State Environment for Entrepreneurs

1. State Environment for Entrepreneurs Monograph 7 March, 2002 Deborah Markley w Co-Directors w Don Macke Abstract. States play an active and significant role in shaping economic development policy and program at a sub-national level. This monograph, State Environment for Entrepreneurs, explores the role that states do and can play in entrepreneurial development in Rural America. Background & Introduction The United States began as a confederation of relatively independent states. This heritage is reflected in our current government and economic systems. States play a very unique and significant set of roles ranging from education to economic development. In the arena of economic development, states actively invest in a wide range of development efforts intended to ensure prosperity for their residents. In many ways, state policy and program define the larger environment in which local development efforts thrive or struggle. Research by Jay Kayne (KCEL, 1999) found two very interesting realities with respect to entrepreneurship and state policy. First, entrepreneurship is on the radar screen of state policy makers such as Governors. A review of state policy statements found at least a quarter of the time entrepreneurship is mentioned in such documents as state of the state or inaugural addresses. This rate of reference is considerably higher than would have been the case a decade ago. Second, Jay found that actual state economic development efforts into entrepreneurial relevant programming and policy was much lower at less than one percent (i.e., 0.71%) of total economic development spending. The following sections provide a conceptual overview of the policies and programs that states might consider in building a stronger E environment. We urge the reader to obtain and review both the Kayne and NGA studies for more specific policy and program ideas. These reports and others are listed in the Reading Section of this monograph. State Climate Local governments are creations of the state. The state can and often does define the climate in which business must operate. State tax and regulatory policies (which often shape local tax and regulatory policies) can significantly impact the business climate. For the past 50 years, state economic development efforts have been biased towards larger business with emphasis on corporate and industrial attraction. Larger businesses have been actively engaged in state chambers of commerce and in shaping state tax, and regulatory policies. Smaller and more entrepreneurial enterprises have typically been less engaged and therefore less effective in shaping these policies to their interests. Recognition. Creating a more supportive E environment begins with state recognition of the role that entrepreneurship plays within that state’s economy and society. The “small business” movement in this country (stimulated by the U.S. Small Business Administration) has made some inroads in raising recognition. Our observations suggest that most state policy and program leaders do not have a sophisticated understanding of the importance of entrepreneurs, and particularly growth entrepreneurs, within their economies. A deeper awareness of the importance of entrepreneurs should ultimately be reflected in refocused policy and programs supportive of entrepreneurs. Tax Policies. Competition for corporations and industries has driven state development policy beginning with the first relocation of factories from the Northeast to the Southeast over 100 years ago. States are in a war competing for corporations, jobs, and branch plants. The primary weapon in this war is tax incentives. States over the past 50 years have created expansive tax abatement programs that have collectively reduced or eliminated tax obligations for many classes of larger corporations. Conversely, these policies have not tended to focus on smaller and emergent companies. In addition to creating an uneven playing field (between small & large), these tax policies have concentrated tax loads on smaller and often the emergent entrepreneurial companies. There is a critical need to review business tax policies and to reform policies to be fairer and more supportive of growth entrepreneurs. Regulatory Policies. There are regulatory policies ranging from the cost of getting a legal status to do business in a state to navigating the complex

2. State Environment for Entrepreneurs regulatory environment administered by literally dozens of different local and state regulatory agencies. State regulatory policies have evolved over time to address specific problems or needs. Rarely have these policies been reviewed and integrated with respect to their cumulative impact on the entrepreneurial enterprise. Projects are underway in Minnesota and Maine that could begin to address some of these issues (see Center web site). State Infrastructure States, in a complex set of relationships with the federal government, help define infrastructure essential to the conduct of business and commerce. We do not have the space here to explore all the state infrastructure issues critical to creating a more supportive E environment. The following are simply our views of some of the more important pieces. Universal Services. In the American age when many industries and services were regulated, universal service access (regardless of location or size) was a central policy element. America and the world are now in an age of deregulation with emphasis on market solutions to the allocation of infrastructure and services. In this environment, scale is very important. High density and low cost markets and consumers (large scale users) have intense competition with high quality service and the lowest costs. Low density and high cost markets/consumers (most of Rural America) often find limited competition, lower quality services, and higher costs. From commercial air service to telecommunications to simple postal service, the divide between haves and have nots is rising. For entrepreneurs who lack scale and are particularly located in high cost and low density markets, access to basic services such as telecommunications or next day parcel service may be more limited and more costly. States are struggling to enact meaningful policies to level the playing field and avoid the creation of pockets of have nots that become the economic and social ghettos of the 21st Century. Capital Access. States have come to appreciate the importance of venture capital to the development of their economies. States look at the concentration of venture capital and venture capital companies in California, Massachusetts, and New York. They are concerned about how to attract these companies and their capital to their states. Legislatures and governors have been enacting various policies and programs to attract venture capital to their states. As challenging as it really is to attract venture capital, success in this undertaking will not likely solve the capital access problem for rural and inner city entrepreneurial firms. Our monograph on capital explores the issues of capital access in greater detail. Simply put, providing capital access – particularly equity capital – for rural entrepreneurs requires a combination of deal development, deal polishing, and financing at a scale typically much smaller than traditional venture capital companies consider. Education. The Global Entrepreneurship Monitor Report for 2000 (KCEL, 2001) suggests a powerful connection between education and entrepreneurial development. Educational experience, particularly related to intellectual property and business development, is a foundation upon which an entrepreneurial economy is built. States with strong commitments to general and strategically focused educational access and quality will provide a more supportive E environment over the long-term states with weak educational infrastructure will be less able to support a dynamic and growing entrepreneurial community. Intellectual Capital. The National Commission on Entrepreneurship’s study Five Myths About Entrepreneurs concluded that an entrepreneur is not the person who creates an innovation, but one who perceives how the innovation can be used to create a successful commercial venture. A dynamic and innovative intellectual capital community within a state provides the opportunity for entrepreneurs to create new generations of enterprises. States that value and invest in building strong intellectual capital (e.g., research within higher education) with effective technology transfer programs can provide another critical asset essential for entrepreneurial growth. A quick review suggests that America’s entrepreneurial growth pockets often correspond to pockets of research and intellectual capital. Health Insurance. The cost of health care is rising along with demands that households have health insurance. The quality and cost of health insurance is optimal through larger group plans with significant cost underwriting by employers as a benefit. Entrepreneurs who are self-employed or part of emergent smaller companies face a huge challenge in obtaining affordable and higher quality health insurance. The challenge of these enterprises to allocate scarce business capital to underwriting employee health insurance is real and large. States Inheritance

3. State Environment for Entrepreneurs are exploring policy options that would enable smaller groups to access state insurance pools to increase quality and reduce cost. A challenge for states seeking to encourage more entrepreneurs is to find ways to make health insurance affordable and accessible to smaller groups. State Support The economic development focus of most states (directly shaping local development priorities) continues to be in traditional areas such as business attraction, workforce development, trade promotion, tourism promotion, and high tech development. Evolving a strong state support system for entrepreneurs begins with the following elements: People Not Businesses. First, with an E strategy, the entrepreneur, not necessarily the business, is what is important. Consequently, state policy and program focus begins and stays with the unique class of people we call entrepreneurs (particularly growth entrepreneurs). Knowing who these people are, creating ways to discover entrepreneurs early helps them to develop a support system. This shift in thinking is much like a talent agent looking for the next Hollywood star – find the raw talent and create the star. Entrepreneurs Not Small Businesses. Meeting the needs of small businesses may help create a stronger E environment, but will not necessarily create a strong or dynamic E environment. The second shift is from a small business focus to an entrepreneurial focus. Most entrepreneurs, and all emergent entrepreneurs, would be defined as small businesses. The difference is most small businesses, even successful ones, will remain small. The E strategy values these entrepreneurs, but must focus on growth entrepreneurs. It is the growth entrepreneur that will create the next business which creates jobs, tax base, and can fundamentally energize a local or regional economy. With enough growth entrepreneurs, the difference between a high performing economy and a weaker economy is determined. Growth Entrepreneurs Not Entrepreneurs. The third shift is strategically identifying and focusing development resources on growth entrepreneurs. If you want to be the next international ice skating champion, a nation must focus on those persons with the drive and talent to meet this competitive challenge. The same is true with entrepreneurs. Of the millions of entrepreneurs dreaming and building in the American economy, a relatively few (less than 5%) have the drive and talent necessary to create high growth companies capable of changing local, regional and national economies. Typically, states target industries and economic sectors; we generally do not target individuals or teams capable of building high growth companies. Small Business Support. Generally, three fourths of all state economic development spending is targeted towards industries and big businesses. Far fewer dollars are invested in small business support. However, the existing small business support systems operating at the state level have the building blocks for creating a greatly enhanced entrepreneurial support system. States such as Minnesota, Missouri and Maine are exploring how to ensure their small business support systems can also be effective entrepreneurial support systems. More Investment. If a state can effectively make the three shifts talked about in this section and commit to evolving their small business development system into an entrepreneurial support system, ultimately there will be a need for additional state (both public and private) investment into those policies and programs helpful to growth entrepreneurs. Conclusion States can not expect to continue investing 99 percent of their economic development resources in non-entrepreneur focused policies and programs and expect to create a vigorous and dynamic entrepreneurial environment and economy. States like communities have choices as to where they invest their economic development energies and dollars. There is a general feeling within the states (both policy makers and program leadership) that much of what they are doing with economic development is equally beneficial to entrepreneurs. We are not sure about this conclusion. We believe it must be challenged and that a more strategic and focused set of interventions are possible that will result in a more supportive E environment (at both the state and local levels) and energized entrepreneurial sector.

4. Other Monographs in this Series #1 About the Center & Resource Guide #2 Entrepreneurs & Entrepreneurship #3 Why Entrepreneurship? #4 Wealth as the Development Goal #5 Understanding Rural America #6 Community Environment for Entrepreneurs #7 State Environment for Entrepreneurs #8 National Environment for Entrepreneurs #9 Capital #10 Public Entrepreneurship #11 Entrepreneurial Support Organizations #12 Social Capital #13 Youth Entrepreneurs* #14 Research & Learning Focus *Under Development Founding Partners Resources The Kauffman Center for Entrepreneurial Leadership was created in 1990 within the Ewing Marion Kauffman Foundation of Kansas City. The Foundation is a private foundation created by Ewing Marion Kauffman (founder of Marion Laboratories) that strives to achieve the vision of self-sufficient people in healthy communities. The Center focuses on entrepreneurs and entrepreneurship supporting research, learning, and education activities. Additional information on the Kauffman Foundation can be found at www.emkf.org. The Rural Policy Research Institute (RUPRI) is the only national policy institute in the U.S. focusing solely upon the rural implications of public policy. This comprehensive approach to rural policy analysis involves scientists from universities, research institutions, governments, and non-governmental organizations. To date, more than 200 scientists representing 16 different disciplines in 80 universities, 40 states, and three countries have participated in RUPRI projects. Additional information on RUPRI can be found at www.rupri.org. RUPRI is a core funder and supporter of the Rural Entrepreneurship Initiative. Author.This monograph was prepared by Don Macke. Don can be reached at don@ruraleship.org or 402-323-7339. • Five Myths About Entrepreneurs, Understanding How Businesses Start and Grow by the National Commission on Entrepreneurship, March 2001. Contact NCOE at www.ncoe.org for free copies, 24 pages. • Global Entrepreneurship Monitor, 2000 Report by the Kauffman Center for Entrepreneurial Leadership. For free copies of this and other GEM Reports contact www.entreworld.org. • State Entrepreneurship Policies and Programs by Jay Kayne with the Kauffman Center for Entrepreneurial Leadership. November 1999. Available through the REI web site. • Nurturing Entrepreneurial Growth in State Economies by Thom Rubel and Scott Palladino with the Center for Best Practices within the National Governors’ Association. 2000. Available through the Center’s web site at www.nga.org/center. During 2000 and 2001, the National Governors’ Association in partnership with the Kauffman Center for Entrepreneurial Leadership and the National Commission on Entrepreneurship sponsored a National Policy Academy on Entrepreneurship. Ten states participated in this Academy and their state policy strategies are available through the NGA web site at www.nga.org/center. Since 2000, six states have participated in REI’s (supported by the Kauffman Center for Entrepreneurial Leadership & the Rural Policy Research Institute) Rural Entrepreneurship Discovery State Initiative (e.g., Colorado*, Maine, Minnesota, Missouri, Texas* & West Virginia - * in progress). Each of these states have or will develop state policy strategies that are available on the REI web site About the Center The Center for Rural Entrepreneurshipis new. It is an outgrowth of the Rural Entrepreneurship Initiative. The Center is a RUPRI National Research and Policy Center with founding support from the Kauffman Center for Entrepreneurial Leadership within the Ewing Marion Kauffman Foundation of Kansas City, Missouri. Our mission is to enable every rural resident to achieve his or her full entrepreneurial potential. This mission will be achieved by collaborating with individuals and organizations engaged in the study,practice and policy of rural entrepreneurship. The Center supports research, field work, and policy development through collaborations with national, state, and local interests. For more information on the Center for Rural Entrepreneurship, check out our web site at www.ruraleship.org or call Taina Radenslaben at 402-323-7336.