Published in Economic Development

Scorecard warns Michigan’s entrepreneurial climate could be cooling

BY Sunday, March 20, 2016 05:25pm

The environment for an entrepreneur to start and grow a business in Michigan continues to improve, although gains are slowing after a decade of significant change as other states do better as well.

That’s the conclusion of an annual scorecard that examines the state’s entrepreneurial economy. The 137 metrics used in the scorecard show that “the rate of improvement in Michigan’s post-recession entrepreneurial economy is slowing” amid an “overall better entrepreneurial economy today than 10 years ago.”

“If feels like we’re losing momentum. It feels like some other states are catching up to us,” said Rob Fowler, the president and CEO of the Small Business Association of Michigan (SBAM).

Despite the conclusion in the 2016 scorecard, “we still have the wind at our back as a state,” Fowler said. At a recent meeting he had with small business owners, two-thirds indicated they had their best year ever in 2015.

“Obviously, we still have some work to do,” he told state lawmakers at a recent legislative committee meeting. “But if you look over the long term, we are in a much better position than we were.”

Published by MiQuest and using 2014 data, the 12th-annual Michigan Entrepreneurship Scorecard shows:

nMichigan ranks 23rd in the nation in overall entrepreneurial climate, down two spots from the prior year but up seven positions from a decade earlier. From 2010 to 2012, Michigan was a top 10 state for entrepreneurial climate.

nThe state ranks 12th in entrepreneurial change, or the movement and direction of the state’s entrepreneurial economy compared to other states. That’s a major improvement from 44th in 2004. The state peaked at seventh in 2012 before dropping back.

“This is, in particular, one of those places where we still feel like we’re making good progress, but our competitive position has fallen,” Fowler said. “To the extent that we’ve fallen back is not because we’ve moved backwards, but because others have caught up with us.” 

nMichigan ranks 35th in entrepreneurial vitality, which measures activity going on in the state, versus 31st in the prior year and 39th in 2004. Data indicate the rate of new business formation is now slowing in Michigan.

Economic vitality remains a difficult area to impact, given how Michigan’s large industrial base and corporate activity overwhelm the activity, said Graham Toft, president of Growth Economics Inc. and author of the annual scorecard. 

“It will take many years for Michigan to build its structural entrepreneurial vitality to match its standing 100 years ago, and the slowing down in the rate of net new business formations may negatively impact this index,” Toft said. “However, the healthy entrepreneurial change index suggests positive factors are at work.”

Specific areas where Michigan does well and ranks in the top 10 nationally include industrial and university research and development, the prevalence of science and engineering workers, high-tech manufacturing employment, small business income and payroll growth, business tax structure, and the five-year survival rate for new businesses.

Michigan also has made “great progress” in commercializing research innovations and spinning out startup companies, and is one of only three states in the top 10 in public- and private-sector R&D. Yet “we don’t live up to our potential as a state” in commercializing innovations, Fowler said.

“Lots of states talk about technology transfer and commercialization of technology, but few of them have the technology that we have in the first place,” he said. “So there’s a real opportunity, we believe, from a public policy standpoint.”

On the downside, Michigan ranks in the bottom 10 states for growth in the new business formation rate, growth in new business ownership, and growth in the net rates for new business entrances and establishments. All those measures are first-time entries in the bottom 10 and “are cautionary” signs, Fowler said.

Michigan ranks 40th in net gains for business expansions by startups or early-stage companies, according to the 2016 scorecard. The U.S. as a whole is experiencing a decline in new business startups following a rise in sole proprietorships during the Great Recession, and “Michigan is probably more dramatic,” Fowler said.

“There are some stormclouds on the horizon as it relates to the sheer amount of activity in the entrepreneurial space,” he said. “It’s a red flag. Our startup rate has fallen. If we’re thinking about planting seeds, we’re not planting as many seeds as we once did.” 

Other areas in the bottom 10 include Michigan’s unemployment insurance costs and the overall tax structure. Unemployment insurance costs is an area “most of us who are advocates for the business community wouldn’t put high on our list, but it’s a place where the other states have really done some serious work and pushed us to the bottom of this pile,” Fowler said.

Michigan’s aging infrastructure also continues “to be an Achilles heel for us,” he said. Keeping a focus on infrastructure “is one of the strategies for continuing to grow in entrepreneurship,” Fowler said.

Fowler urged state lawmakers to think like an entrepreneur in considering any public policy initiatives to drive further gains in the entrepreneurial environment.

“If we were a company and we had been gaining market share, and suddenly some of our competitors were taking some of our market share from us, what would we do? How would we be thinking about this?” Fowler said. “It seems to us that now is the time for us to begin to think about what are the areas we have an advantage in and how do we take advantage of those areas. How do we shore up our weaknesses?” 

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