Musings on Entrepreneurship and Innovation
Saturday, October 16, 2004Ranking Entrepreneurial Environments
Beware of policy prescriptions that are generalizations of "most important factor" analyses.
From Business Opportunities Weblog comes a posting titled Small Business Survival Index 2004 Rates the States. This particular index focuses on tax, workers' compensation, and regulatory cost metrics. Undoubtedly, these are important, and possibly critical factors, to many small and entrepreneurial businesses. However, the implication that these factors are, in general, critical to a robust entrepreneurial environment can be misleading.
For example, take my home state of Montana. According to this index, Montana is ranked #38, making it one of the "most anti-entrepreneurial environments" in the country. I would be the first to agree that there is plenty of room for improvement here, but there is compelling evidence to suggest that entrepreneurship not only survives here, but is thriving.
Stephan Weiler, an economist at the Federal Reserve Bank in Kansas City, presents data that doesn't seem consistent with Montana's portrayal as being anti-entrepreneurial. For example, the breadth of entrepreneurship in the state is unusually high. Studies referenced by Weiler in a recent presentation conclude that Montana ranks #1 in entrepreneurial and small business participation rates, and the micropolitan areas of Missoula and Bozeman rank 9th and 12th, respectively, in terms of business formation rates. Weiler's map of the breadth of entrepreneurship across the state shows that the ratio of proprietorships to total employment in Montana is consistently higher than the national average:
In terms of depth of entrepreneurship, Montana is still, somewhat more surprisingly, above average. As measured by the income of its proprietors, Montana ranks just above the middle of the pack at #21. Weiler's work shows that this is a function of a few counties in the state where proprietor income is significantly above the national average:
From the perspective of value added, the depth of entrepreneurship in Montana looks even more favorable:
So how does higher than average breadth and depth of entrepreneurship measured in these ways square with purportedly having "one of the worst anti-entrepreneurial environments" in the country? The conclusions I come to are:
- The relative importance of the factors that influence entrepreneurial success are a function of context.
- Given the preceding, be wary of "most important factor" policy prescriptions.
I'm pretty sure that the reason that we in Montana are prone to start our own businesses is that there are few alternatives to self-employment. The desire to survive here trumps a relatively unfavorable tax and regulatory environment.
Related: Small Business Survival Index 2004 (PDF)
