Measuring Entrepreneurship

26 May 2006 at 12:57 am Peter G. Klein 3 comments

| Peter Klein |

Earlier this week the Kauffman Foundation released an Index of Entrepreneurial Activity for the US and for individual US states. A local TV station asked me to comment on the report (my state, Missouri, ranked sixth from the bottom, provoking much consternation), so I prepared a few sound bites. Here they are:

1. Entrepreneurship is difficult to define, let alone measure. The Kauffman index estimates the percentage of adults, not already owners of a business, who start a new business each month. But the common notion of "entrepreneurship" encompasses imagination, creativity, risk-taking, judgmental decision-making, and so on, activities or attributes not necessarily reflected in new firm formation.

2. The Kauffman index measures the rate at which new firms are established, not the number of firms that exist. The Census Bureau's Survey of Business Owners provides one measure of the latter. I haven't examined it in detail, state by state, but spot-checking suggests that its ranking doesn't correspond closely to the Kauffman ranking. (Missouri, for example, is 30 of 50 in the number of independent establishments.)

3. The Kauffman index shows strong regional variation. The states with the highest rates of new firm formation are in the Pacific, Mountain West, and lower Midwest, while the lowest-ranking states are clustered in the Midwest, Middle South, and New England. Moreover, though the Kauffman report doesn't provide detail by county or MSA, we know from other research that there is substantial within-state variation in startup rates (particularly among urban/rural lines). For these and other reasons, state-level rankings of entrepreneurial activity may not be especially meaningful.

I explained all this to the reporter in my usual eloquent style. Naturally, when I watched the news that evening, I found that my interview had been cut entirely, replaced by an interview with a local business owner saying "Gee, this state seems like a good place to start a business to me!"

Oh well, to paraphrase what was said of Fred Allen, I guess I have the looks and speaking style perfect for blogging.