With Growing Economy and Entrepreneurial Ecosystem, Is North Carolina Bucking a National Trend? - 1

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With Growing Economy and Entrepreneurial Ecosystem, Is North Carolina Bucking a National Trend? - 1
Amy Huffman is fascinated by the intersection of technology, economic development, startups and the economy. She uses data to discover how the entrepreneurial ecosystem impacts startups and their ability to succeed. Amy has a master's degree in public administration from the University of North Carolina and previously worked at its Center for Public Technology.

Why did you start (or are you starting) your business?

Out of necessity—you lost your job or needed more income?

Or did you spot an opportunity in the market you thought your idea could fill?

Your answer to this question matters because whether your business was born out of necessity or opportunity is a good indicator of the status of the economy's health, according to the Ewing Marion Kauffman Foundation's most recent iteration of its annual Entrepreneurial Activity Index.

Nationally, entrepreneurial activity is declining, but activity in North Carolina increased in 2013, bucking the national downward trend. The Kauffman report suggests declining entrepreneurship could be a sign that the economy is improving—in good economic times, fewer entrepreneurs begin their businesses out of necessity than in poor economic times. If this hypothesis is true and N.C.'s rates are rising, what does this mean for our economy and entrepreneurial ecosystem?

In this post, I want to share the data and explain that, though the Kauffman report's hypothesis is valid, N.C.'s steady rise in entrepreneurial activity suggests something interesting is happening here. In later posts, I'll dig into other current research including the widely talked about recent Brookings Institute report on the U.S.'s declining business dynamism.

Report Summary

To holistically understand and measure entrepreneurship, the Kauffman Foundation created an index, or a combination of multiple measures. The Index combines data on the rate of business creation of all types of businesses, incorporated and unincorporated, and businesses that employ others and those where the entrepreneur is the sole employee. Since business creation is dynamic, data from the beginning of ventures rather than later in the business' life-cycle is used in the index.

Opportunity vs. Necessity

With Growing Economy and Entrepreneurial Ecosystem, Is North Carolina Bucking a National Trend? - 2
The Kauffman report hypothesizes that a strong inverse relationship between overall economic conditions and entrepreneurial activity exists. Plainly, the worse the U.S. economy, the higher the entrepreneurial activity rate will be and vice versa. You can see it drawn out in Table 2. The longitudinal data supports this hypothesis, with entrepreneurial activities hitting record highs during 2009 and 2010, and only now returning to pre-recession levels. It could indicate the national economy is improving.

But why does the inverse relationship exist? This is why necessity and opportunity matter. If you started your business out of necessity, you were more likely to do so during the recession than you are now that the economy is improving. This hypothesis certainly seems logical; with the number of layoffs during the recession and the recovery, starting a business could have been the only option for many unemployed people.

Conversely, now that the economy is improving and more job opportunities exist, starting a business may not be necessary or ideal for some. Data that show fewer people in 2013 started their businesses straight out of unemployment also supports this hypothesis. The Kauffman Foundation takes care to also note that the impetus for creating a business, whether out of necessity or opportunity, does not indicate or predict the level of success the business will realize, but rather is a general indication of the business climate and economy.

N.C. Goes Against the Grain

With Growing Economy and Entrepreneurial Ecosystem, Is North Carolina Bucking a National Trend? - 3
While the national entrepreneurial activity rate has steadily declined since its peak in 2010, NC's rate declined initially after 2010 but rose again from 2012-2013. Why is this? What makes us different? If NC's economic health was inversely related to the entrepreneurship rate in NC, we might expect to see NC's unemployment rate also rise in 2013. However, as shown in Figure 2, NC's unemployment rate not only dropped in 2013—it was the 5th largest drop in the country, steadily dropping from its peak in 2010 (though it remains higher than the national average).

As seen in the chart up top, N.C. is not alone in opposing the national trend. When compared to nine peer states , five other states increased in entrepreneurial activity while their unemployment rates declined last year. But among these peer states, only Washington's rate changes are comparable to NC's.

So why did N.C.'s entrepreneurial activity rate rise in 2013 while its unemployment rate dropped?
Although I can't be certain, here are my theories:

NC's economy is still worse than the nation's as a whole, and a rise in entrepreneurial activity is a remnant of the recession. N.C.'s unemployment rate has consistently been higher than the national average throughout and after the recession and is still 0.6% higher than the national average. If this is true, as unemployment drops and N.C.'s economy improves, we will likely see entrepreneurial activity decline as well. If this were true, we would also see a higher number of necessity entrepreneurs than opportunity entrepreneurs as poor economic conditions produce more of the former than the latter.

As time goes on, the noise in the data will even out and N.C.'s cyclical ups and downs in entrepreneurial activity will even out, looking more like the national averages. This would mean that 2013's modest increase was just that, a modest increase that will go back down to normal numbers next year or soon after.

We've figured out something the others haven't. You'd have to be living under a rock to not know that a lot of excitement and energy is coalescing around entrepreneurship in N.C. right now, as evidenced with the existence of this site, for example. Maybe N.C.'s numbers have more to do with this fact than anything else. In other words, maybe all that time and energy spent to create a supportive ecosystem for entrepreneurs and business owners by entrepreneurial and business support organizations like the SBTDCs, Groundwork Labs, the CED, American Underground, the local Chambers, and all the other economic development agencies is actually working.

The next few years of data will tell us which of these (or another completely different) theories is responsible for our rising entrepreneurial rates. But if the last possibility is true, then it's only a matter of time before other states and countries figure this stuff out too. And they are—with accelerators and incubators popping up in nearly every geographic area and industry, Silicon Valley is no longer the only place for startups.

So we have a small window of time to become leaders in the field of entrepreneurism and entrepreneurial development. I humbly suggest we take this opportunity and go for it. But for now, entrepreneurs, you can rest assured you picked the right spot to build your business: something about our state is fostering your development and growth, and hopefully your success, too.