Useful Stats: An Analysis of Entrepreneurship Indices

Within the past few months, several indices have been released that attempt to rank states based on their entrepreneurial activity. From the perspective of economic development agencies, these indices are particularly helpful in assessing where each state stands according to the numerous ways to measure entrepreneurship. These indices, however, should be taken with a grain of salt; issues can arise when too much importance is placed on these lists for the sake of competition or the need for press. According to a report in the Journal of Applied Research in Economic Development, “the connection between these indexes and actual economic growth and performance has been found to be ambiguous.”

That’s not to say, however, that there is no value in these lists. A combination of statistics related to entrepreneurship is undoubtedly helpful when examining one’s state – there is not just one indicator that appropriately defines entrepreneurship. Furthermore, as long as these indices’ formulas do not change over time, there is value in comparing a state’s entrepreneurial strength from one year to another. Finally, a comparison of multiple indices allows for a more robust analysis of a state’s strengths and weaknesses across the entrepreneurship operationalization spectrum, especially when each index uses different metrics. Because state rankings across indices are not always consistent, it is again important to emphasize that they should be taken with a grain of salt. 

Recent entrepreneurship rankings from four indices illustrate the wide variety of approaches used by policy groups to measure entrepreneurship.  These include the Index of Entrepreneurial Activity from the Kauffman Foundation, the State Entrepreneurship Index from the University of Nebraska-Lincoln’s Bureau of Business research, the State New Economy Index from the Information Technology and Innovation Foundation (ITIF), and the Enterprising States Index from the U.S. Chamber of Commerce Foundation. Because the State New Economy Index captures many statistics not intrinsically related to entrepreneurship, only the rankings for the ‘economic dynamism’ sub-category are included. Similarly, only the innovation and entrepreneurship sub-category from the Enterprising States Index is used.

The Kauffman Index of Entrepreneurial Activity uses Current Population Survey (CPS) data to measure the percentage of non-business owning adults who start businesses in the following month with more than fifteen hours worked per week. The University of Nebraska – Lincoln State Entrepreneurship Index is comprised of five components: percent growth in employer establishments, percent growth in employer establishments per person, business formation rate (i.e., establishment births per person), patents per thousand persons, and average income per non-farm proprietor. The economic dynamism sub-category of the Information Technology and Innovation Foundation’s State New Economy Index consists of the degree of job churning, the number of fast growing firms, the number and value of companies’ IPOs, the number of individual inventor patents granted and the number of entrepreneurs starting new businesses, which is an average of the previous two years’ scores from the Kauffman Index. The innovation and entrepreneurship sub-category of the U.S. Chamber of Commerce Foundation’s Enterprising States Index includes STEM job growth, STEM job concentration, high-tech share of all businesses, business birthrate, academic R&D intensity, and growth in self-employed. The 2014 report only includes information for the top 25 states in each category.

An analysis across the indices yields some interesting, albeit not always consistent results. Colorado is the only state that appears in the top 10 across all four indices analyzed, ranking within the top five in the Kauffman, University of Nebraska, and ITIF indices. Alaska, Texas, Utah, and California rank in the top 10 in three of the indices. Maryland, Florida, and Kentucky appear in the top 10 in two of the indices, while also having one of the 10 highest average rankings across the indices. Massachusetts and New Hampshire also rank in the top 10 in two indices, but do not have an average ranking in the top 10 as a result of lower scores in the other indices.

The top five states with the highest average ranking across the indices are all west of the Mississippi River. North Dakota, which was the highest ranked state according to the University of Nebraska Index, ranked no higher than 21^st in any of the other indices. South Dakota, which ranked third in the Kauffman Foundation Index, ranked no higher than 23^rd in any of the other indices.

Overall, these indices show that there are numerous ways to operationalize entrepreneurship, yet inconsistencies show that one should proceed with caution with their use. In the below table, SSTI has prepared the rankings of each state across the four indices. In a downloadable file, we have also compiled each of the indices for further analysis.

082114.xlsx