Perception versus action on entrepreneurial activity

My posting yesterday described the Small Business Friendliness Survey. That survey describe how some small business owners perceived their local and state government’s attitude toward small business. Specifically, were government policies and actions friendly to small business?
One question I have always had is whether impressions of business owners matter in terms of actions. The lesson that such survey’s seek to impart is that “business-friendly” states generate more economic activity. In this case, a reasonable extension of that argument would be that a more small business friendly location should generate more start-up, entrepreneurial activity. To test that question I looked at the Small Business Friendliness Survey versus the Kauffman Foundation’s Index of Entrepreneurial Activity.
And the answer is, yes, sort of. As the chart below shows, there is a general correlation between a state’s business friendly ranking and the amount of new entrepreneurial activity (as measured as the percentage of the adult, non-business-owner population that starts a business each month). But the relationship is not all that strong. States, as the chart shows, are all over the place.
Friendly v activity.png(Spreadsheet available here).
Of course, there are lots of disclaimers with this data. The measurement of entrepreneurial activity is start-up, which says nothing about the success rate of those businesses. Policies may be relatively easy/friendly with respect to starting a business but unfriendly when it comes to sustaining/operating the business. The discussion yesterday about the complexity of tax laws usually hits a business after it have been running for awhile. On the other hand licensing and regulatory policies can have an impact in the creation phase as well as during ongoing operations. Also, the Kauffman Index of Entrepreneurial Activity does not say anything about expansion of existing small business activity. Government policies and actions can have an impact on the growth of decline of existing businesses without affecting the rate of start-ups — and vice versa. And today’s existing policies may have a greater affect on entrepreneurship in the future than the present as policies often have a lag effect.
Still, the comparison of the two data sets revels some interesting points. Of particular interest are the outliers. California has high entrepreneurial activity but ranks low in small business friendly (with an overall grade of F and, more importantly a grade of F on the ease of starting a business). Iowa and Virginia have a much lower level of entrepreneurial activity than their small business friendly ranking (grades of A- and A+ respectively) would predict.
Clearly there is more going on than just the governmental environment. In California, a strong entrepreneurial culture seems to be driving its economic activities (the highest rate of per capita start-ups in the nation). In Iowa’s case, its grade of A on ease of creating a business has not seemed to translate into more start-ups.
The small business and entrepreneurial ecosystems are complex environments (and not necessarily the same). While there are many other elements to the ecosystem, perceptions are an important part of those environments. Perception are also part of the ecosystem within reach of policymakers so it would behoove them to pay attention. But policymakers need to keep in mind that perceptions are not reality and are just one element. As the weak correlation indicates, policymakers should focus on actions as well as perception – and understand the sometimes tortuous relationship between the two.

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