Report: Michigan needs more entrepreneurs as it loses ground to other states

Michigan continues to grow businesses, but the pace isn’t fast enough to prevent it from losing ground to other states, according to an annual scorecard tracking the state’s climate for entrepreneurship released Tuesday.

In any other year, those results could provide policy direction for incremental gains. But amid COVID-19, the urgency to act on shortcomings in Michigan’s new-business economy is heightened, experts say.

“We really feel the mission of having a strong entrepreneurial economy has never been as important as it is right now," said Brian Calley, president of the Small Business Association of Michigan. “Pre-COVID-19, we really came a long way in creating a good, but not great, entrepreneurial environment.”

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The 16th annual Entrepreneurship Score Card produced by the nonprofit Michigan Celebrates Small Business “gives good insight into our strengths and weaknesses as we look to rebuild,” Calley said.

The annual report normally is released in the spring, Calley said, but it took longer to complete due to the pandemic. There’s already a time lag due to the wait for final audited numbers for the reporting, he added, which means that coronavirus issues won’t be reflected in the scorecard for some time. 

Metrics used for the scorecard track performance in three key areas with more than 200 factors considered: 

• Entrepreneurial climate, including factors that support the entrepreneurial economy, Michigan is ranked 22nd (down from 17th  last year).
• Entrepreneurial change, measuring the direction and momentum of growth in the entrepreneurial economy, Michigan ranks 26th (down from 23rd last year).
• Entrepreneurial vitality, comparing the level of entrepreneurial activity compared to other states, Michigan ranks 36th (down from 35th last year).

“While we have seen some progress in Michigan, we know that if you’re standing still, you’re falling behind and the risks of complacency have never been greater for entrepreneurs,” Calley said.

According to the report, Michigan’s entrepreneurial economy continues to grow, “but with less ‘gusto’ than during the post-recession 2009-13 period, and losing a bit more steam each year. 

“Michigan remained a top entrepreneurial performer among its Industrial Midwest neighbors, and near-term trend indicators for Michigan’s entrepreneurial economy were broadly positive, before these recent, unprecedented times. Even so, each year the relative pace of Michigan’s entrepreneurial economy overall continued to fall behind relative to more states nationally. “

Michigan ranks in the top 10 among states for physical science and engineering workers (1), workers’ compensation premium and business tax burden (2), home ownership rate and foreign business employment growth (3) and both patents per innovation work and industry research and development (4).

But low rankings still plague Michigan: access to next-generation internet (43); residents of prime working age (45);  manufacturing capital investment growth (46); unemployment insurance costs (47) and unemployment insurance tax structure (49). 

Education rankings also show weaknesses, Calley said.

Michigan students preparing for college perform well on the ACT standardized test (sixth compared to other states), but a glimpse into the SAT scores from all high school students in the state places the state at 39th. And the state ranks 42nd for public high school graduation rates.

The graduation rate and the age of Michigan’s workforce are “some real obstacles,” to future business growth, Calley said. “This tells me that our education system prepares students who are going to college exceptionally well. However, our students who are not going to college do a lot worse.”

That is one area where the report can influence public policy, Calley said. 

Michigan fell further behind than other states during the Great Recession, and started to work its way out of that, he said. Not utilizing young adults in an educated workforce — as older workers plan for retirement — could set the state backward in the next recovery, he said. 

“We can’t afford to lose any more ground there,” he said.  “Our demographics are very, very challenging right now.”

A look at five states that moved from the bottom to the Top 15 for entrepreneurial change shows more than one possible path for Michigan to take, instead of a single “silver bullet” solution.

Colorado, Maryland and Utah showed significant growth in workforce, education and productivity measurements. North Carolina and Tennessee grew more due to favorable cost and legal requirements, Calley said. 

“It could be feasible that either pathway could be pursued in Michigan,” Calley said.

A lot is about to change because of COVID-19, Calley said. One area will be the cost of unemployment insurance, which is in flux as the state — previously with among the highest reserves — continues to deplete those resources amid job losses.

The unemployment rate and number of people leaving the workforce also are moving targets amid the pandemic. 

At the time the report was compiled, year-over-year job growth showed it was subdued in late 2019, at about 0.4 percent. Forecasts from early in the year suggested that job growth this year could keep the state’s unemployment rate very low, averaging 3.7 percent. Instead, the most recent data from the Bureau of Labor Statistics put Michigan unemployment at 14.8 percent in June, the most recent month available. It had started the year at 3.8 percent in January.

All of the data gathered by SBAM can help fuel economic recovery, Calley said, as policymakers consider what steps are most important to righting the tilted economy. At the same time, the state is working on a series of grants to aid the state’s small businesses, which could in turn cultivate an encouraging environment for entrepreneurs in coming years. 

Unclear is how much will still change in the immediate future.

“It’s very difficult to get a sense of where we’re going to be [in regards to recovery],” said Gabe Erlich, economist at the University of Michigan. “Once the public health situation returns to normal, it’s clear that the economy is not going to return to normal immediately.”