July 8, 2016
A new ranking system by Ball State economists combines information from several prominent sources into a single, consistent scoring tool.
Lists, rankings, and standings have become the norm for everything from folks wanting to find the best budget vacation spots to homeowners looking to hire a contractor. One of Ball State’s favorite sons even made the Top Ten List the thing of legend.
But what they offer in convenience they sometimes lack in coherence, especially when different sources measure the same thing in very different ways.
Enter Dick Heupel and Rosemary Kaiser, who wanted to avoid this kind of confusion as they sought to build a better ranking system for state business climates. The economist and his research assistant designed a model that aggregates information from several top sources, thereby avoiding the potential confusion or distortion of any single outlet.
“Ranking states’ business climates has become something of a cottage industry,” said Heupel, director of Ball State’s Center for Community Economic Development and the interim co-director of the Indiana Communities Institute. Currently, he said, seven respected sources rank how supportive a state is to business and, not surprisingly, those groups’ efforts return vastly different results.
“The rankings have been criticized for their lack of consistency and relevance,” Heupel said. “They all follow different approaches, some measuring economic indicators such as GDP (gross domestic product) and some considering a state’s tax incentives. Taken individually, the rankings can offer very disparate results.”
And that got he and Kaiser to thinking: Maybe it makes sense to take the idea behind the Dow Jones industrial average — a market indicator comprising 30 leading U.S. stocks — and apply it to rankings for state business climates.
So with that as a model, Heupel and Kaiser created a rankings system that involves the mean scores from the seven sources: Chief Executive Magazine, CNBC, Forbes, George Mason University, Institute for Legal Reform, Pollina Corporate Real Estate and Tax Foundation.
The result of the research: the States’ Business Climates Index, a snapshot of business climates for every state, from Alabama to Wyoming. Utah snags the top spot, while New Jersey brings up the rear. Indiana ranks third. A complete list of the rankings is available here.
“With the great amount of criticism surrounding the usefulness of state business climate rankings, it was necessary for us to compare each ranking system with state data on output and employment growth,” said Kaiser. “Although there is certainly more to a state’s business climate than observable growth in output and employment, doing this led us to believe that our mean ranking system was generally more reflective of states’ actual business climates than any individual ranking.”
In addition to the completion of the index, Heupel and Kaiser found:
- State fiscal structures need to be considered in a much more complex way than is currently the case in any of the seven rankings
- Rankings, any rankings, can be expected to be more reliable when combined with other rankings so that they are composed of more data
As vice president for government relations and community engagement at Ball State, Julie Halbig oversees the Indiana Communities Institute. She said the data Heupel and Kaiser compiled can help answer questions business owners and developers often pose when considering where to create, or expand, a company.
“We routinely work with community developers and other entrepreneurs who want the best, most accurate information to help guide their decision-making,” Halbig said. “This data is a comprehensive, new way of looking at multiple business climate indexes that will hopefully be a quick reference tool by which companies can consult when doing their preliminary research.”