; machinery, 28 percent; and transportation equipment, 19 percent. All types of manufacturing firms primarily used local labor. The percent of wages and salaries paid locally ranged from 100 percent for printing and publishing firms to a low of 81 percent for rock, sand and gravel businesses. A majority of materials was purchased outside of the local area. Food, wood, and rock, sand and gravel manufactu r ing firms purchased about half of their materials, mainly raw materials, locally. Chemical and petroleum firms bought only 14 percent locally. Textile firms bought none locally, and the other types of firms bought only small amounts. The percent of other operating costs (supplies, utilities, interest, gas, oil, etc. ) spent locally varied from a high of 57 perce t by printing and publishing firms to a low of 29 percent for chemical and petroleum businesses. The percent of capital outlays spent locally varied more. It ranged from a high of 62 percent for textile firms to a low of 11 percent for transportation equipment businesses. Textile firms bought almost all of their materials (mainly cloth) from out of state sources. Transportation, machinery, and chemical and petroleum manufacturing firms also bought a majority of their raw and semi-finished materials from out of state. Many rural Utah manufacturing firms bought most or at least part of their materials, supplies, and services from suppliers located in other counties of the state, especially along the more urban and industrialized Wasatch Front.

22 17 Propensity to Sell Outside the Local Area The new dollars a manufacturing firm brings into a local economy from outside of the area depends on 1) its total sales volume and 2) the percent of sales made outside of the local area. Other things being equal, the larger the percent of sales made outside of the local economy, the more new dollars (purchasing power) it provides the local economy. Average sales per firm included in the study were $3.9 million in 1973 (Table 7). Of these sales, 11.3 percent were in the counties where the firms were located, 18.1 percent in other counties of the state, and TO.6 percent out of state. Total sales and the propensity to sell outside the local area varied substantially by type of manufacturing firm. Food manufacturing firms were the largest in terms of sales, $16.9 million per firm compar~d with less than $4.0 million for other types of firms. The propensity to sellout of state was high for all groups except printing and putlishing firms and rock, sand, and gravel businesses. Out of state sales were extremely high for textile and machinery firms, 95.8 and 93.0 percent, respectively. Next were "other" firms with 88.1 percent and chemical and petroleum firms with 86.1 percent: Out of state sales amounted to 77.3 percent of sales for wood manufacturing firms, 73.1 percent for food firms, and 72.8 for transportation firms. Only printing and publishing and rock, sand and gravel businesses sold less than half of their sales out of state. Printing and publishing firms made about 55 percent of their sales within the local area where they were located and were the only

23 18 Tab 1 e 7. A v era g e sal e s per firm and per c e n t of sal e s mad e 1 0 cally ins tat e, and out of state, by type of firm, 88 manufacturing firms, rural Utah, Type of firm Average sales Sales distribution per firm Local Other in state Out of state Thousand dollars Percent Food 16, Textile 1, Hood 1, Rock, sand, g ra ve 1 2, Printing, publishing Transportation equi pr.lent 3, f1achi nery 2, ') Cherlicals, petroleum 2,856 L Other 1, All fi rms 3, Hote: Differences in sales among the nine manufacturing groups were significant at the.001 level of confidenca Differences in percent of sales locally were significant at the.05 level, in state at the.10 level, and out of state at the.001 level.

24 19 manufacturing group selling a majority locally. Rock, sand and gravel firms sold 25.9 percent locally, food firms, 11.6 percent, and liother ll firms, 7.7 percent. For all other groups, local sales were less than 5 percent of total sales.