Are Indices of “Business Climate” Useful?

In a recent paper titled “How Friendly To Entrepreneurs Are “Business Friendly” Policies? Some Preliminary Results,” Joshua Hall and I closely examine six national indices that are often used as indicators of how “business friendly” a state is relative to its neighbors. We find that many of these indices are not useful in explaining the variation in entrepreneurial activity among the 50 US states.

In fact, of the three indices that were statistically significant in our regression analysis, only one index had the empirical relationship that we had predicted. This means that not only were many of the indices not useful but some of them suggest that states that are more business friendly have lower levels of entrepreneurial activity.

The overall results of our research are, therefore, a bit puzzling. Why would a “good” business climate be associated with less entrepreneurial activity?  One possible explanation is that because of the way the Kauffman Index of Entrepreneurial Activity is measured it picks up a lot of necessity entrepreneurship (i.e. people who self employ because of a lack of other opportunities). It may also be the case that some measures of how conducive a state’s policies are to businesses many not actually be good measures of whether they are conducive to entrepreneurship.

Our paper is not, however, meant to show that the indices we examined are necessarily bad indices. In fact, after researching each of them it is clear that they do contain very useful economic data. Moreover, it is clear that many of these business climate indices are popular tools in the policy arena and thus it would be useful for future research to further examine the relationship between these indices and entrepreneurship.



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About Ben VanMetre

Ben VanMetre is an MA Fellow at the Mercatus Center at George Mason University. Before joining Mercatus, Ben earned his Bachelor of Arts degree from Beloit College where he double majored in Economics and Management and Psychology. His research interests include international and state-based development issues, entrepreneurship, institutional arrangements, and economic freedom. His work has appeared in Forbes, Economic Affairs, the Cato Journal, the Journal of Business and Economic Perspectives, the Journal of the James Madison Institute, the Free Market Foundation, and the second volume of the Wealth and Wellbeing of Nations.