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Report On The States
 

The year 1983 has been a hard one to quantify. Soaring deficits, rampant unemployment, and bare-knuckled competition for new industry have taxed the resources -- and occasionally the wisdom -- of governors from Tallahassee to Honolulu. In our Third Annual States Report, INC. once again ranks the states from 1 to 50 on factors that are critical to small business. But statistics don't tell the whole story. In the pages that follow, INC. looks at some of the most intriguing manisfestations of how states are scrambling for economic growth: Rhode Island (see page 151), a little state with big plans; Austin, Tex. (see page 155), the smart little city with a coveted, new high-tech start up; and a host of other instances (see page 160) in which local officials have been overzealous in their development efforts. When all is said and done, the already intense competition for jobs and investments is clearly heating up.
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States, like warrior nations, have long sought to lure businesses from both neighboring and distant areas. Such efforts have been an integral -- and highly publicized -- aspect of state strategies to boost growth and employment. Indeed, one has only to look at some of the latest border skirmishes -- such as the sparring match earlier this year between the governors of South Dakota and Minnesota -- to conclude that the "industrial recruitment" game is still being played with fervor.

But even as many states continue to devote millions of dollars to encouraging businesses to move or set up branches within their borders, a dramatic shift is occurring in the way many public officials think about their states' opportunities for growth. Instead of drawing elaborate battle plans for bigger and better industrial raiding missions, a growing core of policymakers is finding that the most effective route to economic expansion isn't through recruitment, but through the encouragement of smaller companies already doing business within the state. "Almost everybody is still doing a bit of recruitment," notes Miles Friedman, executive director of the National Association of State Development Agencies in Washington, D.C. "But more and more states are asking themselves, 'What do we need to do to take advantage of the expansion potential of the businesses that we've already got?"

Many of the factors that help shape a state's climate for the growth of small businesses are beyond the immediate control of state policymakers. National and international economic forces can play unsettling roles in the lives of large and small companies alike without governors having much say in the matter. The amenities that make up an area's "quality of life," moreover, frequently aren't easy to define and are even harder to alter.

But there are important aspects of a state's small business environment that are far less difficult to describe or influence. Recognizing that promising young companied need various types of capital for growth, for example, 11 of the most entrepreneurial-minded states have responded to weaknesses in the private markets with the creation of their own new, state-sponsored pools of venture capital. States moreover, are taking steps to improve the skills and productivity of their labor forces through investments in education. On a different level, 26 states maintain special legislative committees to handle the special concerns of their small businesses.

INC.'s third annual report on the states compares the 50 states on major, quantifiable factors that contribute to an overall climate for small business. The intent is to help businesspeople and policymakers understand better how to make improvements. The analysis focuses, in large part, on three broad areas of concern to smaller companies -- capital, labor resources, and taxes. We also surveyed each of the states directly to determine the level of small business support programs at the executive or legislative levels. For a fifth category, we selected a series of business and economic measures that influence the general climate. The sources for the data were federal government reports and telephone interviews with state officials.

INC. ranked the 50 states in these five categories -- capital, labor, taxes, state support, and business activity. The overall scoring system was based on 100 possible points. The weighting for each category, moreover, was maintained according to last year's formula to reflect its relative importance to the majority of small, growing companies. Capital and state support were both given 25 points in the belief that they are the most critical factors. Taxes, while always an area of concern, received 10 points, the lowest weighting. Labor and business activity were each weighted at 20 points, in recognition of their significance to smaller companies. According to this methodology, the total scores ranged from 76.0 for Texas to 39.5 for South Carolina.

Texas was at the top of the charts for the second year in a row, largely on the strength of its capital resources and overall business activity, reflected in its recent gains in population, employment, and income. Although its official support for small business isn't as great as that of other states, a productive labor force and a fairly low tax burden were also included on Texas's list of positives. Strengths in the capital and business activity areas were, similarly, the driving forces behind the impressive performances of California and Colorado which once again achieved the second and third rankings, respectively.

Not all of the top performers, however, are located in the dynamic West or the South. Fourth-ranked New York and 5th-ranked Minnesota both overcame comparatively stiff tax rates and average or higher-than-average wage rates to improve their positions substantially over last year, when they ranked 12th and 19th, respectively. Both states benefit from their strengths in the lending activity of their banks and their small business investment companies (SBICs). But, importantly, New York and Minnesota compare very well with other states in their small business support programs. Massachusetts's jump from 18th place last year to 7th this year can be credited, in part, to similar factors. However, the state's comparative economic strength also played a role.

It is not surprising that weaknesses in overall state rankings are often tied to poor performance in the capital-resources category. South Carolina, which ranked 50th overall, also scored last in capital. Its bank lending activity was the lowest in the nation, but it was also weak in SBIC financings, and it has no state-sponsored lending or investment programs. West Virginia, Nevada, and Alabama, with overall rankings of 48, 42, and 41, respectively, also suffer from their weaknesses in most of the capital criteria.

Increasingly, however, the steps some of the more aggressive states are taking to provide active support for small business -- both through general support programs and state-sponsored capital initiatives -- are having an impact on their overall performances. A year ago, Indiana, for instance, was ranked 42nd, reflecting its sluggish economy, weaknesses in capital, and modest level of official support for small business. But a series of recent actions, including its establishment of a new legislative committee, a new governor's advisory council, and a new state institute directed at assisting business start-ups, have helped lift Indiana to 18th place.

Neighboring Michigan's creation of loan and bond guarantee programs during the past year and a publicly backed venture capital fund have likewise contributed to its advance from 36th place to 28th, even in the face of serious declines in the state's auto-based economy. However, Wisconsin's severe shift in the other direction -- from its 35th ranking last year to 49th this year -- dramatically illustrates the consequences of not staying competitive with other states. While Wisconsin's basic labor, economic, and capital characteristics aren't dramatically different from other midwestern industrial states, it has lagged behind in the adoption of general support and capital programs to assist small companies. Pending legislation before the Wisconsin legislature would authorize a new venture capital fund aimed at small and medium-size companies, possibly before the end of this year.

Even as states become more active players in their capital markets, the real challenge for state officials may be in understanding the fundamental dynamism of industrial change so that they can better help their existing companies react to technological opportunities. Many states, to be sure, have been extremely aggressive lately in their pursuit of high-tech manufacturing facilities in the hope of finding an economic savior, much as they used to try to woo "smoke stack" industries.

But more and more experts are becoming doubtful about whether this approach will be as successful in generating jobs as other efforts directed at a state's current industrial base have been. "The race for high-tech manufacturing jobs really won't lead anywhere for most states," predicts Roger Vaughan, former deputy planning director for New York State and now a private economic-development consultant. "By the most generous estimates, new job in 20 will be in making high-tech products." One state that has come around to this view is Rhode Island (see "The Little State that Could," page 151).

For some aggressive states, the efforts in the years ahead will include redesigning vocational education systems to meet industry needs and development of technology extension services. The purpose of such programs will be to create mechanisms for teaching both management and the labor force how to exploit the potential of available high-tech products. "We need to find better ways to coordinate," says Tom Campbell, research director of Washington State's new Emergency Commission for Economic Development. Among other things, he says, "the educational institutions have to be taught how to adapt to the needs of business."

RATING THE STATES BASED ON FIVE MAJOR FACTORS

CAPITAL RESOURCES

Comm./Ind. SBIC

Bank loans loans finan. per State

Rank/state % assets per capita 1,000 pop. programs n1

Median 51.6% $1,078 $.80 --

1. Texas 54.1% $ 2,979 $3.6 DL

2. California 62.3 3,246 3.4 DL,LG

3. Colorado 57.5 1,377 3.9 DL

4. New York 58.9 11,454 3.0 DL,LG,BG

5. Minnesota 54.9 1,804 3.0 DL,LG,BG

6. Florida 46.6 736 0.9 --

7. Massachusetts 50.7 1,962 3.1 DL,LG,BG,VC

8. New Mexico 50.2 1,145 2.1 DL,LG,BG,VC

9. Connecticut 57.1 1,034 3.1 DL,LG,VC

10. New Jersey 50.1 876 1.8 DL,LG,BG

11. Illinois 59.7 4,307 0.7 DL

12. Washington 64.6 1,918 1.2 --

13. Virginia 55.7 850 1.4 --

14. Montana 56.2 1,513 0.3 DL,LG,BG,VC

15. Pennsylvania 49.9 1,697 0.8 DL,LG,VC

16. Delaware 61.4 2,408 0.0 --

17. New Hampshire 59.6 634 1.5 LG

18. Indiana 49.6 811 0.3 DL,LG,BG,VC

19. North Dakota 50.7 1,286 1.0 BG

20. Rhode Island 56.6 1,647 0.3 LG,BG

21. Oregon 53.1 1,693 1.1 DL,BG

22. Kentucky 47.8 845 0.2 DL,BG

23. Georgia 51.6 1,062 0.4 BG

24. Tennessee 49.8 1,025 1.0 --

25. Kansas 48.6 1,213 0.2 --

26. Vermont 65.8 761 2.2 DL,LG,BG

27. Louisiana 50.1 1,346 1.1 DL,LG,BG,VC

28. Michigan 51.6 1,111 1.1 DL,LG,BG,VC

29. Ohio 48.3 866 0.7 DL,LG,VC

30. North Carolina 48.5 985 0.1 --

31. Hawaii 58.7 1,212 1.0 DL

32. Missouri 47.0 1,258 0.3 DL,LG,BG

33. Oklahoma 53.7 2,041 1.4 DL

34. Iowa 47.4 908 0.3 BG,VC

35. Maryland 48.2 646 0.7 DL,LG

36. Arkansas 50.1 1,095 0.6 BG

37. Utah 53.7 831 0.0 --

38. Arizona 61.5 1,013 0.4 --

39. Nebraska 50.7 1,045 0.8 --

40. Mississippi 48.6 700 0.5 DL,LG

41. Alabama 45.5 744 0.8 --

42. Nevada 51.3 663 0.6 --

43. South Dakota 68.0 1,114 1.3 --

44. Wyoming 52.3 1,607 4.6 --

45. Maine 51.7 526 0.5 LG,BG

46. Alaska 48.2 1,332 0.1 DL,VC

47. Idaho 58.9 1,014 1.3 --

48. West Virginia 44.2 491 0.0 DL

49. Wisconsin 53.8 971 0.3 --

50. South Carolina 43.1 388 0.2 --

LABOR TAXES STATE SUPPORT

Avg. % H.S. Value added Per $1,000 Small bus.

wkly % grads. per worker personal assistance n2

.

Rank/state wage union over 25 ($000./yr.) income

Median $331 23% 68% $36.9 $109 --

1. Texas $348 11% 61% $45.1 $100 AO,AC,LC,SC,PS

2. California 367 27 74 38.7 115 AO,OM,AC,LC,SC

3. Colorado 336 18 78 35.5 102 AO,OM,AC,SC

4. New York 325 39 66 37.6 158 AOO,OM,AC,LC,SC,PS

5. Minnesota 361 26 72 37.3 120 AO,OM,AC,SC,PS

6. Florida 284 12 67 33.2 93 AO,OM,LC,SC,PS

7. Massachusetts 300 25 73 33.5 133 AO,OM,AC,SC,PS

8. New Mexico 293 19 68 32.2 140 AO,OM,AC,SC,PS

9. Connecticut 336 23 70 34.5 102 AO,OM,SC,PS

10. New Jersey 353 26 68 37.1 112 AO,OM,AC,SC,PS

11. Illinois 368 30 65 39.7 110 AO,OM,AC,LC,SC,PS

12. Washington 442 34 77 44.8 100 AO,LC,SC,PS

13. Virginia 282 15 63 36.2 100 AO,AC,LC,SC,PS

14. Montana 396 29 75 56.7 129 AO,OM,AC,SC,PS

15. Pennsylvania 328 35 65 35.1 109 AO,OM,AC,LC,SC,PS

16. Delaware 331 25 68 35.0 108 AO,OM,AC,LC,SC

17. New Hampshire 282 16 72 33.7 87 AO,LC,SC

18. Indiana 382 30 66 41.2 92 OM,AC,LC,SC,PS

19. North Dakota 279 17 67 35.7 112 AO,AC,LC,SC

20. Rhode Island 255 28 61 27.3 115 AO,AC,LC,SC,PS

21. Oregon 337 26 75 35.9 118 AO,OM,AC,LC

22. Kentucky 325 24 52 44.1 103 AO,OM,AC,LC,SC,PS

23. Georgia 271 15 57 31.8 106 AO,OM,AC,LC

24. Tennessee 282 19 55 32.9 96 AO,AC,SC,PS

25. Kansas 358 15 72 38.8 100 AO,AC,LC,SC,PS

26. Vermont 294 18 71 34.4 126 AO,SC

27. Louisiana 381 16 58 61.7 115 AO,AC,PS

28. Michigan 443 37 68 36.2 116 AO,OM,AC,LC,SC,PS

29. Ohio 405 31 67 40.0 92 AO,AC,LC,SC,PS

30. North Carolina 246 10 55 30.4 103 AO,OM,AC,LC,SC

31. Hawaii 319 28 73 47.1 138 AC,LC,SC

32. Missouri 331 28 64 37.3 88 AO,OM,LC,SC

33. Oklahoma 349 15 67 37.0 110 AO

34. Iowa 397 22 71 47.2 111 AO,OM,AC,LC,SC

35. Maryland 354 23* 67 37.0 112 AO,AC,LC,SC,PS

36. Arkansas 266 16 55 31.8 93 AO,AC,SC

37. Utah 327 18 80 36.7 119 AO,AC,SC

38. Arizona 334 16 72 36.0 115 AO,OM

39. Nebraska 342 18 74 40.8 104 AO,OM

40. Mississippi 255 16 55 33.1 108 AO,OM,AC,SC

41. Alabama 288 22 57 32.6 98 AO,AC,SC,PS

42. Nevada 339 24 76 38.2 103 AO,SC

43. South Dakota 297 15 69 34.6 109 AC

44. Wyoming 303 19 78 59.0 155 --

45. Maine 295 24 69 31.2 119 AO,OM,AC

46. Alaska 442 34 83 52.1 500 AO,OM

47. Idaho 314 18 73 38.6 100 --

48. West Virginia 336 34 57 42.3 107 AO,OM,LC,SC,PS

49. Wisconsin 375 29 70 38.7 122 AO,OM,LC

50. South Carolina 263 8 54 28.5 107 AO,SC,PS

BUSINESS ACTIVITY

Pop. Employmt. Pers. Inc. Business INC.100

% change % gain % change units per companies

Rank/state (1980-82) (1980-82) (1980-82) 1,000 pop. (197983)

Median 1.4% 4.3% 16.6% 20 2

1. Texas 7.4% 13.9% 19.3% 20 35

2. California 4.5 8.0 15.1 21 62

3. Colorado 5.3 6.24 17.7 23 16

4. New York 0.6 -0.4 20.0 21 38

5. Minnesota 1.4 2.7 14.3 21 22

6. Florida 6.9 24.2 19.0 21 11

7. Massachusetts 0.8 3.2 18.6 20 13

8. New Mexico 4.3 12.1 14.4 19 2

9. Connecticut 1.5 -1.1 18.7 21 9

10. New Jersey 1.0 2.6 20.7 21 18

11. Illinois 0.2 0.7 16.4 19 2

12. Washington 2.7 8.2 13.4 21 6

13. Virginia 2.7 4.6 17.4 18 7

14. Montana 1.8 5.7 15.8 26 0

15. Pennsylvania 0.0 2.2 16.5 18 7

16. Delaware 1.3 4.1 16.8 20 0

17. New Hampshire 3.3 3.3 18.6 21 2

18. Indiana -0.4 0.6 13.8 18 7

19. North Dakota 2.6 1.0 29.8 24 0

20. Rhode Island 1.2 5.2 16.7 22 0

21. Oregon 0.6 4.5 12.0 23 4

22. Kentucky 0.2 5.7 17.1 17 1

23. Georgia 3.2 11.0 18.3 18 6

24. Tennessee 1.3 6.8 16.1 18 4

25. Kansas 1.9 -0.7 15.8 23 2

26. Vermont 0.9 8.6 21.3 25 0

27. Louisiana 3.7 7.0 19.0 18 1

28. Michigan -1.7 -1.0 11.6 17 3

29. Ohio -0.1 -0.7 14.0 18 5

30. North Carolina 2.3 7.6 16.1 19 1

31. Hawaii 3.0 15.1 14.0 21 0

32. Missouri 0.7 -0.2 16.9 20 1

33. Oklahoma 5.0 8.2 18.5 20 7

34. Iowa -0.3 -2.6 13.5 23 2

35. Maryland 1.1 2.2 17.3 17 5

36. Arkansas 0.2 6.5 17.4 18 0

37. Utah 6.3 10.7 14.5 18 1

38. Arizona 5.2 18.4 15.8 18 3

39. Nebraska 1.0 0.9 17.1 24 1

40. Mississippi 1.2 2.5 16.9 17 1

41. Alabama 1.3 4.4 14.8 17 2

42. Nevada 10.0 26.8 10.1 21 1

43. South Dakota 0.0 -2.6 22.9 24 0

44. Wyoming 6.8 2.4 10.9 26 3

45. Maine 0.8 0.2 17.7 21 1

46. Alaska 8.9 7.4 20.5 20 1

47. Idaho 2.3 4.0 14.3 21 0

48. West Virginia -0.1 1.6 14.9 16 0

49. Wisconsin 1.3 3.4 13.0 20 4

50. South Carolina 2.6 12.9 16.6 17 3

n1 DL -- direct loans; LG -- loan guarantees; BG -- bond guarantees; VC -- venture capital.

n2 AO -- advisory office; OM -- ombudsman; AC -- advisory council; LC -- legislative committee; SC -- statewide conference; PS -- procurement setasides.

* Includes union membership in District of Columbia.

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, 1983




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