Recently, the Center for Business Research and Economic Development at Boise State University completed a study on behalf of the Idaho Business Council to assess how Idaho is doing with regard to fostering economic growth and to identify which states may offer insights for improving our economic climate. The results were informative and, to many, surprising.
Economic growth in a state depends upon the creation of new businesses, business survival rates and business ramp-up rates. Traditionally, state and local policy targets new businesses — either startups or relocation/expansion of operations from out-of-state businesses. Metrics are often tracked closely on new businesses, but their resultant success is often overlooked.
The study used the U.S. Census Bureau to establish a database of business creation (births), growth and closure (mortality) statistics through time and compared the results to the other 47 contiguous states to establish a relative health dashboard.
The silver cloud: Idaho is a highly fertile state that, from 2000 to 2010, ranked in the top quartile (and often the top 10 percent) of states in the birth rate for new businesses. Each year, new launches account for 8 percent to 12 percent of Idaho’s total business establishments.
Now for the dark lining: Idaho’s business life expectancy is poor. In this same period, Idaho’s 10-year business-mortality rate has been in the highest 25 percent, and in the last three years it was among the six worst states in the country. Between 9 percent and 15 percent of our businesses close their doors each year.
In addition, our five-year mortality rate has been relatively poor, and in the last three years the data was among the three worst states, with 20 percent to 26 percent of firms ceasing operations within five years of startup.
We tagged states with low birth and high mortality rates as “laggards,” states with low birth and low mortality rates as “incubators,” those with high birth and high mortality as “Darwinists,” and high birth and low mortality as “thrivers.” Idaho falls firmly in the Darwinist category. Interestingly, so are Utah and Colorado — states we often cite as success stories, though their five-year mortality rates are even higher than Idaho’s.
Some may argue that the Darwinism approach is good: You incentivize a lot of new activity and wait for a few success stories to bubble to the top, relying on the law of large numbers. As a matter of fact, Idaho’s growth in business establishments and employment was extremely good through 2007, despite high mortality rates.
The counter argument is that there are significant social impacts from business failures. Employees are displaced, placing a toll on unemployment resources; bankruptcies affect suppliers; and vacated business establishments create issues with real estate markets. This model also proved problematic in the last several years. The mortality rate caused significant economic downsizing.
Idaho has a good story to tell. We are highly entrepreneurial, and we actually outperform many of our traditional peer states. However, we would seldom contend that a region with high birth rates, high infant mortality and low life expectancy was healthy. Similarly, we cannot rest on our laurels with high business-establishment birth rates and say we are healthy. We need to improve our business survival rates. We need to become a “thriver.” States in this category include Montana, Wyoming, North Carolina, Virginia and Maryland.
To be a “thriver,” our focus and resources need to swing from the new to the existing. We need to ensure that our business-support networks, taxation policies, and financial resources and policies are adequately focused to help existing firms survive and step up to the next level of performance.
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Brian Greber, executive director, Boise State Center for Business Research and Economic Development. briangreber@boisestate.edu
