2015 Small Business Friendliness Survey

Earlier this week, Thumbtack.com released its 2015 survey of small business attitudes toward state and local government (see previous posting for 2013 and 2014. I find this survey especially interesting because of their sample. Thumbtack.com is a web-based service where consumers can go to find services. As they note, their data base (and therefore their sample) “tend to be very small, mobile service businesses. 90 percent have five employees or fewer, and about half are working alone.” Specifically the sample is bias toward the professional and nonprofessional services sectors.
The overall findings this year are consistent with previous years. Intangibles — effective government regulatory systems and worker skills — were more important than taxes to small business success.

• Licensing was again more important than taxes – When evaluating their cities, small businesses said the ease of compliance with licensing rules mattered far more than tax rates, and that taxes mattered far less than any measure of regulatory compliance. For example, labor rules were 88 percent more important in driving state friendliness scores when compared to tax rates.
• Effective licensing was just as friendly as no licensing – Small business owners who found licensing compliance to be “very easy” were just as favorable towards their city governments as respondents who weren’t required to be licensed at all. By contrast, licensed professionals in cities with complicated requirements or inconsistent enforcement reported the lowest approval rates.
• Training experience was the top factor in both state and city rankings – Offering training on how to build and run a business and how to navigate the local economic and policy environment was the single biggest factor that influenced perceptions of friendliness. In cities, training was 78 percent more important than the number two factor. On the state level, small businesses who had a positive training experience were 1.5 times more likely to rate their states as being very supportive.
• High quality websites matter – Investing in a high quality, easy-to-use website that provides useful information and decreases the costs of regulatory compliance improves overall perceptions of a local or state government. Business owners who said their city had a “great” website ranked their cities 13 percent higher, while there was no difference in the rankings of business owners who were either unaware of or had had a bad experience on city websites.

I would point out that this year’s finding as to the importance of training are even stronger than before.
– – –
Last year I looked at the Small Business Friendliness Survey versus the Kauffman Foundation’s Index of Entrepreneurial Activity. That data showed 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.
Unfortunately, the link between state policies and entrepreneurship appears to be weakening. The second chart below is an update using this year’s data using the new Kauffman data on start-up activity. There is little correlation this time. This is not necessarily as sign that state policies don’t matter. There could be several reasons. First is that late year was a bad year for start-up activity generally. The Kauffman data shows most states in the negative part of their index.
The report makes an important point in regard to this:

Much has been written recently about a crisis of entrepreneurship in the United States, as seen the broad collapse of self-employment across industries and states and a declining rate of business starts. We believe that because of these trends, creating the right environment for small, unproven business start-ups is more important than ever.

Second, the measure is of start-ups not ongoing activity. Thus it captures only part of the dynamics of those small firms in the Thumbtack data base. 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. 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.
Friendly v activity.png
Friendly v index 2015.png
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. Tennessee has a much lower level of entrepreneurial activity than its small business friendly ranking would predict. Clearly there is more going on than just the governmental environment.
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. Perceptions 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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