Alabama ranks generally in the middle of the pack on economic freedom, which strongly correlates with prosperity. Yet Alabama consistently ranks among the bottom states in household or per capita income. Why do we underperform on income?
Entrepreneurship might offer an answer.
Entrepreneurs start and run businesses. Economics identifies entrepreneurship with new ideas, from new products to new ways to produce goods to new ways to organize businesses. Research identifies entrepreneurship as an important driver of prosperity.
To explore a potential dearth of entrepreneurship, let’s start with large businesses (even though entrepreneurs are generally associated with small businesses). Alabama has recently been headquarters for only one Fortune 500 company, Regions Bank. Most of the Forbes 400 richest Americans have built successful large businesses (e.g., Elon Musk of Tesla and Jeff Bezos of Amazon). No Alabamians currently make this list.
Highly successful companies contribute significantly to the prosperity of their home communities. In addition to their own salaries, these businesses use professional services, like lawyers and accountants. Successful businesspeople are frequently major patrons of culture and the arts. Headquarters for a dozen Fortune 500 companies might remedy Alabama’s income performance.
Yet as economist Mark Perry documents, the Fortune 500 exhibits significant turnover; almost 90 percent of the companies from the 1950s no longer make the list due to decline or merger. A lack of Fortune 500 companies in Alabama today may reflect past entrepreneurship deficit.
Inc. magazine tracks today’s fastest growing companies. Unfortunately, Alabama does not fare well here either. Only 11 Alabama companies make Inc’s top 1,000 businesses, less than our share of the U.S. population.
Two factors may keep Alabama from growing hugely successful businesses. First, we may have too few entrepreneurs starting businesses. Second, the environment - economic factors and government policy - may hold small businesses back.
Economists have developed measures to shed light here. Some of the most frequently used entrepreneurship data are compiled by the Kauffman Foundation. Alabama ranks 43rd in Kauffman’s ratings of new entrepreneurs, or the percentage of the population which starts a business. Our rate is less than two-thirds the national average and less than half of the top state, Florida. Alabama has trailed the national average for over two decades.
Entrepreneurship scholars distinguish two types of business starts. The first is necessity entrepreneurship, where people start businesses due to factors like job loss. The second is opportunity entrepreneurship. These new businesses are trying to take advantage of perceived profit opportunities and are the type featured on TV’s “Shark Tank.” Opportunity entrepreneurship produces the (sometimes) highly successful businesses.
New businesses include both types of starts. Thus, Kauffman also estimates the opportunity share of new business starts. Alabama ranks 32nd with an 80 percent opportunity share. Our rate of opportunity entrepreneurship starts also ranks in the bottom ten.
How is Alabama’s small business environment? While economic freedom indexes include relevant factors, several indexes focus specifically on policies and regulations most heavily impacting new businesses. Three recent ratings suggest that our small business environment is decent. Alabama ranks 29th in the Cato Institute’s Entrepreneur Regulatory Barriers Index, 15th in the Pacific Research Institute’s Small Business Regulation Index, and 11th in the Small Business & Entrepreneurship Council’s policy index ranks.
How might we increase entrepreneurship? Research has explored the personal and demographic characteristics of entrepreneurs. I find Ross Levine and Yona Rubinstein’s results intriguing: entrepreneurs starting incorporated businesses – the ones most likely to grow – were “smart and illicit,” meaning they sometimes broke life’s rules. This dovetails with economic historian Deirdre McCloskey’s observations on the business people who forged the Bourgeois Revolution. These capitalists had enormous self-confidence; they were, after all, defying the existing economic organization of society.
Entrepreneurs are recognized as risk-takers. But they must also possess the self-confidence to proceed in the face of skepticism and opposition. Alabama probably has sufficient economic freedom for entrepreneurs. We perhaps just need to encourage and support more nonconformists looking to disrupt today’s economy.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The views and opinions expressed here are those of the author and do not necessarily reflect the views of Troy University or of the policy and position of 1819 News. To comment, please send an email with your name and contact information to Commentary@1819News.com
