How Does Alabama’s Business Climate Rank For Small Business And Entrepreneurs?

Posted on March 21, 2007

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Alabamians have been bombarded lately with studies either praising or disparaging Alabama’s climate for small businesses and entrepreneurs.  To me, the most intriguing of these studies are the State New Economy Rankings by Kauffman Foundation and the Information Technology Innovation Foundation (“ITIF”) and the Small Business Survival Index prepared by the Small Business & Entrepreneurship Council (“SBEC”).

Many of you probably read the Birmingham Business Journal article regarding Alabama placing 46th in the State New Economy Rankings.  These rankings result from an annual study of each state’s readiness for the “New Economy.”  Twenty-six criteria or indicators are examined in this study.  These criteria basically measure a state’s technology infrastructure, whether its workforce is skilled and tech-savvy, and whether it has a “dynamic” economy.  The study indicates that high scores in these areas are necessary for a state to make a transition to the “New Economy” and be a good environment for entrepreneurs.

According to the Kauffman Foundation and the ITIF, the following states have the top ten environments for entrepreneurship:  (1) Massachusetts, (2) New Jersey, (3) Maryland, (4) Washington, (5) California, (6) Connecticut, (7) Delaware, (8) Virginia, (9) Colorado, and (10) New York.  Given the technology focus of study, I’m not surprised that Virginia, New York, Washington, and California landed in the top ten.  However, I have to admit I was ignorant that the other states in the top ten had such a high degree of technology infrastructure, tech-savvy workforce, etc.—that is, that they were allegedly better prepared for the so-called “New Economy” than Alabama.   

I am a firm believer that technology will one day permeate almost all aspects of how businesses in all industries create, sell, and deliver their products locally and around the globe.  Thus, I find substantial value in measuring a state’s readiness for the “New Economy.”  I also willingly recognize the fact that Alabama has a long way to go to catch up to states in the top ten when it comes to employment in information technology occupations, workforce education, foreign direct investment, number of patents, and other important criteria measured in this study. 

The “New Economy” study probably leads many readers with the impression that Alabama is still in the Stone Age.  However, any Alabamian who reads their local newspaper knows that there are scores of individuals, businesses, and organization in our public and private sectors that are daily working toward the development of new technology and fostering a technology-friendly environment.  A few examples come to mind:  University of Alabama at Birmingham, the Auburn University Research Park, NASA, Southern Research Institute, Hudson-Alpha Institute for Biotechnology, University of Alabama at Huntsville, TechBirmingham, and the Biotechnology Association of Alabama. 

Curtis Palmer, CEO of TechBirmingham, a not-for-profit entity that focuses on growing the technology economy in the Birmingham, Alabama area,  voiced his concerns regarding the “New Economy” study in the BBJ article.  Palmer noted that Alabama’s low ranking seemed to contradict other data regarding Alabama’s successes—especially with cities like Birmingham, Mobile, Huntsville, and Auburn-Opelika being thought of by many as hotspots for entrepreneurship.  Why is it that the entrepreneurial successes and entrepreneur-friendly environment many of us see have seemingly not been picked up or measured by the “New Economy” study?   One of the reasons is that the technology-related criteria/factors measured in the “New Economy” study are not the only contributors to a good environment for entrepreneurs and small business.  The SBEC’s annual Small Business Survival Index illustrates this very point. 

Alabama ranks an impressive fourth in the SBEC’s most recent study.  In contrast to the “New Economy” study, the SBEC’s index portrays Alabama as fertile ground for starting and growing a business.  The SBEC created its index to measure the public policy climate for small business and entrepreneurship in each state.  Some may question the public policy focus of SBEC’s annual study and index.  However, Raymond J. Keating, author of the study, explains that the public policy focus is important because “governmental costs among the states will have an impact on where people live, work and start up businesses.”   

Like the “New Economy” study, the SBEC reviews a large number (29) of criteria to create its index.  However, the criteria reviewed by the SBEC are much broader in scope.  Among the criteria considered are individual and entity-level taxes, health care regulation, utility costs, worker’s compensation costs, total crime rate, state minimum wage, regulatory flexibility status, protection of private property, and per capita state and local government spending.  Using these criteria, the SBEC has determined that the following states have the top ten most favorable business climates:  (1) South Dakota, (2) Nevada, (3) Wyoming, (4) Alabama, (5) Washington, (6) Florida, (7) Mississippi, (8) Colorado, (9) Texas, and (10) Michigan.  **Note that only Washington and Colorado made both top ten lists. 

Alabama has a relatively favorable tax climate for individuals and businesses (I know I’ll probably draw fire from all sides by saying this).  Alabama’s state governmental regulation of businesses is not nearly as comprehensive and onerous as many states.  Unlike some states, we do not have a minimum wage that is set higher than the federal minimum.  With respect to the protection of private property, the Alabama legislature was the first to enact legislation, Ala. Acts 2005-313, to protect its citizens from having their property taken by the state or local government entities for private development.  All of these factors and the many others measured in the SBEC study add up to an overall high score for Alabama’s public policy climate for entrepreneurs and small business.

It is clear from these two studies that different think tanks, trade associations, businesses, entrepreneurs, and innocent bystanders think different things are important to a good environment for entrepreneurs and small business.  Both of the discussed studies measure particular portions of the environment for small business and entrepreneurs—the technology-related portion of the business environment and the public policy portion of the business environment.  I would like to see a study that encompassed technology infrastructure, public policy environment, and numerous other environmental factors important to entrepreneurs and small business.  That is, a study that is broader in scope.  The conclusions drawn by such a study would certainly be a more accurate measure of whether a state is good for entrepreneurs and small business.  Furthermore, the rankings would likely show what I know to be true:  Alabama is a great place for entrepreneurs and small business.   

Russell M. Cunningham, IV, Cunningham Law Firm, LLC

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