(MONEY Magazine) – YOU PROBABLY KNOW BOISE AS THE AMERICAN POTATO CAPITAL. NOW AN exclusive MONEY study shows that the Idaho city is also the best place in the country for starting or running a small business. Surprised? Don't be. The Boise area registered overall employment growth of 27% in the five years to 1993, three times the national rate. And small-company profits climbed even faster during that period. In Boise and its suburbs, the average annual income of proprietorships, a bellwether for small-business fortunes in general, shot up 65%, to $19,711. That's more than twice the national growth rate of 31% and well above the national average of $15,212. Boise's ascendence in our ranking is even less surprising when you consider that western cities in general fared extremely well. Overall, 11 of our top 20 places for entrepreneurs lie west of the Continental Divide (see the table on pages 130 and 131). So do four of the top five, including No. 2, Bellingham, Wash., No. 4, Las Vegas, and No. 5, Reno. (And we're not counting No. 3, Honolulu, which lies too far west to qualify as part of the American West.) Taken together, these results are a virtual road map to higher profits for men and women seeking to start, relocate or expand a business. But even for entrepreneurs who aren't ready to move west, our findings serve an important purpose: They help identify the broad characteristics that make an area anywhere in the country desirable for small companies. After all, the fortunes of your location have a lot to do with your success. Says Nancy Pechloff, managing director of Arthur Andersen's Enterprise Group consulting service: "Small businesses, even more than large businesses, ride the local economic tide. A rising tide can lift their boats, but a falling tide can beach them." That's why we went beyond compiling our list by talking to more than 50 experts -- ranging from economists and consultants to local business leaders in our winning cities -- to pinpoint five important characteristics that make an economy favorable for small firms. Those characteristics are described later in this article. Our hope is that by understanding them you will be better able to evaluate the resources available in your own area and make more profitable use of them. Why did the West do so well? Simple. Western cities led in nearly all of the more than a dozen factors we studied, ranging from employment growth to gains in the number of small businesses to the education level of the local work force. "The economic center of gravity of the U.S. has been moving west since the mid-'80s," says Philip Burgess, president of the Center for the New West, a Denver public policy think tank. Boise, a picturesque, outdoorsy community of 365,300 (including residents of Ada and five adjacent counties), won because it was a consistently high performer in most categories. But that's not news to the businesspeople who live there. "Boise's been kind of like a Garden of Eden for us," says Jim Thompson, chief executive officer of $13 million Ecco, one of many local success stories. Ecco, established in 1972, makes those alarms that beep loudly when trucks and other heavy machinery back up. And thanks to savvy marketing and innovative products -- such as an alarm that automatically gets louder when the decibel level of any background noise goes up -- Ecco has captured some 40% of this classic niche market worldwide. (Another Boise firm, Preco, holds 50%.) "With the Boise airport just three minutes away, we can ship relatively inexpensively to customers in six foreign countries," says Thompson. "And we manage to attract a lot of smart employees without too much trouble, because Boise is a great place to live and it's the biggest city for 300 miles in any direction." To identify Boise and the 19 other premier entrepreneurial hotbeds, we sought help from the Corporation for Enterprise Development (CFED), a nonprofit economic research and public policy firm in Washington, D.C. The CFED started by dividing the nation into 779 commuting zones based on the actual routes people most commonly travel between home and work. "We chose commuting zones because they give a more accurate picture of regional economic activity than political boundaries, such as city, county or even state lines," says Daphne Clones, a senior policy analyst who supervised the research project. In fact, many commuting zones cover parts of several states; Charlotte, N.C. (No. 14), for instance, includes areas of North and South Carolina; the Spokane region (No. 19) covers counties in both Washington and Idaho. Clones and her staff then ranked the places using more than a dozen different kinds of data, including job earnings, employment growth, the availability of capital and the presence of an educated work force. The results, and some of the data that went into them, are shown in our table. Finally, to help you understand the trends behind the raw numbers, we asked small-business experts to discuss the economic, political and social characteristics that make places like these great. With their aid, we came up with the following five factors that are common to many of our winning cities and that contribute substantially to an area's entrepreneurial vitality:

A vigorous local economy based on diverse industries

SOMETIMES, THE SUCCESS of a single local enterprise can boost an entire area's economy. In our ranking, for example, Las Vegas (No. 4) and Reno (No. 5) benefited from their casinos' profits, up 41% since 1988. An influx of money like that trickles down to the local economy through wages to casino employees and through payments to firms that serve the gambling palaces and their customers. The result? Las Vegas has enjoyed an entrepreneurial boom, with the number of proprietorships growing nearly 50% since 1988. That is the largest increase among any of our winning cities. Proprietorship earnings have climbed too, by almost 70% to $22,436, or some 47% above the national average. Talk about being dealt a winning hand. In the long run, though, the most stable economies are those built upon a number of different industries so that a downturn in one may be offset by gains in another. In Houston, for example, entrepreneurship was once synonymous with hard-charging oil and gas wildcatters. Since that industry collapsed in the mid-1980s, however, many other types of businesses have , sprung up. Among them are more than 60 biotech firms, many loosely associated with giant Texas Medical Center, which spends some $350 million a year on medical research. So even though the oil and gas business has stabilized, the biotech firms and other new industries contributed to Houston/Galveston's placing sixth on our list. Major corporations can also help to bolster local economies. The Boise area boasts a number of such firms, including a branch of computer maker Hewlett- Packard (annual revenues of $22.6 billion) and the headquarters of Micron Technology, a $1.4-billion-a-year manufacturer of semiconductors. Among the many small firms that profit from supplying those behemoths is Richard Cortez's Metalcraft Inc. Says Cortez, a former H-P manager who retired at age 51 in 1986 to found Metalcraft: "When I started out, I looked at the larger businesses in town and thought, 'I should be able to make a go of it here.'" And indeed, after surviving a rocky first year, the company has grown to employ 38 people on revenues approaching $2 million a year. Nearly 60% of Metalcraft's business derives from sales of carts, cabinets and metal goods to H-P, Micron and two other local corporations.

An educated work force

ANOTHER ESSENTIAL INGREDIENT of entrepreneurial success is access to smart, educated workers. It's no coincidence that software giant Microsoft (revenues of $4.6 billion) grew up in Redmond, Wash., within an hour's drive of 34 local colleges and universities, including the 25,000-student University of Washington at Seattle. In fact, the Seattle/Tacoma area had the best-educated work force of any place we surveyed, a factor that helped earn it the No. 7 spot in our ranking. Some 65% of area residents have finished at least one year of college, compared with a national average of only 45%. And just 4.6%, the lowest number among our cities, failed to complete the eighth grade. In addition to turning out educated workers, colleges can help spawn companies. "Universities are incubators for the kind of creative thinkers who found new businesses," says Arthur Andersen's Pechloff. Take the case of Eric Heilborn. He was still a small-business student at Western Washington University in Bellingham when he was first bitten by the entrepreneurial bug six years ago. Heilborn and various partners spent two years and $80,000 trying -- unsuccessfully, as it turned out -- to make products such as the perfect ergonomic office chair and the ideal line of sports clothing. Not until 1990 did Heilborn hit on the idea that clicked -- sturdy, attractive dog beds. Today his company, Apogee Industries, employs 20 people and earns gross revenues of $640,000 a year.

An abundance of the two Cs: cash and construction

SINCE ACCESS TO CASH is crucial to a business' success, entrepreneurial hot spots usually also have lots of venture-capital firms, special government loan programs and banks eager to lend. There is no way to measure the volume of such loans directly; they come from too many sources, and the loan amounts, especially with private capital, are often confidential. So we measured the growth of per capita local bank deposits, an excellent proxy for loan activity, since it indicates how much cash is available to banks for lending. Honolulu, for example, has benefited from an influx of Asian capital in recent years -- in part from wealthy Hong Kong residents nervous about the Chinese Communists' takeover of the colony in 1997. As a result, per capita bank deposits in Honolulu have risen to $22,207, almost double the U.S. average of $11,843 and tops among the cities in our chart. The result has been a boom in construction -- the other important C -- that provides local jobs, wages and tax revenues and also ensures a ready supply of affordable commercial real estate. In the five years to 1993, real estate developers have plowed $2.9 billion into nonresidential construction in Honolulu, including warehouses, factories, stores and office space. That's $303 million more than in the previous five-year period, an astounding 2,196 times the $138,000 average increase for the areas in our study. The island's accelJerating real estate boom also has greatly outpaced the rise in nonresidential real estate investment in the other top scorers on our list, Seattle/Tacoma, up $177 million in five years, and Portland, Ore./Vancouver, Wash. (No. 17), up $131 million. In Boise, rapid business growth is keeping contractor Greg Baumgart, 51, working harder than he sometimes likes. His 19-person company, Baumgart Construction, has built six houses in the past year, twice as many as in 1993, including ones for some of the area's top executives. He also counts McDonald's among his corporate clients, having built 10 new restaurants for the fast-food king and remodeled 10 others. This year, Baumgart's revenues will top $10 million, nearly double the amount that his company grossed just five years ago. "We've made every mistake we could have over the past 20 + years, but we've still managed to come out okay," says a modest Baumgart.

A great transportation network

JUST AS A READY SUPPLY of cash can help a small company grow, easy access to transportation can help make a small city seem big. Few people outside the state of Washington have heard of tiny Bellingham, for instance. The city and surrounding county are home to only 137,900 people. Yet thanks to its location along busy Interstate 5, Bellingham is within a day's drive of 9 million U.S. consumers and another 1 million in Canada (the border is just 30 minutes away). That has helped Geographics, a $7-million-a-year office-supplies manufacturer, quadruple its profits since 1981. From its headquarters in nearby Blaine, Wash., a border town with one stoplight and a stunning view of Mount Baker, Geographics ships designer paper products to customers worldwide, mostly by truck but occasionally by air through nearby Bellingham International Airport to overseas buyers. "We may be located in a small town," says chairman Ronald Deans, 61, "but that doesn't mean we can't be a global competitor." Proximity to a border has also helped Laredo, Texas, our No. 18 city. Although the region's population is only 163,400, Laredo is the largest U.S. inland port, thanks to its location on the Rio Grande. And across the river, of course, is Mexico, with 90 million consumers and an economy growing 4% annually. Already, nearly half of U.S. trade with Mexico passes through Laredo. And that volume is likely to grow sharply because of the North American Free Trade Agreement. These advantages have helped average proprietorship earnings in Laredo to double in the past five years to $19,873 -- three times the average growth rate nationwide. Not only is small size no handicap for cities like Bellingham and Laredo, it actually may be an advantage. Smaller towns generally pose fewer bureaucratic obstacles for business owners who are seeking building permits, zoning variances and the like. And city leaders are often uniquely accessible. As Boise mayor Brent Coles explains: "Every time I stop at Nick's Shoe Store to get a shine, businesspeople wander over and give me an earful of ideas."

A good quality of life

WHAT WOULD YOU DO if, by moving your company to another community, you could improve your neighborhood, your kids' schools and your profits? Answer: You'd move, of course. That's the type of no-brainer that is increasingly spurring / businesspeople to set up shop in countrified places where life is cleaner, saner and less congested than in big cities. And entrepreneurs who make the move often find that their businesses benefit as much as their lifestyles. Among the reasons: Pleasant surroundings tend to attract a better-educated work force; employees are more productive if their lives are less hectic; less congestion often means lower costs for rent, utilities and other operating expenses; and business owners sometimes find it easier to be creative in a friendly, low-pressure environment. Those facts may help explain why 98% of the businesses in a city like Spokane have 100 or fewer employees. "People move here to escape congestion and pay less for land, utilities and other business costs," says Meri Berberet of the Spokane Economic Development Council. Such locales also attract affluent professionals -- lawyers, consultants, architects and the like -- who could work almost anywhere but prefer a place where the living is good. Burgess of the Center for the New West calls them lone eagles. "A lone eagle can set up shop in a small town and bring in $150,000 a year on average," he says. "You get 10 of these folks in a small area and they give a healthy boost to the local economy." Finally, a good natural environment opens opportunities for firms that cater to vacationers or those seeking recreation. That's how Intermountain Outdoor Sports, the largest retailer of its kind in the Boise area, has prospered. The 18-year-old store, which employs 65 people, is completing a 60,000-square-foot superstore that will be Idaho's largest. And annual revenues have tripled in five years to more than $5 million. "We've grown up here," says Gerry Sweet, 37, general manager at the store that was founded by his parents and is now run by Sweet and his two brothers. "And I wouldn't want to live anywhere else, for lifestyle or for business." Boise would also be a great place to vacation, Sweet notes -- if he could ever take some time off.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: How our 20 best places compare To be a success, go west to a medium-size metropolitan area. Fourteen of our 20 spots lie west of the Mississippi; most have fewer than 1 million people.