For Higher Growth, Think Small | Eastern North Carolina Now

    Publisher's note: This article appeared on John Hood's daily column in the Carolina Journal, which, because of Author / Publisher Hood, is linked to the John Locke Foundation.

    RALEIGH     Remember the old tale about a drunken man crawling around under a lamppost? Dating at least as far back as 1924, the joke starts off with a police officer approaching the drunk to ask what he's looking for. In earlier versions of the joke, it's a dollar bill. In later versions, it's a set of car keys. After learning that the item in question was actually lost some distance away, the puzzled cop asks the drunk why he's looking under the lamppost. "Because the light's better over here," the man replies.

    There's a lesson here about economic development policy here in North Carolina. The key to unlocking our state's economic potential — and driving up average wages across the state by creating high-value jobs — is unlikely to be found in the places that politicians tend to look.

    No, I'm not making a comparison between drunks and our elected officials (because that would be too easy a joke to tell, and I prefer a challenge). Rather, my point is that far too many political debates about economic growth involve contrasting claims about which factors are likely to attract or repel big corporations.

    Don't get me wrong. I want North Carolina to be an attractive place for large firms to locate and expand. But most net new job creation doesn't happen that way. It comes from new businesses and from small companies becoming larger ones. In other words, it's powered by in-state entrepreneurship, not business relocation. It's a side effect of enterprising innovators, investors, managers, and employees trying to create something new, something different.

    Over the past couple of decades, entrepreneurship rates have stagnated or dropped in most of the country, including North Carolina. The situation worsened after the onset of the Great Recession in 2007, when new-business births "experienced the steepest decline in the history of the [statistic]," as the U.S. Bureau of Labor Statistics put it. There's been a modest recovery in business starts since then, but we're far from making up all the lost ground.

    The Kauffman Foundation, based in Kansas City, has long studied the subject of entrepreneurship. Every year, it ranks the states according to entrepreneurial activity. In its recently released 2015 study, North Carolina ranked 24th. That's up from 29th last year and higher than neighboring South Carolina (29th), Virginia (39th), Georgia (40th), and Tennessee (45th). Still, we have a long way to go to equal the entrepreneurship rates of the top-ranked states, which include many in the Mountain West and Great Plains along with, in our region, the state of Florida.

    Entrepreneurs differ wildly in what they're trying to do and how they're trying to do it. Not surprisingly, then, the factors that nurture business starts and expansions are also wildly disparate. There are some common denominators, however. One is economic freedom. In general, states with smaller governments, fewer regulations, and simpler, less burdensome tax systems tend to produce higher rates of business starts, all other things being equal. The preponderance of recent academic studies confirms this relationship, although specific findings vary according to research design.

    Another is education. States with higher average levels of educational achievement and attainment tend to have more entrepreneurial activity. However, this is not the same thing as saying that states that spend more tax dollars on education are more hospitable to entrepreneurs. That doesn't appear to be true. It's about how effectively resources are employed, not simply about the amount of resources devoted to the job.

    Much political energy is spent debating such issues as targeted tax incentives and the management of business-recruitment programs. Moreover, corporate relocation decisions that add or remove large chunks of jobs from a local economy at one blow tend to make headlines and command the attention of politicians. These matters are all conveniently located beneath the lamppost. They're easy to see.

    But that doesn't make them more important than the flow of financial and human capital into new businesses, or those trying to make the jump from small to large. Go looking for them, even in the shadows. You may be surprised at what you find.