Can states become more attractive breeding grounds for small companies? Increasingly, governors and legislators around the United States have been answering with a determined yes. INC.'s Fourth Annual Report on the States once again ranks in the 50 states on factors that are important to small businesses. Beyond these numbers, we examine some of the more interesting efforts of states to improve their business environments: Ohio's struggle against a legacy of bureaucratic neglect (see page 116); Louisiana's plan to shift gears into a new economy (page 112); California's attempt to keep its pot boiling (page 119); South Carolina's push to find more risk capital (page 122); and Washington's drive to put its volatile economy on the path of steady growth (page 120). Running through these stories is a common thread -- a growing awareness that, when it comes to changing a state's business climate, all the solutions are long term.
As long as states have elected governors and legislatures, job generation and business growth nave been the subject of political debate, but the politics have changed over time. During the 1960s and '70s, for example, public officials strove mightily to attract large manufacturing facilities and branch offices of national companies. Politicians thought that landing -- and keeping -- big companies was paramount to the economic vitality of any state. Then, in the early 1980s, a new trend emerged as governors across America began tripping over themselves to establish the next hot spots of high technology.
Today, while economic development officials continue to deemphasize strategies aimed at big companies, the passion for high tech has expanded into a growing concern for smaller companies in general. And as attitudes toward smaller companies have changed, so too have ideas about economic development. "We now realize that the lion's share of our new jobs will come from entrepreneurial efforts," says John Mutz, Indiana's lieutenant governor.
Of course, many factors that affect a state's small-business climate are beyond the influence of policymakers -- changes in national and international markets, for example. Each region, moreover, has its own history and its own set of amenities that contribute to its "quality of life." It is difficult enough to define all the intangibles conducive to a positive environment for small companies. It is harder still to create them.
But there are some things that state governments can do. Many have been taking steps to leverage the resources of both the public and private sectors by making capital more available and improving the quality of the labor force. In the past year, for instance, 7 more states have established state-sponsored venture capital funds, bringing the total to 15. All over the United States, legislatures are increasing budget allocations for higher education and job training. Beyond that, governors and legislatures are attempting to keep in touch with the changing needs of small businesses through advisory offices and special legislative committees.
In this report, INC. compares the 50 states on a variety of important, quantifiable factors that contribute to the general climate for small business. The purpose of this study is to provide businesspeople and policymakers with information and ideas to assist them in their ongoing efforts to make improvements. The report concentrates on three major areas -- capital, labor resources, and taxes. INC. also surveyed the states for small-business support activities and new programs initiated by either governors or legislatures. As a fifth category, a series of recent business and economic statistics that describe aspects of the general business environment was included. All the information in the report, except where noted, is based on federal government data and telephone interviews with state officials.
As in previous years, our scoring system is based on 100 possible points, weighted to reflect their relative importance to most small, growing companies. Capital and state-sponsored small business support each receive 25 points, reflecting the belief that they are the most significant factors; taxation, although not an insignificant concern, was given 10 points, the lowest weighting; and labor and business activity were each allocated 20 points in recognition of their greater significance to the majority of smaller businesses. Based on this scoring system, the 1984 state totals ranged from Connecticut's 80.3 to West Virginia's 35.6.
At first glance, Connecticut, which was #9 in INC.'s 1983 rankings, is an unlikely occupant of the top rung for 1984. It has generally had significant capital resources and strong official support for small business, including the most active small business investment companies (SBICs) in the nation. But its overall business activity has usually lagged well behind that of the more dynamic states of the Sunbelt. However, Connecticut performed impressively through the last recession, particularly in the area of personal-income growth (15.2% between 1981-83). In addition, the state has continued to bolster its commitment to small business: In the past year, it has established new committees on small business in both houses of the legislature and introduced a new procurement program that encourages all state agencies to buy goods and services from small businesses.
Massachusetts, which rose to the #2 spot from #7 last year, showed a similar economic stability during the most recent business slump. Like Connecticut, the Bay State enjoyed employment and personalincome growth (up 2.05% and 15.97%, respectively) far above the national median averages. In addition, Massachusetts has significant capital resources and a variety of support programs for small business.
The traditionally high-ranking Sunbelt states sagged in the latest INC. rankings. California, which remains the leading state in the nation for capital resources, slipped only slightly, from #2 to #3. Texas, on the other hand, went from #1 to #5, Colorado from #3 to #12, and Florida from #6 to #25.
The explanations vary. Texas suffered from a substantial drop in business activity, due in large part to a lingering softness the energy market. The Colorado economy remained quite healthy, but the state scored relatively low on its official support of small business. Florida's drop can be traced to a combination of factors, especially the weakness of its capital resources. Of the states in 1984's overall top 10, only 4 -- New Hampshire, Kansas, New Jersey, and Washington -- failed to score among the top 10 in capital resources. On the other hand, major weaknesses in the capital category continue to characterize nearly all of the states near the bottom of the rankings. These include West Virginia, Mississippi, Wyoming, and Alabama. West Virginia, #50 in the overall ratings, also scored last in capital resources.
There are other results worth noting. Our methodology viewed high levels of taxation as a negative, for example. But the overall rankings show only 3 low tax states in the top 10 overall -- Texas, New Hampshire, and Kansas. Three of the 10 -- New York, Massachusetts, and Minnesota -- had comparatively high tax burdens. And 2 more -- New Jersey and California -- were above the national median of $107 per $1,000 of personal income.
Similarly, INC.'s scoring system was tilted against those states with high percentages of union members. Here again, the results show only 3 low union states in the top 10, and they happen to be the same 3 -- Texas, New Hampshire, and Kansas. One of the goals of INC.'s states report, as noted above, is to encourage public officials to examine their small business environments with an eye toward improvement. Over the past year, South Carolina and Wisconsin have indeed taken actions to upgrade state support for smaller companies. South Carolina has established a legislative committee, an advisory council, a small business ombudsman, new state programs for direct loans, and loan and bond guarantees. With the help of these initiatives, the state rose in the rankings from #50 in 1983 to #19 in '84.
Wisconsin, for its part, has established its own list of new small business programs, which have enabled it to climb to #32 from #49 last year. Among the most significant steps it took in the past year was its creation of a new statewide financing authority that gives preference to loans for small companies.
Encouraging though all these efforts are, they can only be part of a long-term program to improve the climate for small business. As politicians are slowly recognizing, few of the most important environmental factors are susceptible to a quick fix. If, for example, a state decides to improve its secondary and higher-education systems, the results may not be evident for a decade. Efforts to change the attitudes and practices of commercial bankers may take even longer. Nevertheless, it is through these types of actions that significant, lasting improvements can be made.