How Do Business Owners Perceive the State Business Climate? Using Hierarchical Models to Examine the Business Climate Perceptions, State Rankings, and Tax Rates

Abstract

State business climate rankings are popular and can be influential in policy making. Past academic studies have criticized rankings that are based on elusive criteria of state-level data. Breaking from such practice, the authors argue that state business climate is better conceived and measured at the individual firm level. The authors show how perceptions of business climate varies across business owners, depending on their firms’ sectors and stages of development. Using a survey of more than 3,600 small business owners, mainly in the personal and business service sectors, the authors find that many of the popular state rankings either do not associate with individual perceptions of business climate or predict in the wrong direction. The findings warn against the use of state rankings in making policies that affect small business owners. The authors also suggest a need for further study measuring the perceptions of business owners covering different sectors.