State Environment for

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State Environment for Entrepreneurs
Monograph 7
March, 2002
Deborah Markley w Co-Directors w Don Macke
Abstract. States play an active and significant
role in shaping economic development policy and
program at a sub-national level. This monograph,
State Environment for Entrepreneurs, explores the
role that states do and can play in
entrepreneurial development in Rural
America. Background Introduction The United
States began as a confederation of relatively
independent states. This heritage is reflected
in our current government and economic systems.
States play a very unique and significant set of
roles ranging from education to economic
development. In the arena of economic
development, states actively invest in a wide
range of development efforts intended to ensure
prosperity for their residents. In many ways,
state policy and program define the larger
environment in which local development efforts
thrive or struggle. Research by Jay Kayne
(KCEL, 1999) found two very interesting realities
with respect to entrepreneurship and state
policy. First, entrepreneurship is on the radar
screen of state policy makers such as Governors.
A review of state policy statements found at
least a quarter of the time entrepreneurship is
mentioned in such documents as state of the state
or inaugural addresses. This rate of reference
is considerably higher than would have been the
case a decade ago. Second, Jay found that actual
state economic development efforts into
entrepreneurial relevant programming and policy
was much lower at less than one percent (i.e.,
0.71) of total economic development spending.
The following sections provide a conceptual
overview of the policies and programs that states
might consider in building a stronger E
environment. We urge the reader to obtain and
review both the Kayne and NGA studies for more
specific policy and program ideas. These reports
and others are listed in the Reading Section of
this monograph. State Climate Local governments
are creations of the state. The state can and
often does define the climate in which business
must operate. State tax and regulatory policies
(which often shape local tax and regulatory
policies) can significantly impact the business
climate. For the past 50 years, state economic
development efforts have been biased towards
larger business with emphasis on corporate and
industrial attraction. Larger businesses have
been actively engaged in state chambers of
commerce and in shaping state tax, and regulatory
policies. Smaller and more entrepreneurial
enterprises have typically been less engaged and
therefore less effective in shaping these
policies to their interests. Recognition.
Creating a more supportive E environment begins
with state recognition of the role that
entrepreneurship plays within that states
economy and society. The small business
movement in this country (stimulated by the U.S.
Small Business Administration) has made some
inroads in raising recognition. Our observations
suggest that most state policy and program
leaders do not have a sophisticated understanding
of the importance of entrepreneurs, and
particularly growth entrepreneurs, within their
economies. A deeper awareness of the importance
of entrepreneurs should ultimately be reflected
in refocused policy and programs supportive of
entrepreneurs. Tax Policies. Competition for
corporations and industries has driven state
development policy beginning with the first
relocation of factories from the Northeast to the
Southeast over 100 years ago. States are in a
war competing for corporations, jobs, and branch
plants. The primary weapon in this war is tax
incentives. States over the past 50 years have
created expansive tax abatement programs that
have collectively reduced or eliminated tax
obligations for many classes of larger
corporations. Conversely, these policies have
not tended to focus on smaller and emergent
companies. In addition to creating an uneven
playing field (between small large), these tax
policies have concentrated tax loads on smaller
and often the emergent entrepreneurial companies.
There is a critical need to review business tax
policies and to reform policies to be fairer and
more supportive of growth entrepreneurs. Regulato
ry Policies. There are regulatory policies
ranging from the cost of getting a legal status
to do business in a state to navigating
the complex

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State Environment for Entrepreneurs
regulatory environment administered by literally
dozens of different local and state regulatory
agencies. State regulatory policies have evolved
over time to address specific problems or needs.
Rarely have these policies been reviewed and
integrated with respect to their cumulative
impact on the entrepreneurial enterprise.
Projects are underway in Minnesota and Maine that
could begin to address some of these issues (see
Center web site). State Infrastructure States,
in a complex set of relationships with the
federal government, help define infrastructure
essential to the conduct of business and
commerce. We do not have the space here to
explore all the state infrastructure issues
critical to creating a more supportive E
environment. The following are simply our views
of some of the more important pieces.   Universal
Services. In the American age when many
industries and services were regulated, universal
service access (regardless of location or size)
was a central policy element. America and the
world are now in an age of deregulation with
emphasis on market solutions to the allocation of
infrastructure and services. In this
environment, scale is very important. High
density and low cost markets and consumers (large
scale users) have intense competition with high
quality service and the lowest costs. Low
density and high cost markets/consumers (most of
Rural America) often find limited competition,
lower quality services, and higher costs. From
commercial air service to telecommunications to
simple postal service, the divide between haves
and have nots is rising. For entrepreneurs who
lack scale and are particularly located in high
cost and low density markets, access to basic
services such as telecommunications or next day
parcel service may be more limited and more
costly. States are struggling to enact
meaningful policies to level the playing field
and avoid the creation of pockets of have nots
that become the economic and social ghettos of
the 21st Century. Capital Access. States have
come to appreciate the importance of venture
capital to the development of their economies.
States look at the concentration of venture
capital and venture capital companies in
California, Massachusetts, and New York. They are
concerned about how to attract these companies
and their capital to their states. Legislatures
and governors have been enacting various policies
and programs to attract venture capital to their
states.
As challenging as it really is to attract venture
capital, success in this undertaking will not
likely solve the capital access problem for rural
and inner city entrepreneurial firms. Our
monograph on capital explores the issues of
capital access in greater detail. Simply put,
providing capital access particularly equity
capital for rural entrepreneurs requires a
combination of deal development, deal polishing,
and financing at a scale typically much smaller
than traditional venture capital companies
consider. Education. The Global
Entrepreneurship Monitor Report for 2000 (KCEL,
2001) suggests a powerful connection between
education and entrepreneurial development.
Educational experience, particularly related to
intellectual property and business development,
is a foundation upon which an entrepreneurial
economy is built. States with strong commitments
to general and strategically focused educational
access and quality will provide a more supportive
E environment over the long-term states with
weak educational infrastructure will be less able
to support a dynamic and growing entrepreneurial
community. Intellectual Capital. The National
Commission on Entrepreneurships study Five Myths
About Entrepreneurs concluded that an
entrepreneur is not the person who creates an
innovation, but one who perceives how the
innovation can be used to create a successful
commercial venture. A dynamic and innovative
intellectual capital community within a state
provides the opportunity for entrepreneurs to
create new generations of enterprises. States
that value and invest in building strong
intellectual capital (e.g., research within
higher education) with effective technology
transfer programs can provide another critical
asset essential for entrepreneurial growth. A
quick review suggests that Americas
entrepreneurial growth pockets often correspond
to pockets of research and intellectual
capital. Health Insurance. The cost of health
care is rising along with demands that households
have health insurance. The quality and cost of
health insurance is optimal through larger group
plans with significant cost underwriting by
employers as a benefit. Entrepreneurs who are
self-employed or part of emergent smaller
companies face a huge challenge in obtaining
affordable and higher quality health insurance.
The challenge of these enterprises to allocate
scarce business capital to underwriting employee
health insurance is real and large. States
Inheritance
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State Environment for Entrepreneurs
are exploring policy options that would enable
smaller groups to access state insurance pools to
increase quality and reduce cost. A challenge
for states seeking to encourage more
entrepreneurs is to find ways to make health
insurance affordable and accessible to smaller
groups.   State Support The economic development
focus of most states (directly shaping local
development priorities) continues to be in
traditional areas such as business attraction,
workforce development, trade promotion, tourism
promotion, and high tech development. Evolving a
strong state support system for entrepreneurs
begins with the following elements People Not
Businesses. First, with an E strategy, the
entrepreneur, not necessarily the business, is
what is important. Consequently, state policy
and program focus begins and stays with the
unique class of people we call entrepreneurs
(particularly growth entrepreneurs). Knowing who
these people are, creating ways to discover
entrepreneurs early helps them to develop a
support system. This shift in thinking is much
like a talent agent looking for the next
Hollywood star find the raw talent and create
the star. Entrepreneurs Not Small Businesses.
Meeting the needs of small businesses may help
create a stronger E environment, but will not
necessarily create a strong or dynamic E
environment. The second shift is from a small
business focus to an entrepreneurial focus. Most
entrepreneurs, and all emergent entrepreneurs,
would be defined as small businesses. The
difference is most small businesses, even
successful ones, will remain small. The E
strategy values these entrepreneurs, but must
focus on growth entrepreneurs. It is the growth
entrepreneur that will create the next business
which creates jobs, tax base, and can
fundamentally energize a local or regional
economy. With enough growth entrepreneurs, the
difference between a high performing economy and
a weaker economy is determined. Growth
Entrepreneurs Not Entrepreneurs. The third
shift is strategically identifying and focusing
development resources on growth entrepreneurs.
If you want to be the next international ice
skating champion, a nation must focus on those
persons with the drive and talent to meet this
competitive challenge. The same is true
with entrepreneurs.
Of the millions of entrepreneurs dreaming and
building in the American economy, a relatively
few (less than 5) have the drive and talent
necessary to create high growth companies capable
of changing local, regional and national
economies. Typically, states target industries
and economic sectors we generally do not target
individuals or teams capable of building high
growth companies. Small Business Support.
Generally, three fourths of all state economic
development spending is targeted towards
industries and big businesses. Far fewer dollars
are invested in small business support. However,
the existing small business support systems
operating at the state level have the building
blocks for creating a greatly enhanced
entrepreneurial support system. States such as
Minnesota, Missouri and Maine are exploring how
to ensure their small business support systems
can also be effective entrepreneurial support
systems. More Investment. If a state can
effectively make the three shifts talked about in
this section and commit to evolving their small
business development system into an
entrepreneurial support system, ultimately there
will be a need for additional state (both public
and private) investment into those policies and
programs helpful to growth entrepreneurs.
Conclusion States can not expect to continue
investing 99 percent of their economic
development resources in non-entrepreneur focused
policies and programs and expect to create a
vigorous and dynamic entrepreneurial environment
and economy. States like communities have
choices as to where they invest their economic
development energies and dollars. There is a
general feeling within the states (both policy
makers and program leadership) that much of what
they are doing with economic development is
equally beneficial to entrepreneurs. We are not
sure about this conclusion. We believe it must
be challenged and that a more strategic and
focused set of interventions are possible that
will result in a more supportive E environment
(at both the state and local levels) and
energized entrepreneurial sector.
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Other Monographs in this Series
1 About the Center Resource Guide 2 Entreprene
urs Entrepreneurship 3 Why Entrepreneurship? 4
Wealth as the Development Goal 5 Understanding
Rural America 6 Community Environment for
Entrepreneurs 7 State Environment for
Entrepreneurs
8 National Environment for Entrepreneurs 9 Capit
al 10 Public Entrepreneurship 11 Entrepreneurial
Support Organizations 12 Social Capital
13 Youth Entrepreneurs 14 Research Learning
Focus Under Development
Founding Partners
Resources
The Kauffman Center for Entrepreneurial
Leadership was created in 1990 within the Ewing
Marion Kauffman Foundation of Kansas City. The
Foundation is a private foundation created by
Ewing Marion Kauffman (founder of Marion
Laboratories) that strives to achieve the vision
of self-sufficient people in healthy communities.
The Center focuses on entrepreneurs and
entrepreneurship supporting research, learning,
and education activities. Additional information
on the Kauffman Foundation can be found at
www.emkf.org. The Rural Policy Research
Institute (RUPRI) is the only national policy
institute in the U.S. focusing solely upon the
rural implications of public policy. This
comprehensive approach to rural policy analysis
involves scientists from universities, research
institutions, governments, and non-governmental
organizations. To date, more than 200 scientists
representing 16 different disciplines in 80
universities, 40 states, and three countries have
participated in RUPRI projects. Additional
information on RUPRI can be found at
www.rupri.org. RUPRI is a core funder and
supporter of the Rural Entrepreneurship
Initiative. Author. This monograph was prepared
by Don Macke. Don can be reached at
don_at_ruraleship.org or 402-323-7339.

• Five Myths About Entrepreneurs, Understanding How
  Businesses Start and Grow by the National
  Commission on Entrepreneurship, March 2001.
  Contact NCOE at www.ncoe.org for free copies, 24
  pages.
• Global Entrepreneurship Monitor, 2000 Report by
  the Kauffman Center for Entrepreneurial
  Leadership. For free copies of this and other
  GEM Reports contact www.entreworld.org.
• State Entrepreneurship Policies and Programs by
  Jay Kayne with the Kauffman Center for
  Entrepreneurial Leadership. November 1999.
  Available through the REI web site.
• Nurturing Entrepreneurial Growth in State
  Economies by Thom Rubel and Scott Palladino with
  the Center for Best Practices within the National
  Governors Association. 2000. Available through
  the Centers web site at www.nga.org/center.
• During 2000 and 2001, the National Governors
  Association in partnership with the Kauffman
  Center for Entrepreneurial Leadership and the
  National Commission on Entrepreneurship sponsored
  a National Policy Academy on Entrepreneurship.
  Ten states participated in this Academy and their
  state policy strategies are available through the
  NGA web site at www.nga.org/center.
• Since 2000, six states have participated in REIs
  (supported by the Kauffman Center for
  Entrepreneurial Leadership the Rural Policy
  Research Institute) Rural Entrepreneurship
  Discovery State Initiative (e.g., Colorado,
  Maine, Minnesota, Missouri, Texas West
  Virginia - in progress). Each of these states
  have or will develop state policy strategies that
  are available on the REI web site

About the Center
The Center for Rural Entrepreneurship is new. It
is an outgrowth of the Rural Entrepreneurship
Initiative. The Center is a RUPRI National
Research and Policy Center with founding support
from the Kauffman Center for Entrepreneurial
Leadership within the Ewing Marion Kauffman
Foundation of Kansas City, Missouri. Our mission
is to enable every rural resident to achieve his
or her full entrepreneurial potential. This
mission will be achieved by collaborating with
individuals and organizations engaged in the
study,practice and policy of rural
entrepreneurship. The Center supports research,
field work, and policy development through
collaborations with national, state, and local
interests. For more information on the Center
for Rural Entrepreneurship, check out our web
site at www.ruraleship.org or call Taina
Radenslaben at 402-323-7336.