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HOW CAN I CREATE MY FAVORITE STATE RANKING The Hidden Pitfalls of Statistical Indexes Yasuyuki Motoyama, Ph.D. and Jared Konczal
Ewing Marion Kauffman Foundation
 
September 2013
 
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HOW CAN I CREATE MY FAVORITE STATE RANKING The Hidden Pitfalls of Statistical Indexes Yasuyuki Motoyama, Ph.D. and Jared Konczal
Ewing Marion Kauffman Foundation
 Reprinted from the
Journal of Applied Research in Economic Development
© 2013 by the Ewing Marion Kauffman Foundation. All rights reserved.
 
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HOW CAN I CREATE MY FAVORITE STATE RANKING The Hidden Pitfalls of Statistical Indexes State economic rankings are both pervasive and popular. The long list of well-known rankings includes the State Competitiveness Report by the Beacon Hill Institute, the State New Economy Index by the Information Technology and Innovation Foundation,[1] the Cost-of-Doing-Business Index by the Milken Institute, the Economic Freedom Index by the Pacific Research Institute, and the State Business Tax Climate Index by the Tax Foundation, among many others. These rankings
 –
and even many that are less familiar 
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receive substantial media attention on the scale of thousands of viewers each day. As a result, media outlets have started to create their own rankings:
Forbes’ Best States for Business and CNBC’s America’s Top States for
Business. We know that there are more than one dozen out there, and the list seems to grow every year. [1] [Disclosure: the Kauffman Foundation has given grant funding to support this report in the past. Also, Kauffman research has been used as the basis for ranking states, most notably on the rate of entrepreneurial activity, formalized in the Kauffman Index of Entrepreneurial Activity. This is an index-based data from the U.S. Census Bureau and Bureau of Labor Statistics, and has never been a normative attempt to claim that one
state or another is “better” for entrepreneurs
.]
 
So business climate indexes have become a cottage industry within the economic development profession. Reacting to, and explaining why and how their state-community is ranked by business climate indexes has accordingly become a cottage industry among state and sub-state economic developers. The combination of
publishing indexes and states and community’s reacting to them has not been a pretty
picture
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in fact, it can be quite challenging and sometimes demeaning. Frankly, a serious measure of cynicism, opportunism, confusion, and manipulation has also entered this dismal business climate index picture. A large part of the business
climate index “problem” is that, at heart, business climate indexes are a statistical and
methodological concoction drawn from a database that is unavailable to the economic developer, the media, or the governance of your agency-community. We, as state and sub-state economic developers, are pretty much at the mercy of the entity and researcher compiling and presenting the index. Understanding statistical findings derived from poorly explained methodologies is usually not the forte of a state and sub-state economic developer. Hence this article. Statistics and methodologies are a magical land that badly needs some explanation.

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