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.
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.
