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Tuesday, December 29, 2009

Minnesota 9th, South Dakota 39th in Small Business Performance

Small businesses do best in D.C.; Minnesota ranks 9th

South Dakota lags behind much of the nation in small business performance. According to the Lake Herman Institute's Small Business Success Index, South Dakota ranks 39th on concrete measures of small business success.

While the Small Business & Entrepreneurship Council's Small Business Survival Index ranks states by an ideological wish list, LHI's Small Business Success Index ranks states by the actual economic performance of their small businesses.

The U.S. Census Survey of Business Owners released this year finds that in 2002, there were 5.5 million small firms (i.e., employing fewer than 500 people). Table 1 compares the receipts and payrolls of those firms in South Dakota and surrounding states with the national figures:

Area Number of employer firms Rcpts for employers ($1,000) Number of employees Annual payroll ($1,000)
United States 5,508,048 8,311,958,607 54,236,327 1,686,205,038
Minnesota 111,378 178,789,074 1,150,026 35,689,776
Iowa 60,748 85,982,227 606,033 15,532,711
Nebraska 38,942 51,164,695 362,170 9,386,137
North Dakota 16,060 21,127,904 152,112 3,502,804
South Dakota 19,506 24,941,973 177,223 4,086,122
Wyoming 15,591 14,908,651 117,122 2,844,255
Montana 27,623 25,278,791 203,212 4,503,774

Table 1: Small Employer Firms, Rececipts, Employees, and Payrolls
Source: U.S. Census, 2002 Survey of Small Business Owners

To rank the states, the Small Business Success Index asks the following questions:
  1. How much in receipts does each firm generate? More receipts mean more economic activity, a main goal of each state in fostering entrepreneurship.
  2. How many jobs does each firm create? More jobs is an obvious measure of economic development success.
  3. How much in receipts does each employee generate? The more economic activity produced per employee, the more successful the firm.
  4. How much is each firm's payroll? More payroll means more money to support consumer spending in the local/state economy, another key goal of state economic development policy.
  5. How much does each employee make? Higher wages increase the ability of the firm to attract and retain top workers who will sustain the success of the firm and contribute to community growth overall.
  6. What is the ratio of receipts to payroll? The Lake Herman Institute takes the ideological position that a low receipts-to-payroll ratio represents a wider distribution of wealth among the employees. Sharing more of the firm's wealth with the workers who produce that wealth improves firm and community morale and empowers more citizens economically and politically.
By these metrics, South Dakota ranks well below national averages in small business performance. South Dakota's receipts per small firm in 2002, $1.28 million, are 85% of the national average of $1.51 million, but annual payroll per employee, $23,100, was 74% of the national average of $31,100.

Regionally, Minnesota offers the strongest small business performance, ranking 9th. Iowa barely makes the top half at 25th. Nebraska and North Dakota rank 31st and 36th, respectively. Wyoming (50th) and Montana (51st) are at the bottom of the Small Business Success Index.

Rcpts/Firm Emp/Firm Rcpts/Emp
United States $1,509,057 9.847 $153,254
Minnesota $1,605,246 10.33 $155,465
Iowa $1,415,392 9.976 $141,877
Nebraska $1,313,869 9.3 $141,273
North Dakota $1,315,561 9.471 $138,897
South Dakota $1,278,682 9.086 $140,738
Wyoming $956,234 7.512 $127,292
Montana $915,136 7.357 $124,396

Annual Payroll per Firm Annual Payroll per employee Rcpts/Payroll SBSI rank
United States $306,135 $31,090 4.93
Minnesota $320,438 $31,034 5.01 9
Iowa $255,691 $25,630 5.54 25
Nebraska $241,029 $25,916 5.45 31
North Dakota $218,107 $23,028 6.03 36
South Dakota $209,480 $23,056 6.10 39
Wyoming $182,429 $24,285 5.24 50
Montana $163,044 $22,163 5.61 51

Table 2: Small Business Success Index Metrics and Rankings
South Dakota and Surrounding States

By these metrics, the place where entrepreneurs produce the best economic results is Washington, DC, with small firms producing the highest receipts per firm, the highest employment per firm, the highest pay per firm, and the highest pay per employee in the nation. Following the District of Columbia on the Small Business Success Index are Connecticut, Massachusetts, New Jersey, California, Illinois, New York, Texas, Minnesota, and Michigan.

Download the complete spreadsheet and check the numbers yourself!


  1. Most small businesses fail within the first year or two, no matter where they are.

    In states with high prices, high wages, and high taxes (the three seem to go together), I suspect that gross receipts for small businesses would have to be higher in order for them to survive.

    Which states have the highest startup survival rates after one year or two years? Which have the lowest?

    If South Dakota were to implement the tax structure of New York or California or Massachusetts tomorrow, what do you suppose would happen to small businesses here?

    Cory, this post shows that we can twist statistics to make any theory look like a plausible model of reality. As for the extent to which this post portrays reality itself, I have no clue.

    I will say this, however: If I wanted to start a new business, I would not go to New York or California or Massachusetts. I'd stay here, go to Wyoming, or go to Texas.

  2. Excellent question on actual success rates, Stan. I can find national numbers and some breakdowns by type of business, but I haven't found a state-by-state analysis yet.

    One author says that a lot of small biz sectors don't hit the 50% failure rate until year 4.

    I will take issue with the "twist statistics" charge. Unlike the SBEC, which looks at governmental factors it doesn't like, I'm looking at actual economic performance numbers, the same kind of money factors a good socialist like me doesn't like but which I would think any good capitalist (or local economic development official) would consider valid measures of success.

  3. Interesting take on things.

    However, this doesn't take into account the higher cost of living or higher tax burden, as your previous commenter pointed out.

    But thanks for the analysis -- good food for thought.

  4. Cost of living doesn't cover the difference, Anita. Latest data I've seen puts SD's cost of living at 91.3% of the national average. SD's payroll per employee is 74% of the national average. Facto in cost of living, and our employees are still coming out at 81% of what they would get nationally. If you're making the national average somewhere else and you come to South Dakota to work for a small firm, you will have less buying power, even after adjusting for cost of living. From a labor perspective, SD's small businesses aren't succeeding in providing attractive wages.

    On state tax burden: the Council on State Taxation finds that in 2007 (yes, we're mixing years, so caution!), state and local business taxes in South Dakota amounted to 5.2% of Gross State Product. The national average was 4.9%. In Minnesota, it was 4.3%.

    By the way, Anita, your Ohio has a cost of living of 93.5% the national average. Ohio ranks 13th on the SBSI. State and local business tax amounted to 4.6% of Ohio GSP. Will you be moving your small business to South Dakota? (Believe me, we'll be glad if you do! Contact me, I'll help you find an office here in Madison!)

  5. Cory,

    Why do you invite business to move to South Dakota after trashing our state?

  6. Citing statistics = trashing South Dakota?

    [Sibby, I thought only we secular humanist teachers chose boosting self-esteem over facts. ;-) ]

  7. Cory, you caught me miscalibrating my words! I should not have said "twist statistics." I should have said "select statistics."

    In regards to economic performance numbers, we can only derive these for businesses that actually survive. For those who try and fail, no numbers exist. A state with a 10-percent survival rate after x years might therefore produce better "numbers" than a state with a 90-percent survival rate after x years.

    I heard or read that in New York City, one can get the best food in the U.S. The reason: Only the best restaurants and delis survive in that environment. I imagine they do pretty well. That says nothing for all those "also-rans" who could not "cut the Big Apple." As we all know, New York City imposes a formidable tax burden on its residents and businesses.

    Interesting statistics otherwise. South Dakota's low wage-to-cost-of-living ratio troubles me. We need to improve on that somehow! I doubt that increasing taxes all by itself would accomplish that, however. I should note that prices here are not much, if any, lower than they are in Minnesota, Iowa, North Dakota, or Nebraska. In fact, I noticed that gasoline prices are higher here than in Minnesota (largely because of our gas tax, I think!).

    Perhaps higher taxes may result from general economic success, but I can't see how taking more of people's (or corporations') incomes could increase their chances of success. (Not that you have implied causation either way.)

    I am adamantly against any tax increases, or any new taxes, in this state -- even to the point, I admit, that I have slammed the door of my mind shut on the issue. No more taxes in South Dakota -- period.

  8. Steve Sibson12/30/2009 5:52 PM


    What facts? Your charts runs off the page, and your spreadsheet link doesn't work. How am I able to look at facts?

  9. [Link doesn't work? Yikes! Sorry! Remind me of that next time I give you crap for not using hyperlinks. ;-) Try it now; I changed the URL, so it should work.]

    [Table overrun -- looks o.k. on my end. Let me do some re-arranging...]


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