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Useful Stats: An Analysis of Entrepreneurship Indices

August 20, 2014

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 21st in any of the other indices. South Dakota, which ranked third in the Kauffman Foundation Index, ranked no higher than 23rd 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.

 

  Kauffman UNL ITIF - Economic
Dynamism
USCCF - Innovation and
Entrepreneurship
Average Average Ranking
Colorado 5 10 2 2 4.8 1
California 4 2 3 13 5.5 2
Utah 12 8 1 4 6.3 3
Texas 11 7 10 7 8.8 4
Montana 1 20 12 11 11.0 5
Maryland 25 14 8 1 12.0 6
New York 21 3 14 -- 12.7 7
Florida 10 19 6 17 13.0 8
Alaska 2 36 9 8 13.8 9
Kentucky 7 4 37 -- 16.0 10
Idaho 14 28 7 -- 16.3 11
Massachusetts 28 32 4 6 17.5 12
New Hampshire 39 5 17 9 17.5 13
Delaware 22 24 18 10 18.5 14
Connecticut 23 6 22 24 18.8 15
South Dakota 3 31 23 -- 19.0 16
Vermont 26 27 15 16 21.0 17
Washington 46 12 25 3 21.5 18
Nevada 33 23 11 -- 22.3 19
Wyoming 6 22 39 -- 22.3 20
Georgia 30 29 13 19 22.8 21
North Dakota 42 1 27 21 22.8 22
New Mexico 9 48 24 14 23.8 23
Arizona 34 45 5 12 24.0 24
Oregon 37 9 26 -- 24.0 25
Virginia 32 43 16 5 24.0 26
North Carolina 13 49 21 15 24.5 27
South Carolina 27 17 32 22 24.5 28
Oklahoma 17 21 36 -- 24.7 29
New Jersey 43 15 19 23 25.0 30
Nebraska 15 18 46 -- 26.3 31
Louisiana 16 30 35 -- 27.0 32
Maine 19 44 20 -- 27.7 33
Hawaii 8 41 42 20 27.8 34
Rhode Island 49 16 28 18 27.8 35
Tennessee 18 26 43 -- 29.0 36
Minnesota 47 13 30 -- 30.0 37
Illinois 40 25 33 -- 32.7 38
Pennsylvania 41 38 29 -- 36.0 39
Iowa 50 11 48 -- 36.3 40
Mississippi 31 34 44 -- 36.3 41
Missouri 35 35 40 -- 36.7 42
Michigan 20 50 41 -- 37.0 43
Kansas 44 37 31 -- 37.3 44
Arkansas 36 39 38 -- 37.7 45
West Virginia 24 40 50 -- 38.0 46
Wisconsin 45 33 45 -- 41.0 47
Alabama 29 46 49 -- 41.3 48
Ohio 38 42 47 -- 42.3 49
Indiana 48 47 34 -- 43.0 50

 

state tbed, useful stats, entrepreneurshipFile 082114.xlsx