Subscribe to Inc. magazine

A Report On The States

INC.'s second annual study rates 50 small business climates.
Advertisement

If your company's history is anything like that of most small companies, where it is located -- be it Palo Alto, Calif., or Portland, Maine -- has nothing to do with any carefully drawn corporate plan. Instead, you put the business where you were raised, attended school, or simply wanted to live. Presumably, the area had much of what you wanted of the myriad things that influence "quality of life." Perhaps there was good skiing, music, or a major university within easy reach. Or you may have wanted to be near people in similar vocations, which may be why so many high-technology companies grew or are expanding in California's Silicon Valley and along Boston's Route 128.

Although state officials everywhere wish they could do more to spawn and keep growth-oriented companies, all too often they find that it is hard enough to define the amenities that attract small businesspeople without trying to influence a decision to set up business. But apart from the intangibles in appraising a business climate, there are factors that are both more concrete and, to some extent, within a state's control.

As companies grow, for example, they may need long-term debt and equity, in addition to working capital. They may also need to hire employees who have specialized skills. A company's inability to find such fundamental resources when they are needed can greatly influence its success, and it can also dampen the growth of the economy within the state.

The purpose of INC.'s second report on the states is to compare some of the major, quantifiable aspects of the climate for small business, to help businesspeople and state officials understand better how to make improvements. In selecting the critera for measuring the 50 states as homes for smaller companies, INC. interviewed economists, state development officials, venture capitalists and small business executives. INC. also talked with special liaison people appointed by governors to gather information on small business support programs in every state.

The analysis focused on areas of broad concern to all small companies, rather than such factors as transportation and energy, important as these may be to some bnsinesses. Since all small business operators have capital and labor needs and are affected by taxes, we looked at the impact of those three factors on small companies. Growth opportunities in a particular envi -- ronment are also influenced -- sometimes heavily -- by external economic and busi -- ness factors These factors, therefore, are reflected through a number of criteria under the heading of business activity.

Finally, we examined each state for small business support programs initiated at the executive or legislative level. The mere existence of official support does not guarantee that significant numbers of small companies are being helped. However, support for innovative programs and a strong commitment to small business at high levels can be enormously useful. Through special programs, a state can leverage its existing capital and labor resources to the benefit of small businesses. State support can also soften the effects of a declining economy.

INC. ranked the 50 states in five categories. Each category -- capital, labor, taxes, business activity, and state support -- was weighted to reflect its relative importance to small companies. The scoring system was based on a scale of 100 points. Because most of the experts we spoke with considered capital resources and state support the two most critical factors, each was given 25 points. Taxes, while always an area of real concern, received only 10 points, the lowest weighting, since taxes rarely play more than a minor role in the investment decisions of small companies. Labor and business activity were each weighted at 20 points to reflect their broad significance to smaller companies. Calculated by this method, the overall scores range from 82 for Texas to 33 for West Virginia.

Texas achieved the top overall ranking with an unbeatable combination of strong capital resources, an effective labor force, and a low tax burden. But it was further aided by a high level of business activity within the state and official support for small business. California and Colorado, with higher tax rates than Texas, placed second and third, respectively, largely because of their strength in capital and labor. Each also received a very helpful boost from a robust economy.

Fourth-ranking Florida scored very favorably in labor, taxes, business activity, and small business support, but appeared in the bottom 10 for capital resources. For the other states scoring low in capital, such as West Virginia and Delaware, the impact on the overall ranking was often devastating. They did not compensate as well as Florida did with strengths in other areas.

West Virginia, for example, ranked 50th overall and scored weakly on labor and business activity and only average in taxes and small business support. Its ranking of 49th in capital resources -- low lending activity compared with bank assets -- compounds its weakness in other areas. Delaware, although somewhat stronger than West Virginia in labor and business activity, also suffers from its poor showing in capital. It ranks last in the capital category and 49th overall. In fact, four of the five lowess-ranking states on the summary table (West Virginia, Delaware, South Carolina, and Alabama) are the weakest four states for capital resources. The fifth state, Maine, ranks 48th overall and also suffers in terms of capital.

The influence of other categories, while important, proved less decisive in a state's ranking. Although 7 of the top 10 states had very favorable climates for labor -- only Oregon, Oklahoma, and Washington did not -- poor performers in labor (reflecting such factors as high levels of wages, low level of education, and the strong presence of organized labor) did not automatically suffer in the overall rankings. In fact, only three states scoring low in labor -- Indiana, West Virginia, and Alabama -- appeared in the bottom 10 overall. Other high-wage and highly unionized states, sucb as Ohio, Illinois, Michigan, and Pennsylvania, ranked higher because of stronger showings in other areas.

At first glance, Indiana's rank of 42 seems surprisingly weak in relation to such midwestern neighbors as Illinois and Michigan. While none of these states ranks very favorably in terms of labor or business activity -- measures by which Illinois ranks at the very bottom -- Indiana distinguishes itself by having the lowest taxes (per $1,000 of personal income) in the nation, while Illinois and Michigan fall in the middle.

Nevertheless, Indiana parts company from Illinois and Michigan in small business support activities. Unlike Michigan, for example, Indiana has neither a small business assistance office nor a governor's advisory council on small business. It also lacks a legislative committee devoted to small business matters, as Illinois and 11 other states have had and as 9 states have now added. To Indiana's credit, though, its officials have recently shown an interest in bolstering small business capital resource through the state's new Corporation for Innovation Development (see page 100).

A careful examination of the accompanying table shows that even states that appear quite similar can differ dramatically. But the most useful discovery may be that each of the 50 states has its own set of strengths The Midwest and the New England states, for instance, are clearly not seeing the same heady growth as Texas and California. But both regions can become vibrant areas for small companies.

Increasingly, states concerned about the future are examining their support programs as the most obvious way of upgrading their climate for small business. Delaware, for example, made notable strides in the past year when it created four support vehicles -- an advisory council, a legislative committee, an assistance office, and a program requiring the state to purchase goods and services from small companies.

Such programs can be extremely valuable for bringing awareness and help to small companies. But for states facing difficult economic times and declining industries, the future may require more specialized programs in the areas of capital resources, job training, and technical assistance -- all aimed at broadening opportunities for small businesses.

In the past, several states targeted most of their initiatives at existing companies, through efforts such as technical assistance programs in conjunction with universities. But increasingly, some states -- Pennsylvania, Georgia, and New York, for example -- appear to be highlighting new companies as the important thrust in their economic development efforts. Each of these states is directing money into supporting technology-based start-ups, with technical universities playing key roles (see page 100). Notes Roger Vaughan, a consultant at the Council of State Planning Agencies in Washington D.C., and former deputy planning director of New York: "States interested in distinguishing themselves will have to do a lot more in helping new businesses come about."

Just as important to the small business climates of many states, though, may be how well the capital and labor needs of growing companies can be met. A growing number of states are considering such measures as the revamping of investment guidelines on public employee pension funds and increasing the outlays for technical education. Through its new Technology Park Corp., for instance, Massachusetts is putting up $20 million for a center co-funded by industry in order to train engineers and other technical specialists in microelectronics.

Some experts are convinced that every state will need to help reshape its work force to accommodate businesses. During the next decade companies are going to need a great many technically competent workers for seemingly nontechnical jobs, according to a number of authorities on small business.

It may not be easy for public officials to think about helping small business in such ways, especially in the Midwest and the South, where the emphasis has long been on big companies and large manufacturing plants. "Politicians don't have to learn how to wave 1,000 jobs around," says Alexander Dingee, president of Venture Founders Corp., a Waltham, Mass., company specializing in assistance to start-up companies. "But it's a lot harder for them to make election-year claims about how they've helped small companies."

RATING THE STATES BASED ON FIVE MAJOR FACTORS

CAPITAL RESOURCES

Comm./ind SBIC

Bank loans finan. per State

loans

Rank/state %assets per capita 1,000 pop. programs<1>

Median 53.5% $927 $0.8 -

1. Texas 54.8% $2,527 $3.9 DL

2. California 64.7 1,468 3.2 DL,LG

3. Colorado 57.9 1,262 3.1 -

4. Florida 49.5 598 1.2 -

5. New Hampshire 63.2 588 1.8 LG

6. Kansas 48.4 1,082 1.4 -

7. Arizona 62.6 888 0.6 -

8. Oregon 58.8 1,112 1.8 DL

9. Oklahoma 52.8 1,921 1.2 DL

10. Washinton 58.9 1,382 0.9 -

11. New Mexico 52.7 1,043 2.3 -

12. New York 54.4 4,164 2.2 DL,LG,BG

13. Kentucky 49.2 773 1.0 DL,BG

14, North Dakota 50.1 1,245 - BG

15. Connecticut 59.7 857 5.1 DL,LG,VC

16. Virginia 60.0 718 0.9 -

17. Nevada 59.5 738 0.3 LG

18. Massachusetts 50.0 1,213 2.1 DL,BG,VC

19. Minnesota 54.5 1,430 2.7 DL

20. New Jersey 53.1 765 0.9 DL,LG,BG

21. Utah 56.5 838 0.1 -

22. Arkansas 52.1 946 0.2 BG

23. Georgia 52.8 683 1.0 -

24. Tennessee 51.9 908 0.5 -

25. Wyoming 53.4 1,541 2.6 -

26. Mississippi 50.6 639 0.8 LG

27. Montana 55.1 1,176 1.2 -

28. Maryland 57.1 555 0.3 DL,LG,BG

29. Missouri 47.4 1,112 0.1 BG

30. Ohio 50.4 757 0.6 DL,LG

31. Rhode Island 55.0 1,426 0.4 DL,LG,BG

32. Idaho 55.8 944 3.5 -

33. Illinois 58.7 2,841 0.7 DL

34. North Carolina 51.4 804 0.5 -

35. Wisconsion 55.8 853 0.6 DL

36. Michigan 54.3 909 0.7 DL

37. Pennsylvania 53.5 1,365 0.5 DL

38. Vermont 66.3 712 1.3 DL,LG

39. Hawaii 60.6 992 0.1 DL

40. Iowa 48.6 854 0.1 DL

41. South Dakota 67.5 1,039 1.5 -

42. Indiana 51.4 726 0.3 DL,LG,VC

43. nebraska 50.6 965 0.2 -

44. Louisiana 52.2 1,231 1.6 DL,LG

45. Alaska 45.0 978 0.2 DL,BG,VC

46. Alabama 48.7 664 0.7 -

47. South Carolina 48.2 361 0.6 -

48. Maine 54.1 502 0.5 DL,LG

49. Delaware 46.3 551 - -

50. West Virginia 49.8 499 0.1 DL,LG

1. KL-direct loans, LG-loans guarantees, BGbond guarantees, VC-venture capital.

2. AO-advisory office, OM-ombudsman, ACadvisory council, LC-legislative committee, SC-statewide conference, PSprocurement set-asides.

*Includes union membership in District of Columbia.

LABOR TAXES

Avg. Value added Per $1,000

wkly % %H.S. per worker personal

Rank/state wage union grads (thou./yr.) income

Median $317 23% 68% $43.6 $112

1. Texas $328 11% 65% $55.1 $98

2. California 339 27 74 48.0 122

3. Colorado 326 18 78 45.7 113

4. Florida 265 12 65 37.0 97

5. New Hampshire 256 16 70 31.2 92

6. Kansas 325 15 73 44.0 100

7. Arizona 317 16 73 47.7 133

8. Oregon 352 26 76 39.0 114

9. Oklahoma 329 15 66 42.2 102

10. Washington 405 34 76 49.5 109

11. New Mexico 259 19 66 36.0 122

12. New York 309 39 66 47.2 163

13. Kentucky 309 24 53 45.6 104

14. North Dakota 271 17 68 52.6 102

15. Connecticut 319 23 70 42.8 105

16. Virginia 270 15 64 36.0 102

17. Nevada 325 24 76 51.0 105

18. Massachusetts 280 25 72 40.0 139

19. Minnesota 331 26 73 45.5 127

20. New Jersey 322 26 66 47.4 117

21. Utah 308 18 80 40.4 125

22. Arkansas 247 16 56 30.4 99

23. Georgia 255 15 59 33.3 108

24. Tennessee 268 19 55 33.7 94

25. Wyoming 314 19 76 61.4 148

26. Mississippi 236 16 52 31.6 109

27. Montana 370 29 73 47.9 130

28. Maryland 335 23* 69 43.7 120

29. Missouri 318 28 64 43.6 93

30. Ohio 390 31 68 46.6 94

31. Rhode Island 240 28 62 28.4 119

32. Idaho 311 18 72 36.0 104

33. Illinois 356 30 66 47.0 112

34. North Carolina 232 10 55 30.6 106

35. Wisconsin 353 29 70 43.6 125

36. Michigan 426 37 69 47.6 115

37. Pennsylvania 325 35 65 38.5 116

38. Vermont 272 18 70 36.6 127

39. Hawaii 290 28 73 45.1 148

40. Iowa 379 22 72 51.0 111

41. South Dakota 296 15 69 36.6 106

42. Indiana 376 30 67 43.5 88

43. Nebraska 324 18 74 46.7 111

44. Louisiana 362 16 58 64.9 116

45. Alaska 457 34 80 54.2 368

46. Alabama 280 22 56 30.8 96

47. South Carolina 250 8 57 27.3 107

48. Maine 296 24 68 27.8 125

49. Delaware 333 25 70 49.4 116

50. West Virginia 347 34 53 43.5 112

1. DL-direct loans, LG-loan guarantees, BGbond guarantees, VC-venture capital

2. AO-advisory office, OM-ombudsman, ACadvisory council, LC-legislative committee, SC-statewide conference, PSprocurement set-asides.

*Includes union membership in District of Columbia.

STATE SUPPORT

Small bus.

assistance[2]

Rank/state (1971-80)

Median -

1. Texas AO,OM,AC,LC,SC

2. California AO,OM,AC,LC,SC

3. Colorado AO,OM,AC,SC

4. Florida AO,OM,LC,SC,PS

5. New Hampshire AO,LC,SC,PS

6. Kansas AO,AC,LC,SC,PS

7. Arizona AO,OM,AC,SC,PS

8. Oregon AO,OM,AC,SC

9. Oklahoma AO,SC,PS

10. Washington AO,LC,SC,PS

11. New Mexico AO,OM,SD,PS

12. New York AO,OM,AC,LC,SC,PS

13. Kentucky AC,OM,AC,LC,SC,PS

14. North Dakota AO,AC,LC,SC

15. Connecticut AO,OM,PS

16. Virgina AO,OM,SC

17. Nevada AO,IC,SC

18. Massachusetts AO,OM,IC,SC

19. Minnesota AO,OM,LC,SC

20. New Jersey AO,OM,AC,LC,SC

21. Utah AO,OM,AC,SC

22. Arkansas AO,AC,SC,PS

23. Georgia AO,OM,AC,LC

24 Tennessee AO,OM,AC,SC,PS

25. Wyoming -

26. Mississippi AO,OM,AC,LC,SC

27. Montana AO,AC,SC,PS

28. Maryland AO,AC,LC,SC,PS

29. Missouri AO,OM,LC,SC,PS

30. Ohio AO,OM,AC,LC,SC

31. Rhode Island AO,AC,LC,SC,PS

32. Idaho -

33. Illinois AO,OM,AC,LC,SC,PS

34. North Carolina AO,AC,LC,SC

35. Wisconsin AO,OM,AC,LC,SC

36. Michigan AO,OM,AC,SC,PS

37. Pennsylvania AO,OM,AC,SC,PS

38. Vermont AO,SC

39. Hawaii AC,LC,SC

40. Iowa OM,AC,LC,PS

41. South Dakota AC

42. Indiana OM,SC,PS

43. Nebraska AO,OM,SC

44. Louisiana AO

45. Alaska OM, SC

46. Alabama OM,SC,PS

47. South Carolina AO,SC,PS

48. Maine AO,ON,AC

49. Delaware AO,OM,AC,LC,PS

50. West Virginia AO,OM,LC,SC,PS

BUSINESS ACTIVITY

Pop. Enploymt. Pers. Inc. Business INC.100

% change % gain % change units per companies

Rank/state (1971-80) (1971-80) (1971-80) 1,000 pop. (1979-82)

Median 11.5% 27.7% 45.4% 46 2

1. Texas 27.1 67.8 77.4 47 27

2. California 18.5 41.6 48.7 46 49

3. Colorado 30.7 61.0 74.2 50 13

4. Florida 43.4 65.9 771. 55 10

5. New Hampshire 24.6 47.9 56.7 46 2

6. Kansas 5.3 63.2 43.5 46 1

7. Arizona 53.3 79.7 88.7 49 3

8. Oregon 26.5 46.5 64.3 51 4

9. Iklahoma 17.2 46.6 65.6 49 6

10. Washington 21.0 25.1 60.4 47 4

11. New Mexico 24.7 58.0 67.6 50 2

12. New York -3.3 0.6 9.1 46 31

13. Kentucky 13.7 41.8 44.4 40 1

14. North Dakota 5.6 50.5 45.4 54

15. Connecticut 2.5 17.0 26.7 43 6

16. Virginia 11.8 39.6 50.3 39 5

17. Nevada 63.8 96.8 92.0 50 1

18. Massachusetts 0.8 17.1 21.3 40 12

19. Minnesota 6.9 34.6 37.9 41 18

20. New Jersey 2.7 17.2 22.2 44 16

21. Utah 37.9 32.6 70.3 48 1

22. Arkansas 18.5 38.9 60.3 45 0

23. Georgia 17.8 37.8 49.7 45 6

24. Tennessee 13.0 13.3 50.0 42 4

25. Wyoming 41.1 88.6 123.1 57 4

26. Mississippi 12.9 34.4 50.0 44 1

27. Montana 13.3 42.2 42.3 56 -

28. Maryland 7.5 25.6 34.2 35 5

29. Missouri 5.1 18.5 31.9 44 1

30. Ohio 1.0 13.3 24.9 40 3

31. Rhode Island -0.4 15.8 25.0 47 -

32. Idaho 32.3 58.7 61.5 50 -

33. Illinois 1.2 14.5 23.9 41 -

34. North Carolina 15.5 33.8 45.2 41 1

35. Wisconsin 6.5 27.1 36.5 40 3

36. Michigan 4.2 15.0 32.6 37 2

37. Pennsylvania 0.2 8.6 24.9 42 6

38. Vermont 15.0 35.1 29.4 54 -

39. Hawaii 25.3 37.5 41.0 52 2

40. Iowa 3.1 24.7 31.9 47 1

41. South Dakota 3.8 36.0 30.4 50 -

42. Indiana h5.7 17.4 31.0 39 6

43. Nebraska 5.3 30.7 34.4 49 -

44. Louisiana 15.3 51.8 65.8 46 1

45. Alaska 32.5 84.3 93.3 49 1

46. Alabama 12.9 34.4 50.9 41 2

47. South Carolina 10.8 41.0 53.0 42 3

48. Maine 13.2 26.3 38.9 49

49. Delaware 8.6 21.3 29.6 44 -

50. West Virgina 11.8 25.1 49.1 43 -

Sources (by column, left to right): Federal Deposit Insurance Corp. (1,2); U.S. Small Business Administration (3); State development agencies (4); U.S. Department of Labor, Bureau of Labor Statistics (5,6); U.S. Department of Education (7); Bureau of Census, Census of Manufacturers (8); Tax Foundation (9); INC. survey of 50 states (10); Bureau of the Census (11); Bureau of Labor Statistics (12); U.S. Department of Commerce, Bureau of Economic Analysis (13); Bureau of the Census, County Business Patterns (14); INC. (15).

Last updated: Oct 1, 1982




Register on Inc.com today to get full access to:
All articles  |  Magazine archives | Livestream events | Comments
EMAIL
PASSWORD
EMAIL
FIRST NAME
LAST NAME
EMAIL
PASSWORD

Or sign up using: